Was a cabinet fabricator a retailer when its office showed unsaleable sample cabinets and it bought primary materials for accepted jobs rather than general inventory?

Subject

Sample cabinets and job-specific materials did not make installer a retailer

Plain-English summary

Virginia removed installed-cabinet transactions from a six-year audit because the fabricator did not satisfy the showroom and inventory elements of the special cabinet-retailer rule. The sample cabinets mounted on two office walls showed styles and colors, but they were not merchandise held for sale or resale and therefore did not make the office a showroom.

The company also bought its primary materials for accepted jobs rather than for general speculative sale. Under the Department's clarified interpretation, even a consolidated bulk order for two or more accepted installation jobs did not create qualifying inventory when none of the materials were purchased for general sale.

The result was narrower than a complete audit cancellation. Freestanding cabinets and other freestanding items sold without installation remained retail sales unless a valid exemption certificate applied. Other fabricated items permanently affixed to realty followed the consuming-contractor rules described in the ruling.

What this means for you

• Unsaleable display samples do not necessarily create a retail showroom.
• Job-specific material purchasing differs from maintaining inventory for future general sales.
• The special cabinet rule required all three elements: a retail or wholesale place of business, qualifying inventory, and installation connected to the sale.
• Freestanding property sold without installation generally remained taxable retail property.
• Items built into or permanently affixed to realty could make the fabricator a consuming contractor for the materials.

Common questions

Did the office-wall cabinet samples count as merchandise?

No. They displayed styles and colors but were not held for sale or resale.

Did buying materials for multiple accepted jobs create inventory?

No, so long as the primary materials were not purchased for general sale purposes.

Were all sales removed from the audit?

No. Installed-cabinet transactions were removed, but taxable freestanding sales remained.

Did the business need a traditional showroom?

Under the clarified interpretation applied here, the showroom had to display merchandise actually held for sale or resale, not merely unsaleable samples.

Citations and references

• Va. Code § 58.1-610(D).
• 23 VAC 10-210-410(G) and 23 VAC 10-210-280.
• Virginia Public Documents 09-60 and 09-157.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-88

Original ruling text

June 4, 2010

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you request correction of the retail sales and use tax assessment issued as a result of an audit for the period June 2003 through March 2009. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer fabricates and installs cabinets into realty and also fabricates tables and desks. The Department's auditor determined that the Taxpayer is a retailer as defined in Title 23 Virginia Administrative Code (VAC) 10-210-410 G. The audit resulted in the assessment of sales tax over a six-year period because no sales tax was collected and reported. The audit also resulted in the assessment of use tax on untaxed purchases of office supplies and other items used or consumed by the Taxpayer.

The Taxpayer asserts that it is not a retailer of cabinets but a consuming contractor and, therefore, is not required to collect the sales tax on cabinets that it sells and installs. The Taxpayer contends that it is not a retailer in general because it has no showroom, does no advertising, and does not meet with customers at its place of business. The Taxpayer also contends that it is not a retailer as defined in Title 23 VAC 10-210-410 G because it does not maintain an inventory. The Taxpayer states that it buys materials on a job-by-job basis and does not maintain a stock of cabinets or a stock consisting of most of the cabinet materials needed to fabricate a finished product. While the Taxpayer does maintain supplies such as nails, staples, and glue, they are of inconsequential value in comparison to the value of the materials.

DETERMINATION

Pursuant to Va. Code § 58.1-610 D, persons who sell "fences, venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings (as distinguished from the floors themselves), cabinets, kitchen equipment, window air conditioning units or other like or comparable items shall be deemed to be a retailer of such items and not a using or consuming contractor . . . ." This statute is interpreted by section G of Title 23 VAC 10-210-410, which defines the term "retailer" for purposes of the above statute only as a person who satisfies all three of the following requirements:

1) Maintains a retail or wholesale place of business,

2) Maintains an inventory of the items or materials noted in the above statute that enter into or become a component part of such items or materials, and

3) Performs installation as part of or incidental to the sale of such items or materials.

It is my understanding that the audit was based, in part, on the ruling made in Public Document (P.D.) 09-60 (5/5/09), in which the Department determined there was no show room 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. The Department also 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 ." However, in P.D. 09-157 (10/16/09), the Department reconsidered the determination in P.D. 09-60 and clarified that the show room requirement does apply but only for true retail or wholesale businesses. Thus, a show room for purposes of Title 23 VAC 10-210-410 G is a room in which merchandise held for sale or resale is generally displayed. The show room requirement would not include a room that merely displays unsaleable samples of merchandise. In P.D. 09-157, the Department also clarified that the inventory requirement would apply to the bulk ordering of materials for general sale, e.g. , buying materials on the speculation of future jobs and sales. In contrast, the inventory requirement would not apply to a bulk order that consolidates primary material needs for two or more accepted jobs (to furnish and install cabinets) into one purchase order, provided none of those primary materials are purchased for general sale purposes.

It is my understanding that some sample cabinets are displayed on two walls in the Taxpayer's office, and they show the different styles and colors offered by the Taxpayer. Because these display cabinets do not constitute merchandise held for sale or resale, I find that such office does not satisfy the show room requirement of Title 23 VAC 10-210-410 G. Based on the facts presented, it appears that the Taxpayer also does not satisfy the inventory requirement of Title 23 VAC 10-210-410 G. Accordingly, transactions for the sale and installation of cabinets made during the audit period will be removed from the audit.

It is my understanding the Taxpayer makes and sells a number of other items, such as tables, desks, book cases, fireplace mantles, shelves, etc. These items are not like or comparable to cabinets or the other items specifically named in Title 23 VAC 10-210-410 G. Thus, the general tax rules apply to such items. For instance, if these items are built into realty or otherwise become permanently affixed to realty, the Taxpayer becomes the consuming contractor of all materials used in their construction and installation and is liable for the tax on the cost price of the materials.

As for freestanding desks, tables and other freestanding items sold at retail without installation by the Taxpayer, such sales are generally subject to taxation unless a valid exemption certificate is received from the purchaser. See Title 23 VAC 10-210-280 for the general rules applicable to exemption certificates. Without a valid exemption certificate, the Taxpayer is responsible for collecting the sales tax on retail sales of cabinets sold without installation and on retail sales of any other freestanding personal property that is not permanently affixed to realty by the Taxpayer. Any such retail sales will remain in the audit.

CONCLUSION

The audit will be revised in accordance with this determination. 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, Attention: *, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia section, 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/1-3783842415.R