Could a contractor buy U.S.-embassy construction materials tax-free when they were temporarily stored at a Virginia receiving point?

Plain-English summary

Virginia said the contractor's purchases were generally taxable unless they qualified for the narrow contractor exemption for property used solely outside Virginia. Routing the materials through a Virginia receiving point did not itself create an international-commerce exemption.

The dealer sold construction materials to a contractor building U.S. embassies abroad. Classified-project materials went to a Virginia consolidated receiving point, where they were received, temporarily stored, prepared, inspected and sealed by a State Department agent, and then sent to a freight forwarder.

Va. Code § 58.1-610(A) and 23 VAC 10-210-410(A) treated a real-property construction contractor as the taxable user or consumer of materials it furnished and installed. The resale exemption therefore did not apply.

Va. Code § 58.1-609.3(1) provided a specific exception when contractor property:

• was used solely in another state or foreign country;
• could be purchased there free of sales tax; and
• was stored temporarily in Virginia pending shipment.

The contractor had to apply to Virginia for Form ST-11A and prove the foreign tax treatment. The Department's policy said a foreign value-added tax was not similar to Virginia retail sales and use tax, so a country imposing VAT but no sales tax could satisfy that part of the test.

The general foreign-commerce exemption in Va. Code § 58.1-609.10(4) did not apply because the contractor took possession in Virginia. Only the contractor-specific exemption could protect the purchases on these facts.

What this means for you

• Do not assume an overseas destination makes a contractor's Virginia purchase exempt.
• Obtain Form ST-11A before treating qualifying foreign-project materials as exempt.
• Document sole foreign use, temporary storage, shipping, inspections, and the destination country's tax law.
• Distinguish a foreign VAT from a sales tax when applying the statutory condition.

Common questions

Q: Did the resale exemption apply?
A: No. Virginia treated the construction contractor as the user or consumer.

Q: Did the foreign-commerce exemption apply?
A: No, because the contractor took possession in Virginia.

Q: Could the special contractor exemption apply?
A: Yes, if all statutory conditions were proven and Form ST-11A was obtained.

Citations and references

• Va. Code §§ 58.1-610(A), 58.1-609.3(1), and 58.1-609.10(4).
• 23 VAC 10-210-410(A) and (I).
• P.D. 08-156 (August 29, 2008).

Subject

Virginia sales or use tax applies to materials in international commerce.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-207

Original ruling text

December 13, 2012

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request a ruling on the application of the retail sales and use tax to materials sold by * (the "Taxpayer") to a construction contractor who ships the materials from a consolidated receiving point in Virginia.

FACTS

The Taxpayer is a registered Virginia dealer that sells materials to a customer who constructs US embassies overseas. The customer's Virginia warehouse is a consolidated receiving point (CRP). This means that materials destined to classified overseas projects must be shipped to the CRP, where the materials are received, temporarily stored and prepared for overseas shipment. Once the materials are ready for shipment, a U.S. State Department agent will inspect the material and the shipping container and seal it. At this point, the container with the prepared materials is sent to a freight forwarder. The Taxpayer asks if any exemption from the Virginia sales or use tax applies to materials in international commerce.

RULING

Virginia Code § 58.1-610 A treats any person who performs construction services with respect to real estate and furnishes tangible personal property to affix to such real estate as the taxable user or consumer of the tangible personal property. Also see Title 23 Virginia Administrative Code (VAC) 10-210-410 A.

An exception to the above taxable treatment is set out in Va. Code § 58.1-609.3 1. This statute provides an exemption from the retail sales and use tax for:

Personal property purchased by a contractor which is used solely in another state or in a foreign country, which could be purchased by such contractor for such use free from sales tax in such other state or foreign country, and which is stored temporarily in Virginia pending shipment to such state or country.

As set out in subsection I of Title 23 VAC 10-210-410, a construction contractor may apply to the Department for a certificate of exemption, Form ST-11A. The contractor will need to include information to establish that the construction materials may be purchased by the contractor free from the sales or use tax in the foreign country. In addition, the Department has previously ruled that a value-added tax (VAT) that is commonly imposed in many foreign countries is not similar to the Virginia retail sales and use tax. See Public Document 08-156 (8/29/08). Accordingly, if the foreign country imposes a VAT but no sales tax, the contractor may purchase construction materials free from the Virginia retail sales and use tax.

Because Va. Code § 58.1-610 treats contractors as consumers, tangible personal property purchased by a construction contractor in Virginia or purchased outside Virginia and shipped into Virginia for use by a real property construction contractor is generally taxable to the contractor although it may subsequently arrange for the purchased materials to be shipped overseas. Furthermore, the resale exemption does not apply to the contractor's purchases of materials for its use or consumption. Nor does the foreign commerce exemption (provided by Va. Code § 58.1-609.10 4) apply to the circumstances in this instance because the contractor is taking possession of the materials in Virginia and Virginia law imposes the tax on such contractor's purchases, unless it is established that the purchases qualify for the exemption provided by Va. Code § 58.1-609.3 1.

CONCLUSION

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

The Code of Virginia sections, regulation and public document cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions 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,

Craig M. Burns

Tax Commissioner

AR/1-5052431565.R