What does Virginia Ruling of the Tax Commissioner P.D. 09-15 conclude about Tax applies to the charges for the fabrication of tangible personal property?

Subject

Third-party brick cutting was taxable fabrication

Plain-English summary

Virginia held that separately charged third-party brick cutting was taxable fabrication. The masonry contractors bought bricks, sent them to another business to be cut into shapes needed for arches, and then used the finished bricks in real-property construction.

Cutting changed the bricks' form, fitting the statutory and regulatory definition of fabrication. Because the contractors furnished the materials and were the users and consumers of property and taxable services purchased for construction contracts, they owed tax on the fabricator's charges.

The result differed from a brick mason hammering a brick to fit during the construction job. In that situation, the shaping labor was part of the real-property construction service rather than a separate retail fabrication service billed by a third party.

What this means for you

• Cutting, shaping, sawing, welding, drilling, and similar changes can be taxable fabrication.
• A contractor that supplies material to a separate fabricator purchases a taxable service under the cited rules.
• Work performed as part of the contractor's own real-property construction charge may be characterized differently.
• Identify the material owner, service provider, physical change, and invoicing for every custom-processing transaction.

Common questions

Did cutting change the bricks enough to count as fabrication?

Yes. The shapes were altered so the bricks fit together into arches.

Why was on-site hammering different?

The mason did not separately sell fabrication; the labor was included in the construction work.

Were the audit assessments removed?

No. Virginia upheld them.

Citations and references

• Va. Code § 58.1-602.
• 23 VAC 10-210-560(A)-(B) and 10-210-410.
• P.D. 86-242 and 90-14.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-15

Original ruling text

February 4, 2009

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

Dear *:

This will reply to your letter in which you seek correction of assessments issued to *, , and *** (collectively, the "Taxpayers"), for the periods January 2003 through December 2006, January 2003 through December 2006, February 2005 through December 2006 and April 2005 through December 2006, respectively. I apologize for the delay in this response.

FACTS

The Taxpayers are masonry contractors that were audited and assessed use tax on labor charges to cut bricks. The Taxpayers purchase the bricks and provide the bricks to a third party business that cuts the bricks to the Taxpayers' specifications. The bricks are then returned to the Taxpayers and used to construct arches for real property construction jobs. The Department audited the Taxpayers and treated the third party's charges to cut the bricks as taxable fabrication labor. The Taxpayers maintain that the cutting of bricks does not change the state or form of the bricks. Thus, the cutting of the bricks does not meet the definition of fabrication and is not subject to sales and use tax.

DETERMINATION

Virginia Code § 58.1-602 defines the term "sale" to include "the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication, ...." Title 23 of the Virginia Administrative Code (VAC) 10-210-560 A defines fabrication as "[a]n operation which changes the form or state of tangible personal property ...." Paragraph B of the same regulation mirrors the statute cited above and states in part:

The tax applies to the charges for the fabrication of tangible personal property for users or consumers who furnish, either directly or indirectly, the materials used in the fabrication work.

The Department has traditionally held that tangible personal property that is cut, sawed, shaped, bent, threaded, welded, bored, drilled, punched, machined, sheared, or otherwise subjected to an operation which changes the property's form or state is considered to have been "fabricated." Such operations are deemed to represent a taxable service in accordance with the statute and regulation cited and the charge for the service is subject to sales or use tax. The Department has issued a number of public documents that address fabrication issues. In Public Document ("P.D.") 86-242 (11/28/86), the Tax Commissioner ruled that the cutting or shaping of lumber constituted fabrication because these activities changed the state or form of the lumber. In P.D. 90-14 (1/11/90), an operation in which two steel beams were spliced or welded together was deemed to be fabrication because it changed the state or form of the steel beams.

In accordance with Title 23 VAC 10-210-410, the Taxpayers are real property contractors and are considered the users and consumers of all purchases made in the performance of real property construction contracts. The Taxpayers furnish the bricks to a third party that cuts the bricks in a manner that allows the Taxpayers to construct arches. The bricks must be cut to different shapes so the bricks fit together properly to form the arches constructed by the Taxpayers. The form of the bricks is changed by cutting them and this constitutes fabrication for sales and use tax purposes.

The Taxpayers ask how the cutting of bricks by a third party is different from a brick mason hammering a brick to fit during construction. In that case, a taxable sale does not take place because the mason does not bill the customer for hammering the brick. The labor is included in the price for the construction work. Real property contractors generally do not make retail sales but are the users and consumers of tangible personal property and taxable services they purchase to perform real property construction. Thus, contractors pay the tax on all purchases of tangible personal property and taxable services made for their use or consumption. Unlike the brick mason, the third party business that cuts bricks is not performing real property construction services. The third party is a retailer and bills the Taxpayers for services that are specifically defined in the Code of Virginia as taxable retail sales.

Based on the Department's longstanding policy and the authorities previously cited, I find no basis to remove the fabrication labor charges from the Taxpayers' audits. The assessments are correct as issued. The Taxpayers' previous payments have been credited and updated bills, with interest accrued to date, will be mailed to the Taxpayers. The bills should be paid within 30 days from the date of the bill notices to avoid the accrual of additional interest.

The Code of Virginia sections, regulations and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions concerning this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2037185634.S