Does a contractor who fabricates and installs mailboxes at new homes owe use tax on the materials, even if the finished mailboxes become real property?

Plain-English summary

Virginia's Tax Commissioner upheld a use tax assessment against a contractor who fabricated and installed mailboxes at new construction homes. The Department's auditor had classified the taxpayer as a "consuming contractor," meaning all the materials the taxpayer purchased to build the mailboxes were taxable to the contractor itself, not resold tax-free to the homeowner or builder.

The taxpayer pushed back on two grounds: first, that its local business license classified it as "personal services" rather than as a contractor, and second, that the finished mailboxes were real property (not tangible personal property) once installed. The Tax Commissioner actually agreed with the taxpayer that the completed mailboxes are real property — but that agreement didn't help the taxpayer's case. Under Virginia law, a contractor who fabricates materials and then incorporates them into real estate (so the materials lose their identity as tangible personal property and become part of the real estate) is deemed to have used or consumed those materials itself. That means the contractor owes the sales or use tax on the materials at the time of purchase, regardless of whether the final product is real property. The Commissioner also held that how the business is classified for local business-license purposes has no bearing on how it's classified for state sales and use tax purposes. The assessment for the September 2013 through August 2019 audit period was upheld in full.

What this means for you

Contractors who fabricate and install fixtures (mailboxes, cabinetry, railings, etc.)

If you build something out of raw materials and then install it into real estate so it becomes part of the real estate, Virginia treats you as a "using or consuming contractor." You owe sales tax on the materials when you buy them (or use tax if the supplier didn't collect it), even though your finished product is real property. You cannot buy the raw materials tax-free on a resale exemption certificate in this situation, because you are the end user of the materials, not a reseller of tangible personal property.

Businesses with a "personal services" local business license

Don't assume your local business-license classification carries over to state tax treatment. This ruling makes clear that how a local commissioner of the revenue classifies your business for BPOL (business license) purposes is irrelevant to how the Department of Taxation classifies you for sales and use tax. You can be a "personal services" business locally and still be a "consuming contractor" for state use tax purposes.

Accountants and tax professionals advising contractors

The key legal chain here is § 58.1-610 A of the Code of Virginia, together with 23VAC10-210-410 A and D and 23VAC10-210-560. A contractor who fabricates (changes the form or state of) tangible personal property and incorporates it into real estate is a using/consuming contractor and must pay tax on the cost price of the raw materials — via Form ST-7, Consumer's Use Tax Return, if the supplier didn't collect the tax at purchase. Whether the end product is legally real property is not the deciding question; what matters is whether the contractor consumed materials in performing a real-property construction contract.

Homeowners and builders buying installed mailboxes

This ruling doesn't change what you pay at the register — it addresses who owes tax on the contractor's raw materials, not what's charged to the customer for the finished installation.

Common questions

Q: The mailboxes became real property once installed — why did the taxpayer still owe tax?
A: The Tax Commissioner agreed the finished mailboxes were real property, but that doesn't exempt the contractor. Virginia law treats a contractor who fabricates tangible personal property and installs it into real estate as having used and consumed that property itself, so the tax attaches to the contractor's purchase of the raw materials, not to the final real-property product.

Q: Does a "personal services" business license classification protect a contractor from use tax?
A: No. The ruling states directly that the taxpayer's business-license classification for local purposes "is irrelevant to the Taxpayer's classification for sales and use tax purposes."

Q: What period did the assessment cover, and what happened to it?
A: The audit period was September 2013 through August 2019. The assessment was upheld, with an updated bill (including accrued interest to date) to be mailed, and no further interest to accrue if paid within 60 days of the bill.

Q: What's the difference between a "consuming contractor" and a reseller for sales tax purposes?
A: A reseller buys tangible personal property tax-free (using a resale exemption certificate) and collects sales tax when reselling it to the end customer. A "using or consuming contractor" instead is treated as the end consumer of the materials it buys, because it fabricates and incorporates them into real estate — so it must pay sales or use tax on the materials itself, with no resale exemption available.

Citations and references

Statutes and regulations:

• § 58.1-1821, Code of Virginia (appeal of tax assessment)
• § 58.1-610 A, Code of Virginia (contractors deemed consumers of tangible personal property used in real property construction)
• 23VAC10-210-410 A (regulation on contractors and real property construction)
• 23VAC10-210-410 D (using/consuming fabricators must pay tax on cost of raw materials)
• 23VAC10-210-560 (definition of fabrication)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-163

Original ruling text

September 15, 2020

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

Dear *:

This will respond to your letter, submitted on behalf of * (the “Taxpayer”), in which you appeal the retail sales and use tax assessment issued as a result of an audit for the period of September 2013 through August 2019. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer was engaged in the fabrication and installation of mailboxes at new construction homes in Virginia. During the audit, the Department’s auditor concluded that the Taxpayer was a consuming contractor and, therefore, all materials purchased by the Taxpayer were taxable. The Taxpayer was issued an assessment for untaxed purchases of materials. The Taxpayer contests the Department’s assessment, asserting that its business license classified the Taxpayer as personal services and not as a contractor. The Taxpayer also asserts that the completed mailboxes are real property and not tangible personal property.

DETERMINATION

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 of the Virginia Administrative Code (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.

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 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 Form ST-7, Consumer's Use Tax Return.

The Department agrees with the Taxpayer in finding that the completed mailboxes are real property. In accordance with the cited authorities, the Taxpayer is clearly a using or consuming contractor in Virginia for retail sales and use tax purposes. Thus, any materials used in the fabrication of the mailboxes would be deemed to have been used and consumed by the Taxpayer. The Taxpayer’s classification with regard to local business license purposes is irrelevant to the Taxpayer’s classification for sales and use tax purposes.

As such, the assessment at issue is upheld. An updated bill with accrued interest to date will be mailed to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of the bill.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3284.C