Could a homebuilder remove freight-and-handling and millwork purchases from a Virginia audit sample?

Plain-English summary

Virginia gave the custom homebuilder 45 days to prove two categories of sampled audit purchases.

Combined “freight and handling” charges were taxable because handling is not exempt transportation. The invoice summary's shorter “freight” label did not control. The builder could obtain removal only by proving that the charge was actually freight alone or by submitting corrected invoices.

The builder also claimed a millwork vendor had acted as the real-property contractor and installed the materials. The contracts and general vendor letter did not identify the sampled transactions, and many invoices were missing. Virginia required transaction-specific invoices or evidence tying those purchases to vendor-installed real-property contracts.

Without the requested documentation, the existing assessment would become due.

Common questions

Is a combined shipping-and-handling charge exempt? Generally no. The exempt freight portion must be separately established.

Did unrelated vendor contracts prove the sampled millwork purchases? No. The evidence had to connect to the actual transactions in the sample period.

Citations and references

• Va. Code §§ 58.1-609.5 3 and 58.1-610 A
• 23 VAC 10-210-6000 A and B
• P.D. 96-119, P.D. 97-79, and P.D. 11-126

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-81

Original ruling text

May 9, 2018

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

Dear *:

This will reply to your letter in which you seek the correction of the retail sales and use tax assessments issued to * (the “Taxpayer”) for the period May 2009 through March 2016. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a custom homebuilder. An audit of the Taxpayer's records disclosed that the Taxpayer made purchases of tangible personal property that included freight and handling charges in the body of the invoice, but were listed as freight charges in the invoice summary. The freight and handling charges were untaxed and included in the audit sample. The Taxpayer also made purchases of tangible personal property that were used by the Taxpayer in its installation of stairs and millwork during home construction projects.

The Taxpayer disagrees with the assessment, contending that the freight charges in the invoice summary are separately stated charges and should not be included in the sample. The Taxpayer also states that the millwork was installed by the vendor, who was acting as a contractor installing materials that became real property. The Taxpayer seeks to have the purchases removed from the auditor's sample computation, which would result in a revision to the Department's assessment.

DETERMINATION

Delivery Charges

Virginia Code § 58.1-609.5 3 states that the retail sales and use tax does not apply to “transportation charges separately stated.” Title 23 of the Virginia Administrative Code (VAC) 10-210-6000 A states:

The tax does not apply to transportation or delivery charges added to a taxable sale provided such transportation charges are separately stated on the invoice to the customer. If the transportation or delivery charges are not separately stated on the invoice, they will become part of the sales price of the property and will be subject to the tax.

Title 23 VAC 10-210-6000 B states that:

As used in this section the terms “transportation” and “delivery charges” mean charges for delivery from the seller to the purchaser, commonly known as “transportation-out,” and include postage or common carrier charges. Transportation and delivery charges do not include charges from a manufacturer to a retailer's place of business relative to purchases for resale, nor do they include handling charges . [Emphasis added].

The Tax Commissioner has addressed the transportation and handling issue in prior determinations. In Public Document (P.D.) 96-119 (6/4/96), the taxpayer was assessed use tax on combined freight and handling charges. The taxpayer presented letters from its suppliers that segregated the shipping charges. Although the Tax Commissioner confirmed that the combined charge of exempt shipping and taxable handling rendered the entire charge taxable, the Department agreed to remove the shipping portion from the assessed charges based on the vendor statements.

In P.D. 97-79 (2/18/97), the taxpayer was assessed tax on lump-sum shipping and handling charges. The Tax Commissioner found that although the taxpayer invoiced charges as “shipping and handling,” the amounts were exempt freight and insurance charges. Accordingly, the charges were removed from the audit.

In P.D. 11-126 (7/6/11), the taxpayer was assessed tax in the audit on combined shipping and handling charges. The taxpayer maintained that the charges were mislabeled on the invoices and were for shipping only. Based upon the rulings in Public Documents 96-119 and 97-79, and because the audit was a first time audit for the taxpayer, the taxpayer was given the opportunity to provide documentation to support its contention that the charges at issue were only for shipping.

In this instance, the freight and handling charges are separately stated within the body of the vendor's invoices. The same charges are shown as freight only in the invoice summary. The auditor has not seen any documentation that provides that the freight and handling charges actually represent freight charges only. Unless the Taxpayer can provide proof that freight and handling charges represent freight only or that the vendor will re-invoice its charges, the Department's assessment is correct as issued. I will allow the Taxpayer an additional 45 days to submit such documentation or to submit invoices showing the corrected charges.

Millwork

The Taxpayer, as a custom homebuilder, is a real property contractor. Generally, real property contractors must comply with Virginia Code § 58.1-610 A, which sets out the following rule:

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.

In this instance, the auditor found in the sample period, thirty-one untaxed purchase transactions from a particular vendor. Of those transactions, the auditor found that six invoices did not show any application of the sales tax from the vendor nor did the auditor find where the Taxpayer had accrued and remitted the tax on those same purchases. The remaining purchases did not have any invoice documentation to review to determine if the tax was applied or not. Further, in no instance did any of the transactions have any documentation to support the Taxpayer's contention that the purchases at issue were part of a real property contract in which the purchased property was installed by the vendor. The Taxpayer provides, with its appeal, two contracts that appear to indicate that the same vendor at issue acted in the capacity of a real property contractor. While it is conceded that the contracts provided may refer to purchases included in real property contracts, the contracts provided are not within the sample period, nor do they refer to any of the transactions at issue.

Additionally, the Taxpayer has submitted a letter from the vendor making broad statements of the type of work and services performed by the vendor. However, such statements do not provide documentation to prove that the transactions at issue are real property transactions. If the Taxpayer can provide the missing invoices or evidence that the invoices at issue are part of a real property contract, I will consider a revision of the audit, dependent upon review by the Department's auditor. As with the prior issue regarding the freight and handling, I will allow the Taxpayer an additional 45 days to provide the required documentation to support its position.

The audit staff will contact you to arrange a mutually agreed upon time to review the required documentation. If such information is not made available within the allotted time, the Department's audit assessment will be considered correct as issued and become immediately due and payable.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/738.J