What does Virginia Ruling of the Tax Commissioner P.D. 20-169 conclude about Sales Price: True Object, Exemptions - Manufactured Signs, Permit Fees, Permit Procurement Fees, Installation?

Plain-English summary

This ruling addresses a use tax assessment against an out-of-state medical care center operator with multiple Virginia locations. During an audit, the Department assessed use tax on fees the taxpayer paid its sign contractor for manufactured signs at its Virginia locations. The taxpayer appealed, arguing the fees were for real property installation services by a contractor, not a purchase of tangible personal property, and it submitted contractor invoices (not previously given to the auditor) itemizing "permit fees," "permit procurement fees," and "installation" charges.

The Tax Commissioner held that since July 1, 2005, Va. Code § 58.1-602 has defined manufactured signs as tangible personal property, regardless of whether the sign becomes attached to real property once installed. That statutory change supersedes the older regulation, 23 VAC 10-210-4070 A, that treated sign installers as real-property contractors — the taxpayer's reliance on that regulation was rejected. Applying the "true object" test (from prior ruling P.D. 12-70 and a 2011 Attorney General opinion), the Commissioner found the true object of the purchase was the sign itself, so the entire transaction was a taxable sale of tangible personal property.

On the specific line items: permit fees and permit procurement fees were held taxable because Virginia's "sales price" definition (Va. Code § 58.1-602) includes all charges connected to a sale of tangible personal property unless a statute expressly excludes them, and no statute exempts permit or survey charges. However, the separately stated installation labor charges on the contractor's invoices qualified for the specific statutory exemption in Va. Code § 58.1-609.5(2) for separately charged installation labor. The outcome was mixed: the Department upheld the tax on the signs and the permit-related fees, but ordered the audit revised to remove the separately stated installation charges, with corresponding interest and penalty adjustments to follow.

What this means for you

Sign companies and contractors

If you manufacture and install signs in Virginia, the sale is treated as tangible personal property, not a real-property contracting job, no matter how the sign is physically attached once installed. Any permit fees or permit procurement fees you bill along with the sign are part of the taxable sales price unless a specific statutory exclusion applies (none does for permits or surveys). To keep installation labor exempt, state and invoice it as a separate line item distinct from the sign, permit, and survey charges.

Business owners purchasing signs

If your business buys and installs signs at Virginia locations, expect to owe sales/use tax on the sign price plus any bundled permit fees, permit procurement fees, or survey charges — these do not qualify as exempt "real property" services. Only genuinely separately stated installation labor is exempt. Review contractor invoices carefully to confirm installation charges are broken out separately, since that is what determines whether that portion escapes tax.

Accountants and tax professionals

This ruling reaffirms the Department's position from P.D. 12-70 that manufactured signs are tangible personal property under Va. Code § 58.1-602, and it applies the true-object test (23 VAC 10-210-4040 D; 2011 Op. Va. Att'y Gen. 068) to hold that permit and permit-procurement fees riding along with a sign sale are part of the taxable sales price, while installation labor separately stated on the invoice remains exempt under Va. Code § 58.1-609.5(2). When advising clients being audited on sign purchases, check whether contractor invoices itemize installation separately — that itemization was decisive here.

Common questions

Q: Are manufactured signs treated as real property or personal property for Virginia sales tax?
A: Tangible personal property. Since July 1, 2005, Va. Code § 58.1-602 has defined manufactured signs as tangible personal property even after they are attached to and become part of real property, which supersedes the older regulation (23 VAC 10-210-4070 A) that treated sign installers as real-property contractors.

Q: Are permit fees and permit procurement fees for a sign taxable?
A: Yes. The ruling found no statutory exemption or exclusion covers permit fees, permit procurement fees, or survey charges when they are part of a sale of tangible personal property, so they are included in the taxable "sales price" under Va. Code § 58.1-602.

Q: Is sign installation labor taxable?
A: Not if it is separately stated on the invoice. Va. Code § 58.1-609.5(2) exempts amounts separately charged for labor or services rendered in installing property sold, and the Department ordered the audit revised to remove the taxpayer's separately stated installation charges.

Q: Did the taxpayer win or lose this appeal?
A: A mixed outcome. The Commissioner upheld tax on the signs themselves and on the permit fees, permit procurement fees, and survey charges, but agreed to remove the separately stated installation labor charges from the assessment, along with corresponding interest and penalty adjustments.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-602 (tangible personal property and "sales price" definitions; manufactured signs included since 7/1/2005)
• Va. Code § 58.1-604 (use tax based on cost price)
• Va. Code § 58.1-609.5 (service exemptions, including separately stated installation charges)
• Va. Code § 58.1-1821 (application for correction of assessment)
• 23 VAC 10-210-4070 A (sign contractor rule, superseded as to manufactured signs)
• 23 VAC 10-210-4040 D (true object test)

Related public documents and guidance:

• P.D. 12-70 (3/5/2012) (manufactured signs as tangible personal property; permit/survey fees taxable)
• P.D. 98-71 (4/20/1998) (taxability of services connected to a sale of tangible personal property)
• 2011 Op. Va. Att'y Gen. 068 (true object test)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-169

Original ruling text

September 22, 2020

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 correction of the retail sales and use tax assessment issued for the period January 2015 through December 2017. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is an out-of-state medical care center owner and operator with numerous locations in Virginia. As a result of the Department’s audit, the Taxpayer was assessed use tax on fees incurred in connection with the purchase of sign contracting services for its locations in Virginia. The Taxpayer appeals the assessment on the grounds that the fees incurred during the sign installation process resulted from real property installation services from a contractor and not the purchase of tangible personal property. With its appeal, the Taxpayer provides invoices from its sign contractor for the audit period that were not provided to the auditor. In addition, the Taxpayer requests an adjustment to the interest and waiver of the assessed penalty.

DETERMINATION

Manufactured Signs

The Department’s policy and treatment of sign manufacturing and installation businesses within Virginia during the audit period is well established. Effective July 1, 2005, Virginia Code § 58.1-602 included manufactured signs in its definition of tangible personal property. In Public Document (P.D.) 12-70 (3/5/2012), the Department explains the change, noting that the intent of the law change was to treat a transaction for the sale and installation of a manufactured sign as a sale of tangible personal property regardless of the fact that the sign may be attached to or become part of real property.

The inclusion of manufactured signs in the Virginia Code § 58.1-602 definition of tangible personal property and the legislative intent supersedes Title 23 of the Virginia Administrative Code (VAC) 10-210-4070 A, which states “Any person who constructs and installs signs, billboards or similar items which, upon installation, become incorporated into realty is a contractor with respect to such items. No tax is applicable to the charge for constructing and installing a sign which becomes attached to realty, but the person constructing and installing the item must pay the tax on all property used in the construction and installation.” The Taxpayer cites Title 23 VAC 10-210-4070 A in support of its claim that its contracted sign installation was a real property transaction. The Taxpayer’s reliance on the regulation is erroneous, and the contracted sign and installation expenses at issue are deemed a purchase of tangible personal property.

Service Charges Related to Sign Installation

The Taxpayer requests the Department remove the invoiced permit fees, permit procurement fees, and survey expenses on the basis that these fees and expenses are associated with real property installation. P.D. 12-70 addresses taxable services resulting from the manufacture and installation of signs onto a structure.

Virginia Code § 58.1-604 imposes a use tax based on the cost price of tangible personal property used or consumed in Virginia, and Virginia Code § 58.1-602 states the cost price is computed in the same method as the sales price. The “sales price” defined under Virginia Code § 58.1-602 means “the total amount for which tangible personal property or services are sold, including any services that are part of the sale … without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.” As stated in P.D. 12-70, “unless specifically exempt by law, any services provided in connection with the sale of tangible personal property are subject to taxation. See P.D. 98-71 (4/20/1998).”

Virginia Code § 58.1-602 lists the exclusions from the sales price of taxable tangible personal property transactions, and Virginia Code § 58.1-609.5 lists service exemptions. As stated in P.D. 12-70, “[f]or any part of the sales price to be exempted from the tax, the service or expense must be expressly stated in an exemption or exclusion statute.” With the appeal, the Taxpayer submitted invoices it received from the contracted sign installation company. The invoices show the total itemized charges to the Taxpayer, of which “permit fees,” “permit procurement fees,” and “installation” are clearly stated.

The exclusions from the “sales price” under Virginia Code § 58.1-602 include cash discounts allowed and taken, certain finance charges related to credit extended on conditional sale contracts, etc. The pertinent service exemptions under Virginia Code § 58.1-609.5 include separately stated transportation charges and separately charged installation or repair charges. There is no specific exemption or exclusion in the law that allows charges for permits or site surveys to be exempted or excluded from tax when such charges are part of the sale of tangible personal property.

In accordance with the guidance published in P.D. 12-70, the true object of the transaction must be analyzed before determining the applicability of the exclusions in Virginia Code § 58.1-602 and § 58.1-609.5. The Attorney General of Virginia has held that “when the true object of a transaction is the acquisition of a good and the service provided is incidental to that purchase, there is a connection between the sale and service that allows the imposition of the sales tax on the service. See 2011 Op. Va. Att’y Gen. 068. P.D. 12-70, citing Title 23 VAC 10-210-4040 D, states “a transaction will constitute an exempt service if the object of the transaction is to secure a service and the tangible personal property that is transferred to the customer is not critical to the transaction. On the other hand, if the object of the transaction is to secure the property, then the entire charge, including the charge for any services, is taxable.”

The taxpayer in P.D. 12-70 appealed the Department’s use tax assessment on its invoiced charges for permits and site surveys on the grounds that the charges should not be considered part of the sale. With regard to the taxpayer in P.D. 12-70, the Tax Commissioner determined that the permit fees and site survey fees were subject to taxation on the basis that: (1) the sign installation was a sale of tangible personal property, (2) a statutory exemption did not apply, and (3) the true object of the transaction was the sale of tangible personal property. The same is true in this case. The true object of the Taxpayer’s purchase is to obtain tangible personal property, the sign. Therefore, permit fees, permit procurement fees, and surveys fees made in connection with or related to the sign are taxable as part of the sale.

Installation Charges

The Taxpayer’s invoices from its contractor included separately stated installation charges. In accordance with Virginia Code § 58.1-609.5 2, the tax does not apply to “amounts separately charged for labor or services rendered in installing…property sold.” The audit will be adjusted to remove the separately stated and invoiced installation labor charges.

CONCLUSION

The audit will be revised by the appropriate field audit staff in accordance with this determination. Interest will be adjusted accordingly, and the applicability of the compliance and amnesty penalties will be determined based on the revision to the audit. Once the revision and adjustments are complete, a revised audit report will be provided to the Taxpayer. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 60 days of the date of the bill. Please remit payment within 60 days from the date of the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203.

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 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/1944.W

Related Documents

12-70

98-71