Did a federal construction contractor owe consumer use tax on freestanding furniture, audiovisual equipment, and installed cabling?

Subject

Assessment of consumer use tax on untaxed purchases of tangible personal property.

Plain-English summary

A real-property contractor challenged consumer use tax on furniture, audiovisual equipment, and related property bought for federal construction projects. The audit had treated the contractor as the user or consumer of all the items.

Virginia distinguished property incorporated into real estate from freestanding items. Furniture, chairs, shelving, file cabinets, power strips, and similar property that remained unattached could be sold by the contractor as a retailer. To buy those items for resale without tax, the contractor had to register to collect sales tax, separately state the property charges, and give vendors a Form ST-10 resale certificate.

Cabling received different treatment. If the contractor permanently affixed cabling to the real property, the contractor used or consumed it and owed tax on its cost. If a vendor installed it, the vendor owed tax on the cabling's cost rather than passing that amount through as sales tax.

The contract line items did not establish separate independent contracts; the freestanding property was still acquired in connection with the federal real-property contracts. Even so, the distinction between affixed and freestanding property required the audit to be revised.

Citations and references

• Va. Code §§ 58.1-609.1(4) and 58.1-610.
• 23 VAC 10-210-230.
• P.D. 87-210, 11-56, and 14-91.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-131

Original ruling text

June 23, 2016

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 October 2006 through May 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a real property construction company. An audit resulted in the assessment of consumer use tax on untaxed purchases of tangible personal property that the auditor, who relied upon Public Document (P.D.) 11-56 (4/11/11), treated as used or consumed by the Taxpayer in the performance of its real property construction services.

The Taxpayer contends that the contested purchases constitute purchases of tangible personal property by the United States government and should qualify for exemption from the Virginia retail sales and use tax under Va. Code § 58.1-609.1 4. The contested purchases consist of furniture and audio visual equipment. The Taxpayer also contends that the furniture and other tangible personal property at issue were purchased under separate contracts.

DETERMINATION

Since the issuance of P.D. 11-56, the Department has issued P.D. 14-91 (6/12/14). In P.D. 14-91, a real property contractor engaged in a real property construction contract with the federal government to design, renovate, and construct certain facilities in Virginia. The contract was modified and the contractor was requested to furnish and install furniture, fixtures and equipment (FFE) for the project. The FFE consisted of freestanding office furniture and chairs, shelving, file cabinets, power strips and similar items found in typical office settings. Although the FFE was provided in connection with a real property construction contract, none of the FFE was incorporated into or permanently affixed to real property.

Pursuant to Va. Code § 58.1-610, a real property contractor's purchase of tangible personal property that is incorporated into the real property constitutes a sale to the ultimate consumer, and not a sale for resale by the contractor. Alternatively, when tangible personal property is purchased by the contractor and sold to customers and does not become permanently affixed to the real property, a contractor may purchase such tangible personal property exempt of the tax pursuant to the resale exemption. In such instances, the contractor must: (1) register with the Department for the collection and remittance of the retail sales tax on such sales, (2) separately state the charges for the tangible personal property to its customers, and (3) provide Form ST-10 (resale exemption certificate) to its vendors in order to make the FFE purchases exempt of the tax. The decision set out in P.D. 14-91 is further supported by P.D. 87-210 (09/15/87). In that case, a contractor that sold modular buildings with installation was considered a contractor with respect to the modular buildings but a retailer with respect to wall pictures, furniture, and similar items that did not become permanently affixed to the buildings. In accordance with the above discussion, the audit in the instant case will be revised.

In reviewing the contested miscellaneous purchase exceptions list, I note that a few purchases are for audio visual equipment, cabling and installation. If cabling is permanently affixed to the real property by the Taxpayer, then the Taxpayer is deemed to have used or consumed the cabling and is liable for the tax on the cost price of such cabling. If a vendor installed the cabling, then such vendor is liable for the tax on the cost price of the cabling and does not pass on the tax as a tax. This treatment is similar to the retail sale treatment for non-monitored burglar, security, and fire alarm equipment. See Title 23 of the Virginia Administrative Code 10-210-230.

Separate Contracts

Based on the contract documentation presented, I cannot conclude that any of the contract line item numbers (CLINs) for furniture purchases constituted separate independent contracts. Rather, it appears from the contract documentation presented that the furniture, audio visual equipment and other freestanding tangible personal property were awarded and purchased by the Taxpayer in connection with its real property contracts with the federal government.

Offer in Compromise

The Taxpayer contends that the contested assessment will create a financial hardship and would like to pursue an offer in compromise based on doubtful collection. No financial statements were furnished to establish the Taxpayer's financial condition. Notwithstanding, because of the determination made in this case and the fact that the Taxpayer has paid in full the non-contested assessment, there is no need to address an offer in compromise at this time.

CONCLUSION

The audit will be revised in accordance with this determination. If there is a balance remaining, 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, 600 East Main Street, 23 rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

Please note that failure to remit full payment, if a balance remains, within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program. See the enclosure entitled “Important Payment Information.”

The Code of Virginia sections, regulation and public documents 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 determination, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5650324281.R