Did a Virginia shutter manufacturer owe sales or use tax on raw materials used for shutters it installed as part of out-of-state real-property contracts?

Plain-English summary

Virginia upheld a use-tax assessment against a manufacturer that designed, fabricated, and installed custom wood plantation shutters. Once installed, the shutters became real property, so the taxpayer was a using and consuming contractor and owed tax on the cost of the wood, lacquer, hardware, and other raw materials.

That result also applied to shutters installed outside Virginia. The taxpayer exercised rights over the materials in Virginia by purchasing and fabricating them there. The industrial manufacturing exemption did not apply because the shutters were fabricated for the taxpayer's own real-property contracts, not manufactured as products for sale or resale.

The ruling distinguished a different transaction: if the taxpayer sold fabricated shutters to an out-of-state customer without installing them, Virginia sales tax would not be collected on that interstate sale.

Common questions

Why was the taxpayer treated as a contractor instead of a retailer? The installed shutters became part of real property, making the installer the consumer of the materials.

Did out-of-state installation eliminate Virginia tax on the materials? No. The taxpayer bought and fabricated the materials in Virginia.

Did the manufacturing exemption apply? No. The exemption required manufacturing products for sale or resale.

Citations and references

• Va. Code §§ 58.1-610 A, 58.1-609.3 2 (iii), and 58.1-602
• 23 VAC 10-210-410, 10-210-560, 10-210-780, 10-210-920, and 10-210-6030
• P.D. 04-156

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-147

Original ruling text

July 25, 2018

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 seek the correction of the retail sales and use tax assessment for the period November 2013 through December 2016. I note that the assessment is paid in full. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a manufacturer of wood plantation shutters in Virginia who contracts with clients to design, fabricate, and install the custom shutters in their homes or establishments. The Taxpayer has contracts within Virginia as well as other states.

The Taxpayer accrued and paid Virginia use tax only on the raw materials purchased for contracts performed within Virginia. The Taxpayer reported and paid the Virginia use tax due on raw materials by calculating the percentage of out-of-state sales to total sales for each reporting period. The total cost of the raw materials used to fabricate the shutters was reduced by the out-of-state sales percentage. The resulting balance was reported as the taxable cost amount on Form ST-9, Virginia Retail Sales and Use Tax Return. The Taxpayer was assessed the Virginia use tax on the cost of the raw materials allocated to out-of-state sales.

The Taxpayer contends that Title 23 VAC 10-210-410 D, Virginia Code § 58.1-610 A, and Public Document (P.D.) 04-156 state because they acquired and fabricated materials for use outside of Virginia, they are not required to pay use tax on those raw materials and are, instead, only required to remit tax on materials used in fabricating products for sale in Virginia. The Taxpayer also argues that the taxation of an industrial manufacturer for its business operations is not supported by Title 23 of the Virginia Administrative Code (VAC), section 10-210-920.

DETERMINATION

Contractors

Virginia Code § 58.1-610 A provides that:

Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption. Any sale, distribution, or lease to or storage for such person shall be deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale, and the dealer making the sale, distribution, or lease to or storage for such person shall be obligated to collect the tax to the extent required by this chapter.

The regulation interpreting this provision, Title 23 VAC 10-210-410 A further provides:

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.

P.D. 04-156 addresses a business that contracted with customers to sell and install window shutters. The Tax Commissioner ruled that window shutters become real property upon installation. As a result, the sale and installation of window shutters is a real property service that is not subject to the retail sales tax. Businesses engaged in the sale and installation of window shutters are using and consuming contractors and are required to pay the sales or use tax on the purchase of raw materials that are fabricated into window shutters.

The Taxpayer purchases raw materials (wood, lacquers, and hardware) and utilizes pneumatically powered machinery to transform these materials into wood plantation shutters. Pursuant to Title 23 VAC 10-210-560, the Taxpayer is engaged in fabrication, which is defined as an operation that changes the form or state of tangible personal property. As the Taxpayer fabricates tangible personal property exclusively for use and consumption in real property contracts, the Taxpayer must pay the sales tax or remit the use tax pursuant to Title 23 VAC 10-210-410 D, which states:

A fabricator who contracts to perform services with respect to real estate construction, and in connection therewith to furnish tangible personal property for incorporation in real estate construction thereby causing it to lose its identity as tangible personal property by becoming real property, is classified as a using or consuming contractor and must pay the tax on the cost price of the raw materials which make up such fabricated property. The tax must be paid at the time of purchase to all suppliers who are authorized to collect the tax. In instances where the supplier is not authorized to collect the tax or fails to collect the tax, the tax must be remitted directly to the Department of Taxation…

As a consuming contractor, the Taxpayer is responsible for paying the sales or use tax on the purchase of raw materials as they are the end user or consumer of tangible personal property that becomes real property after installation.

P.D. 04-156 supports this conclusion, explaining that “any person who furnishes and installs them [shutters] would be deemed a real property installation contractor pursuant to Virginia Code § 58.1-610 A and liable for the sales and use tax on all of its purchases of materials used in fabricating these shutters.” [Insert added.]

The Taxpayer is a consuming contractor located in Virginia; thus, any raw materials used in the fabrication of the wood plantation shutters would be deemed to have been used and consumed by the Taxpayer.

Manufacturing

Virginia Code § 58.1-609.3 2 (iii) provides an exemption from the retail sales and use tax for “machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining, or converting products for sale or resale ....” [Emphasis added.]

Title 23 VAC 10-210-920 A provides further clarification of the exemption statute and states, in pertinent part, that “for a business to obtain the exemption it first must be manufacturing or processing products for sale or resale ...” [Emphasis added.] Title 23 VAC 10-210-920 B 1 provides that “Establishments which manufacture or process tangible personal property as an incidental part of a retail or service business are generally deemed to be engaged in nonindustrial activities.”

Interstate Commerce

Pursuant to 23 VAC 10-210-780, if the Taxpayer sells fabricated window shutters to customers located outside Virginia, without installation, the Taxpayer would not be required to collect Virginia sales tax.

If the Taxpayer installs window shutters out of state, the Taxpayer would be subject to the provisions in Title 23 VAC 10-210-410 E, which states:

A fabricator who contracts to perform services with respect to real estate construction, and in connection therewith to furnish tangible personal property for incorporation in real estate construction thereby causing it to lose its identity as tangible personal property by becoming real property, is classified as a using or consuming contractor and must pay the tax on the cost price of the raw materials which make up such fabricated property. The tax must be paid at the time of purchase to all suppliers who are authorized to collect the tax. In instances where the supplier is not authorized to collect the tax or fails to collect the tax, the tax must be remitted directly to the Department of Taxation on Form ST-7, Consumer's Use Tax Return.

The use tax applies to “the use, consumption or storage of tangible personal property in Virginia,” as explained in Title 23 AC 10-210-6030. “Use,” as defined in Virginia Code § 58.1-602, means “the exercise of any right or power over tangible personal property incident to the ownership thereof”.

When installing window shutter out of state, the Taxpayer is considered a using and consuming contractor, responsible for paying the tax on the cost of the raw materials used in fabricating the shutters. As the Taxpayer operates and purchases raw materials in Virginia, the Taxpayer would be responsible for paying the tax on purchases from suppliers—or remitting the consumer use tax on the raw materials if the sales tax is not collected at the time of purchase.

CONCLUSION

Based on this determination, the assessment is correct. The Taxpayer has paid the assessment in full and no further action is required regarding the assessment in question.

The Code of Virginia sections, regulations, and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions about this determination, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1483L