Who paid Virginia sales or use tax in a cabinet installation chain involving a big-box retailer, broker, and installer?

Plain-English summary

After a July 2017 law change, retailers selling and installing cabinets that became part of real property were treated as real-property contractors. In the proposed chain, that status applied to the big-box retailer, the broker, and the installer.

The party that actually bought the cabinets and job materials had to pay sales tax to the supplier or remit consumer use tax if the supplier did not charge it. None of the three parties could claim a resale exemption for materials incorporated into the realty, and their invoices should describe real-property construction services to avoid taxing the same materials twice.

Citations and references

• Va. Code § 58.1-610 D
• 23 VAC 10-210-410 A
• Virginia Tax Bulletin 17-8 and P.D. 17-180

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-220

Original ruling text

December 29, 2017

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you seek a ruling regarding the application of the retail sales and use tax to the purchase, sale and installation of cabinets. I apologize for the delay in responding to your letter.

FACTS

In your letter, you request that the Department base this ruling on the fact pattern that follows.

A big box retailer sells cabinets to a customer. The sale includes the installation of the cabinets. The big box retailer contracts with a broker/retailer to furnish and install the cabinets. The broker/retailer subcontracts with an installer to furnish and install the cabinets.

There are four transactions related to the sale and installation of the cabinets.

Invoice #1: The retailer/broker invoices the installer for the purchase of the cabinets and materials.

Invoice #2: The installer invoices the retailer/broker for the cost of the cabinets and materials, installation labor and profit.

Invoice #3: The retailer/broker invoices the big box retailer for the cabinet job.

Invoice #4: The big box retailer invoices the customer for the cabinets and installation.

You ask which party in the transactions described is the retailer that is responsible for charging and remitting the Virginia retail sales tax to the Department. You also seek confirmation that the remaining parties qualify for the resale exemption on the purchase of the cabinets and materials.

RULING

Legislative Change

The 2017 Virginia General Assembly enacted House Bill 1890 and Senate Bill 1308 (2017 Acts of Assembly, Chapters 436 and 449). The law change, which became effective July 1, 2017, affects the tax treatment of retailers that sell and install certain products that become part of real property upon installation. Tax Bulletin 17-8 was issued by the Department on June 29, 2017 and discusses the law change in detail. As this change affects the response to this ruling request, a member of my staff contacted you and was instructed to base this ruling on the new law that is now in effect.

Prior to the legislative change noted above, Va. Code § 58.1-610 D provided an exclusion from the real property contractor provisions of Va. Code § 58.1-610 for retailers that sold and installed specific items that became part of real property upon installation. The excluded items listed in the statute included cabinets. The legislative change removed the retailer exclusion from the statute. Virginia Code § 58.1-610 D now states “[t]angible 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.”

As a result of this legislative change, big box retailers are now considered real property contractors and are the taxable users or consumers of tangible personal property purchased for sale and installation if such property becomes part of the realty upon its installation.

Ruling Response

Based on the application of Va. Code § 58.1-610 D to the facts presented in your letter, the big box retailer is a real property contractor with respect to the sale and installation of cabinets. The big box retailer is responsible for paying the sales or use tax to its supplier for the cabinets, supplies, materials and other items purchased to perform the cabinet work. If the supplier does not charge the sales tax at the time of the sale of the cabinets and other job materials, the big box retailer must report and remit directly to the Department the proper amount of consumer use tax that is due on the items purchased. In addition, if the cabinets and job materials are withdrawn from a tax exempt inventory, the big box retailer must report and remit the consumer use tax on the cost price of the items withdrawn from inventory.

This response assumes that the big box retailer is the party that purchases the cabinets and materials used to perform the job. Based on the facts presented, the broker/retailer and the installer are real property contractors because both parties are also contracting to provide real property services. In the event the broker/retailer or the installer is responsible for purchasing the cabinets and materials directly from the suppliers, the party making the purchases is responsible for paying the applicable sales tax to the supplier or remitting consumer use tax to the Department, if the supplier does not charge the tax.

The Department recently published Public Document 17-180 (10/13/17), which provides additional information regarding the law change. The ruling addresses scenarios that are similar to the facts in this ruling and consistent with this response.

Resale Exemption

Title 23 of the Virginia Administrative Code 10-210-410 A provides that:

Tangible personal property incorporated in real property construction which loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor. Any sale, distribution, or lease to or storage for such a contractor is deemed a sale, distribution, or lease to or storage for the ultimate consumer (the contractor), and not for resale by the contractor. The dealer (supplier) making the sale, distribution, or lease to or storage for such a contractor must collect the tax from him. [Emphasis added.]

Under the facts presented, the resale exemption is not available to the big box retailer, the broker/retailer or the installer. Each party is contracting to furnish and install tangible personal property that becomes real property upon installation. As such, all three parties are acting as real property contractors and the resale exemption is not available. The transactions between the parties as described should be structured in a manner to avoid the double taxation of the cabinets and related materials to be installed. The invoices between the three parties should reflect the fact that the charges are for real property construction services rather than retail sales of tangible personal property.

This ruling is based on the facts as presented and outlined in this letter. Any change in the facts or the introduction of new facts may lead to a different result.

The Code of Virginia section, regulation, public document and Tax Bulletin cited, along with other reference documents, 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 concerning this ruling, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1168.S