Did a countertop fabricator owe use tax on solid-surface materials it installed when customers also charged sales tax?

Subject

Countertop installer was the taxable consumer of solid-surface materials

Plain-English summary

Virginia upheld use tax on solid-surface countertops and related materials installed by the fabricator. The business sold laminate countertops without installation as a retailer, but fabricated and installed artificial-stone countertops as a real-property contractor.

Under Virginia's contractor rule, a person furnishing and installing tangible property as a real-estate fixture is the user or consumer of the materials. The fabricator therefore owed sales or use tax on its cost and could not use the resale exemption.

The fact that customers may also have charged sales tax on the installed countertops did not relieve the fabricator; Virginia called that customer collection erroneous. The Department also found no evidence that a prior audit had approved the practice or that policy changed, because the earlier audit did not show solid-surface installations.

What this means for you

• Selling an item and furnishing it as a real-estate fixture can make the installer the taxable consumer.
• The resale exemption did not apply to materials consumed in the installation contract.
• A downstream customer's incorrect sales-tax charge did not erase the installer's use-tax duty.
• A prior audit supports reliance only when the same facts and practice were actually examined.

Common questions

Did Virginia treat every countertop sale the same way?

No. Uninstalled laminate countertops were retail sales; installed solid-surface countertops were real-property contracts.

Was the assessment double taxation?

No. Virginia said customers' sales-tax collection was erroneous and did not alter the contractor's liability.

Citations and references

• Va. Code §§ 58.1-205(1) and 58.1-610(A).
• 23 VAC 10-210-410.
• P.D. 96-111, 00-83, 07-108, and 08-98.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-102

Original ruling text

June 24, 2009

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period January 2005 through December 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer primarily fabricates and sells laminate countertops without installation, and also fabricates and sells artificial stone (solid surface) countertops with installation. An audit showed that the Taxpayer is a retailer of laminate countertops and a real property construction contractor of solid surface countertops. While the Taxpayer collected sales tax on retail sales of laminate countertops, it failed to pay any tax on the cost price of materials used or consumed in connection with solid surface countertops. Accordingly, the auditor assessed use tax on the solid surface countertops and related materials.

The Taxpayer takes exception to the use tax assessed on the solid surface countertops and related materials. The Taxpayer claims to have no use tax liability because its customers (wholesalers/contractors) charge sales tax on the solid surface countertops sold and installed by the Taxpayer. The Taxpayer contends that the use tax assessed under these circumstances amounts to double taxation. The Taxpayer also contends it was not given prior notice of any policy change, especially since the prior audit did not apply use tax to solid surface materials furnished and installed by the Taxpayer. For these reasons, the Taxpayer requests abatement of the use tax assessed on the contested items.

DETERMINATION

Real Property Contractor

The Department's established policy is to treat transactions for the sale and installation of kitchen counter tops as real property construction services subject to the provisions of Va. Code § 58.1-610 A and Title 23 of the Virginia Administrative Code 10­210-410. See Public Documents 08-98 (6/18/08), 07-108 (7/6/07), 00-83 (5/16/00), and 96-­111 (5/31 /96). This policy is based upon the provisions set out in Virginia Code § 58.1-610 A as follows:

Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption. Any sale, distribution, or lease to or storage for such person shall be deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale, and the dealer making the sale, distribution, or lease to or storage for such person shall be obligated to collect the tax to the extent required by this chapter.

Thus, the Taxpayer is considered the user or consumer of all materials used in transactions requiring the Taxpayer to sell and install kitchen counter tops regardless of whether made with laminated, solid surface, or natural materials. Furthermore, the resale exemption has no application to such transactions. Because the Taxpayer is a consuming contractor when it contracts to perform construction, reconstruction, installation, or repair with respect to real estate or fixtures, it is liable for the sales or use tax on the cost price of materials purchased for use or consumption in connection with its solid surface countertops or any other counter tops that it installs as fixtures of real estate. The fact that the Taxpayer's customers may have charged and collected the sales tax on the countertops sold and installed by the Taxpayer is erroneous and does not relieve the Taxpayer of its responsibilities to pay the tax. As such, the Taxpayer's claim of double taxation is without merit.

Prior Audit

The Taxpayer contends that the Department accepted its practice of not paying any tax in connection with the sale and installation of solid surface counter tops in the prior audit period June 1995 through May 1998. Otherwise, the Taxpayer contends it should have been given prior notice of any policy change.

Pursuant to Va. Code § 58.1-205 1, any tax assessment issued by the Department is deemed prima facie correct. This means that the burden of proving that an assessment is incorrect is upon the Taxpayer. The Taxpayer has not furnished any documentation from the prior audit period in support of its contention. In fact, a review of the prior audit report shows that the Taxpayer was engaged in the fabrication of laminated countertops for sale to home builders, distributors, and retailers. It does not show any information with respect to solid surface countertops. It is the current auditor's understanding based on comments from one of the Taxpayer's partners that the Taxpayer did not begin offering solid surface countertops until approximately 2003 or 2004, which is well after the prior audit period. Thus, in the absence of proof to support its contention, the Taxpayer has not met its burden of proof.

Accordingly, I find no basis to conclude that the Department accepted the Taxpayer's practice of not paying any tax on its costs of solid surface materials that it installed as fixtures in real estate. Furthermore, there has been no tax policy change since the Taxpayer's prior audit with respect to the Taxpayer's counter top installations. As such, no prior notice of a policy change was needed.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2573448984.R