I'm a subcontractor who fabricates and installs steel stairs and railings into buildings. I bought my raw materials tax-exempt on a resale certificate and figured the general contractor would remit sales tax on the finished work -- can the state still assess ME use tax on the materials?

Plain-English summary

An out-of-state subcontractor fabricated and installed steel stairs, gates, and railings for commercial real property construction projects in Virginia. It bought the raw steel and other materials exempt from sales tax under a resale certificate, then used machinery to cut, bend, weld, and otherwise transform those materials into finished stairs, gates, and railings, which it installed into the buildings. Throughout the audit period, the subcontractor didn't collect or remit sales tax on its work to the general contractor -- it instead relied on the general contractor to remit tax based on the subcontractor's invoices once the overall project was complete. The Department's audit assessed use tax directly against the subcontractor on the cost of the raw materials used in fabrication.

Fabrication + real property installation = "consuming contractor." Virginia law treats any tangible personal property that's transformed by "fabrication" -- cutting, sawing, shaping, bending, welding, or similar operations that change its form -- as a taxable service. Separately, anyone who furnishes tangible personal property while performing construction, installation, or repair work on real estate is deemed to have PURCHASED that property for their own use or consumption (not for resale), even though they go on to build it into someone else's building. Put those two rules together: a subcontractor that both fabricates materials AND installs the fabricated product into real property is a "consuming contractor" -- meaning IT, not the general contractor, and not the ultimate building owner, is legally responsible for paying sales or use tax on the raw materials it used.

You can't contractually shift the tax obligation. The subcontractor argued the general contractor was supposed to remit the tax on its behalf, based on the subcontractor's invoices. The Tax Commissioner rejected this: under Virginia's regulations, a contractor (prime or sub) never legally "passes the tax on to anyone else as a tax" -- at most, a contractor can factor the expected tax cost into its BID PRICE when submitting a proposal. There's no mechanism by which a subcontractor's private expectation that someone else would remit tax on its behalf changes who the law actually holds responsible. As the consuming contractor here, the subcontractor itself owed the tax on its materials, and the assessment was upheld in full.

What this means for you

Contractors and subcontractors who fabricate tangible personal property and install it into real property (stairs, railings, gates, custom metalwork, cabinetry, etc.)

You are a "consuming contractor" for Virginia sales and use tax purposes -- you owe tax on your raw materials yourself, and can't avoid that responsibility by assuming a general contractor (or anyone else) will remit tax on your behalf based on your invoices.

Businesses relying on informal arrangements where "someone else" is expected to handle sales/use tax remittance

Get any such arrangement in writing and confirm it actually shifts LEGAL responsibility (which, for a consuming contractor's own materials, it generally can't) -- an unconfirmed assumption that another party is handling your tax obligation is not a defense if the Department audits and assesses you directly.

Businesses buying materials under a resale certificate that will ultimately be fabricated and installed into real estate

A resale certificate is appropriate only if you're truly reselling the property as tangible personal property -- once you fabricate it and then install the finished product into real property, you become the ultimate consumer of the materials, and the resale exemption doesn't hold up on audit.

Common questions

Q: I fabricate custom metalwork (stairs, gates, railings, etc.) and install it into buildings -- am I responsible for sales/use tax on my raw materials?
A: Yes. Fabricating tangible personal property and then installing it into real property makes you a "consuming contractor" under Virginia law, personally responsible for the sales or use tax on the materials used, regardless of any arrangement with a general contractor.

Q: Can I arrange for the general contractor to remit sales tax on my behalf instead?
A: Not in a way that shifts your legal tax liability -- Virginia regulations state a contractor doesn't pass sales/use tax on to anyone else "as a tax"; at most, you can build the anticipated tax cost into your bid price. The legal responsibility to pay tax on materials used stays with the consuming contractor.

Q: I bought my materials tax-exempt using a resale certificate -- does that protect me if I later fabricate and install them?
A: No. Once you fabricate the materials and install the finished product into real property, you're the ultimate consumer of those materials, not a reseller, so the resale exemption doesn't apply and use tax is due on the materials' cost.

Citations and references

• 23 VAC 10-210-410 A -- a contractor never "passes the tax on to anyone else as a tax"; at most, the anticipated tax cost is factored into the contractor's bid

Subject

Fabricating Contractor of steel stairs, gates, and railings : Real Property

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-95

Original ruling text

July 20, 2021

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

Dear *:

This will reply to your letter in which you protest the sales and use tax assessment issued to * (the “Taxpayer”) as a result of an audit for the period June 2014 through December 2017. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, an out-of-state subcontractor that fabricates and installs steel stairs, gates, and rails for commercial real property construction projects in Virginia, purchased the raw materials for its fabrication work exempt of the sales and use tax. For the period at issue, the Taxpayer did not include, collect or remit sales tax from the general contractor. Instead, the Taxpayer relied upon the general contractor to remit the tax upon completion of the final project. As a result of the Department’s audit, the Taxpayer was assessed use tax on the cost of the materials used to fabricate the metal work provided in the performance of its contracts. The Taxpayer appeals, contending it purchased the raw materials exempt from the tax under a resale certificate and the sales tax was remitted general contractors based on the Taxpayer’s invoices.

DETERMINATION

Fabricating Contractors

Virginia Code § 58.1-610 A provides that:

Any person who contracts orally, in writing, or by purchase order, to perform construction, 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.

Virginia Code § 58.1-602 defines the term “sale” to include “the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication…” Title 23 VAC 10-210-560 A defines fabrication as “[a]n operation which changes the form or state of tangible personal property…”

The Department has traditionally held that tangible personal property that is cut, sawed, shaped, bent, threaded, welded, bored, drilled, punched, machined, sheared, or otherwise subjected to an operation which changes the property’s form or state is considered to have been fabricated. These operations are deemed to be a taxable fabrication service in accordance with the statute and regulation cited, and the charge for such services is subject to the sales tax.

In this case, the Taxpayer purchased raw materials and utilizes machinery to transform these materials into stairs, gates and railings that are then installed into commercial real property. Pursuant to Title 23 VAC 10-210-560, the Taxpayer was engaged in fabrication. Because the fabricated tangible personal property was used by the Taxpayer in real property contracts, it was also a consuming contractor under Virginia Code § 58.1-610 A. As a consuming contractor, the Taxpayer is responsible for paying the sales or use tax on the purchase of raw materials.

The Taxpayer asserts that the general contractors were remitting the tax on its behalf. Pursuant to Title 23 VAC 10-210-410 A “a contractor, whether he be a prime contractor or subcontractor, does not pass the sales or use tax on to anyone else as a tax. He will take the amount of the tax into consideration in submitting bids”. Based on the cited authorities, the Taxpayer is responsible for compliance with the retail sales and use tax laws regarding its real property construction projects in Virginia.

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter.

The Code of Virginia sections 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, please contact * in the Office of Tax Policy, Appeals, and Rulings at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1691.A

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