Did a subcontractor's failure to collect sales tax on installed floating floors relieve the building contractor of tax?

Subject

Purchaser owed use tax when flooring subcontractor failed to collect sales tax

Plain-English summary

Virginia upheld use tax against the residential building contractor even though its subcontractor should have collected sales tax. The subcontractor sold and installed floating laminate floors without charging the contractor tax.

Virginia's prior policy treated sale and installation of floating laminate floors as a retail sale. The seller had a collection duty, but the purchaser still bore the legal tax debt.

Because no Virginia sales or use tax was paid when the contractor purchased the flooring, the contractor had to remit use tax directly to the Department. Virginia therefore upheld the audit assessment.

What this means for you

• A vendor's failure to collect sales tax does not necessarily eliminate the purchaser's liability.
• Review invoices for taxable project purchases and accrue use tax when Virginia tax was not charged.
• The ruling treated floating laminate flooring installation as a retail sale under the cited policy.
• Contractors should not assume the Department must collect only from the subcontractor.

Common questions

Was the subcontractor supposed to collect sales tax?

Yes, under the floating-floor treatment cited in the ruling.

Why was the purchaser still liable?

Virginia sales and use tax was a legal debt of the purchaser, so unpaid sales tax became a use-tax obligation.

What happened to the assessment?

It was upheld.

Citations and references

• Va. Code §§ 58.1-604 and 58.1-610.
• 23 VAC 10-210-6030(A).
• United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978).
• Virginia Public Document 98-139.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-154

Original ruling text

October 16, 2009

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

Dear *:

This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to * (the "Taxpayer") for the period October 2005 through December 2008. I apologize for the delay in this response.

FACTS

The Taxpayer is a residential building contractor that was audited by the Department. The Taxpayer was assessed use tax on purchases of floating floors sold and installed by a subcontractor. The Taxpayer maintains that the subcontractor is a retailer of the floating floors and is responsible for charging and collecting the retail sales tax. Thus, the Department should look to the subcontractor, and not the Taxpayer, for payment of the tax.

DETERMINATION

In Public Document 98-139 (10/6/98), the Department ruled that the sale and installation of floating laminate floors is a retail sale and that the seller must collect sales tax from it customers on the sale and installation of this type of floor. Virginia Code § 58.1-604 imposes a use tax on the use or consumption of tangible personal property in the Commonwealth. Title 23 of the Virginia Administrative Code 10-210-6030 (A) provides in part that "[t]he use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased." Further, Va. Code § 58.1-610 clearly imposes the tax upon purchases made by real estate construction contractors such as the Taxpayer.

The courts have held that the legal incidence of the Virginia sales and use tax is on the purchaser. Although the seller is legally obligated to collect the tax from the purchaser, the tax is a legal debt of the purchaser. See United States v. Forst , 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978). The Taxpayer's subcontractor made retail sales of flooring and failed to collect the tax on those sales, making the Taxpayer liable for remitting the applicable use tax on the flooring directly to the Department. Based on the cited authorities, the Department properly assessed use tax on the flooring purchases held taxable in the Taxpayer's audit.

The Taxpayer will be issued an updated bill that includes accrued interest. The bill should be paid within 30 days of the date of the updated bill to avoid the accrual of additional interest.

The Code of Virginia sections, regulation and public document 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 regarding this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3326888919.S