Was a construction dust-and-debris protection service exempt from Virginia sales tax when temporary plastic was installed and removed?

Subject

Construction dust-and-debris protection was an exempt service

Plain-English summary

Virginia treated the charge for temporary construction dust-and-debris protection and removal as an exempt service. The provider installed plastic below commercial-building ceilings during another company's roofing work, then removed the plastic and collected debris when the project ended.

Under the true-object test, customers were buying the protection and cleanup service. The plastic transferred to them was only incidental, so the customer-facing service charge was not subject to sales and use tax.

The provider remained responsible for Virginia tax on the materials, tools, and equipment used to perform the service. A credit for sales tax paid to another state was available only when the provider first took possession outside Virginia and the other state's tax was properly applicable and paid. Materials delivered directly to a Virginia job site, employee, agent, or Virginia place of business were first used in Virginia and received no out-of-state credit.

What this means for you

• A transaction can be an exempt service when transferred property is incidental to the customer's objective.
• The service provider generally pays tax on items it consumes while performing the service.
• Out-of-state tax credit depends on where initial possession occurs and whether the other state's tax was properly imposed and paid.
• Direct shipment to a Virginia job site can make the property fully taxable in Virginia.

Common questions

Why was the service charge exempt?

The true object was dust-and-debris protection and removal, not the temporary plastic.

Could the provider buy its materials tax-free for resale?

No. The ruling treated the provider as the user or consumer of its materials, tools, and equipment.

Did tax paid to another state always create a Virginia credit?

No. The provider had to take initial possession outside Virginia, and the other state's tax had to be properly applicable and paid.

Citations and references

• Va. Code § 58.1-609.5(1).
• 23 VAC 10-210-4040(D), (E).
• 23 VAC 10-210-450.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-62

Original ruling text

May 7, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter requesting a ruling on the application of the sales and use tax to a service provided by * (the "Taxpayer") to Virginia customers. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is headquartered outside of Virginia and offers construction dust and debris protection to building owners and roofing contractors. The Taxpayer temporarily installs plastic below the ceilings in commercial buildings to prevent debris from falling into work areas during a re-roofing construction project performed by another company. Upon completion of the project, the Taxpayer's crew removes the plastic and the accumulated construction dust and debris on and above the plastic. The Taxpayer asserts that it pays the sales and use tax on all materials purchased.

RULING

Virginia Code § 58.1-609.5 1 provides an exemption for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made . . . ." Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 D also provides the following:

In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.

In this case, the true object of the transaction is to secure the service of construction dust and debris protection and removal. Any tangible personal property (the plastic) transferred to customers is an incidental component of the transaction. Based on the above, the charge for the debris collection and removal service is exempt from sales and use tax.

As a service provider, the Taxpayer is generally liable for the Virginia retail sales and use tax on all materials, tools and equipment used in performing such services. See Title 23 VAC 10-210-4040 E. When purchasing from the Taxpayer's out-of-state location, a credit for sales tax paid to another state is available for tangible personal property used or consumed in Virginia provided the Taxpayer takes initial possession of the purchased property outside of Virginia and such other state's sales or use tax is properly applicable and paid. For more information on such out-of-state tax credits, see Title 23 VAC 10-210-450. On the other hand, materials purchased outside Virginia and delivered directly by the vendor to a Virginia job site, a Taxpayer's agent or employee in Virginia, or a Taxpayer's place of business in Virginia are considered first used in Virginia and thus fully taxable in Virginia. In such instances, no out-of­-state tax credit is available.

This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.

The Code of Virginia section and regulations 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 ruling, you may contact * in the Department's Office of Tax Policy, ,Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3326583885.R