Was a fence installer a taxable retailer when it had no showroom and bought construction materials only after accepting each job?

Subject

Fence installer buying materials job by job was a contractor, not a retailer

Plain-English summary

Virginia treated the fence business as a contractor and abated the sales-tax assessment in full. The company sold fences with or without installation, but a Department site visit found no showroom and no inventory held out to the public for retail sale.

Its materials were ordered after construction jobs were accepted. The property on hand consisted of materials awaiting a particular installation and leftovers from earlier jobs.

Although Virginia law specially addresses fence sellers and installers, the Department found that this business did not satisfy all elements of the regulatory retailer definition. It was therefore a using-and-consuming contractor for installed fences rather than a retailer taxing the full installed sale.

What this means for you

• Fence classification depends on the actual business model, not just the product installed.
• Job-specific construction materials differ from inventory held out for retail sale.
• A showroom was relevant here together with the absence of retail inventory, not as a standalone statutory requirement.
• Mixed installed and uninstalled sales require careful contractor-versus-retailer analysis.

Common questions

Did the business maintain retail inventory?

No. The observed materials were job-specific or leftovers and were not offered to the public.

What happened to the assessment?

It was abated in full.

Citations and references

• Va. Code § 58.1-610(D).
• 23 VAC 10-210-410(G).
• Virginia Public Document 09-60.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-157

Original ruling text

October 16, 2009

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

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the Taxpayer) as a result of an audit for

the period February 2003 through December 2008.

FACTS

The Taxpayer sells fences with or without installation. An audit resulted in the assessment of sales tax on the untaxed sales price of fences sold with installation because the auditor determined that the Taxpayer is a retailer as defined by Title 23 Virginia Administrative Code (VAC) 10-210-410 G. The Taxpayer contests the assessment on the basis that it should be treated as a contractor for purposes of such regulation because it does not maintain a showroom and does not carry a general inventory of goods for retail sale. The Taxpayer contends it carries only an inventory of construction materials. Such construction inventory consists of major fence components ordered on a job-by-job basis only. Moreover, title to these goods remains with the Taxpayer until the fence is constructed at the customer's property and thus should not be treated as a retailer's inventory within the meaning of Va. Code § 58.1-610 D. For these reasons and because the Taxpayer paid the sales or use tax on all of its purchases of raw materials, the Taxpayer requests abatement of the entire assessment.

Alternatively, if the Taxpayer is treated as a retailer, it requests that such treatment be limited to the last six months of the audit period because of the small amount of retail sales (with no installation) made during such period. If determined a retailer for purposes of the above cited regulation, the Taxpayer requests that the sales tax assessment apply only to the untaxed 10% markup applied to the materials installed by the Taxpayer. Furthermore, the Taxpayer requests that the assessment cover only three years.

According to the Department's records, the Taxpayer filed sales tax returns and paid the sales tax on sales made without installation for the periods July 2008 through December 2008.

DETERMINATION

Because the Taxpayer sells and installs fences, it is subject to the special provisions of Va. Code § 58.1-610 D, which provides the following:

Tangible personal property incorporated in real property construction which loses its identity as tangible personal property shall be deemed to be tangible personal property used or consumed within the meaning of this section. Any person selling fences . . . shall be deemed to be a retailer of such items and not a using or consuming contractor with respect to them, whether he sells to and installs such items for contractors or other customers and whether or not such retailer fabricates such items. [Emphasis added.]

Title 23 VAC 10-210-410 G sets out the Department's longstanding interpretation of the above statute and provides, in part, the following:

A person selling and installing tangible personal property that becomes real property after installation is generally considered a contractor, except that a retailer selling and installing fences . . . is not classified as a using or consuming contractor with respect to them.

For purposes of this subsection only, a "retailer" shall be deemed to be any person who maintains a retail or wholesale place of business, an inventory of the aforementioned items and/or materials which enter into or become a component part of the aforementioned items, and who performs installation as part of or incidental to the sale of the aforementioned items. As so defined, a retailer is not classified as a using or consuming contractor with respect to installations of the aforementioned items. A retailer must treat such transactions as taxable sales except that installation charges when separately stated on an invoice are exempt from tax.

Persons who are not classified as retailers within the definition set forth above and who sell and install fences, venetian blinds, etc., are deemed to be contractors and must pay the sales tax on such items at the time of purchase.

Subsection B is applicable to persons engaged as contractors with respect to the installation of fences . . . and also as sellers of such items at retail to customers, including contractors, on an uninstalled basis for use or consumption by them. [Emphasis added.]

I understand that a member of the Department's Appeals and Rulings staff met with the Taxpayer at his place of business. Based on that meeting, it was observed that the Taxpayer maintains only an inventory of construction materials and left over materials from prior construction jobs. I understand that none of the construction materials, whether awaiting installation for a particular job or left over from a prior job, are part of any retail inventory or held out to the public for retail sale. From these observations, it is apparent that the Taxpayer does not currently maintain a retailer's inventory within the meaning of Va. Code § 58.1-610 D. It was also observed that the Taxpayer does not maintain a showroom.

In Public Document 09-60 (5/5/09), the Tax Commissioner considered classifying a cabinet business as a retailer if it "purchases materials on a job-by-job basis only and not in bulk for more than one job ." The Tax Commissioner determined that there was no showroom requirement for a place of business because the retailer definition set out in Title 23 VAC 10­-210-410 G merely requires the existence of a retail or wholesale place of business. In light of the facts of this case, I must conclude that a showroom requirement should be applied only to true retail or wholesale businesses that conform to the spirit of Va. Code § 58.1-610 D. It is evident that the Taxpayer buys its primary construction materials on a job-by-job basis and consolidates its ordering of construction materials. While such ordering may constitute a form of bulk purchasing, the Taxpayer orders its primary materials only after it has accepted a construction job. Based on all of the foregoing, I find that the Taxpayer does not satisfy all of the criteria of the "retailer" definition in Title 23 VAC 10-210-410 G. Rather, the Taxpayer is a contractor of the fences that it sells and installs.

CONCLUSION

In accordance with this determination, the assessment is improper and will be abated in full.

The Code of Virginia sections, regulations and the public document 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 Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3451338320.R