I install wireless signal-boosting systems in buildings -- how does Virginia sales/use tax apply to my sales when a customer gives me an exemption certificate, to my own purchases, to the amplifier equipment I install, and to my shipping charges?

Plain-English summary

A company that designs and installs wireless signal-boosting systems inside Virginia buildings asked the Department for a ruling covering four distinct questions about how sales and use tax applies to its business.

Exemption certificates and direct sales. Sometimes the company's customers give it a resale or exemption certificate; other times, the company makes a straightforward taxable sale of the installed system. The Department explained that the company, as a "dealer" selling tangible personal property, doesn't have to collect and remit sales tax on a transaction where it accepts a complete, valid exemption certificate in good faith -- but the burden is on the company to make sure any certificate it accepts actually bears the required information and covers the specific property being sold, and it must retain those certificates (along with its other sales records) for at least three years.

Use tax on the company's own purchases. The company asked whether it's still subject to use tax on its own purchases even when a customer hands it an exemption certificate. The Department clarified these are separate questions: the customer's certificate relieves the company of collecting SALES tax on that sale to the customer. USE tax is a different animal -- it applies only when the company itself buys tangible personal property for its OWN use (not for resale) and Virginia sales tax wasn't correctly charged on that purchase. A customer's certificate on an unrelated sale has no bearing on that.

Real property vs. tangible personal property (the amplifiers). The company's bi-directional amplifiers boost cellular or two-way radio signal throughout a building; a building occupant can unplug and remove the amplifier itself, leaving only wiring behind, which renders the system non-functional. Whether this equipment counts as part of the real estate (exempt as a real property improvement) or remains taxable tangible personal property turns on Virginia's classic three-part fixture test from Danville Holding Corp. v. Clement: (1) whether the item is physically annexed to the building, (2) whether it's adapted to the building's use or purpose, and (3) most importantly, whether the party who installed it intended to make it a PERMANENT part of the building. Because the amplifiers are specifically designed to be removable if the occupant relocates, and nothing shows an affirmative, plain intent to permanently annex them, the Department concluded they remain tangible personal property (i.e., stay taxable as such) rather than becoming an exempt real estate fixture.

Shipping charges. Separately-stated transportation or delivery charges are exempt from Virginia sales tax. But if shipping is lumped into one combined charge with other taxable items (including handling charges), the whole lump sum becomes taxable. The Department also noted it can pursue payment of unpaid tax from either the buyer or the seller, even though the tax is legally imposed on the purchaser and collected by the seller.

What this means for you

Businesses that sometimes sell for resale and sometimes sell directly to end users

Accepting a valid, complete exemption certificate in good faith relieves you of the duty to collect sales tax on that sale -- but you're still on the hook if the certificate is incomplete, doesn't match the property sold, or you didn't actually keep it on file. Retain exemption/resale certificates and your other sales records for at least three years.

Businesses wondering whether accepting a customer's exemption certificate creates a USE tax problem for them

It generally doesn't. Use tax applies to what YOU buy for your own use or consumption when sales tax wasn't properly charged -- it's a separate question from whatever certificate a customer gives you on a sale you make to them.

Anyone installing removable equipment that's wired into a building (amplifiers, sensors, control panels, etc.)

Virginia's three-part fixture test (physical annexation, adaptation to the building's purpose, and intent to permanently annex) decides whether your equipment is an exempt real property improvement or remains taxable tangible personal property. Equipment specifically designed to be removed if the occupant relocates -- even if it's wired in -- is likely to stay classified as tangible personal property, since there's no clear intent to make it a permanent part of the building.

Anyone charging customers for shipping

State the shipping/transportation charge separately from other charges on the invoice if you want it exempt. Bundling it with handling or other taxable charges into one lump sum makes the whole amount taxable -- and the Department can pursue either the buyer or the seller for tax that wasn't properly collected.

Common questions

Q: If a customer gives me a resale exemption certificate, do I still owe use tax on my own purchases?
A: No -- those are separate issues. A customer's certificate relieves you of collecting sales tax on your sale to them. Use tax only applies to items you buy for your OWN use (not resale) where sales tax wasn't correctly charged on that purchase.

Q: How long do I need to keep exemption and resale certificates?
A: At least three years, along with your other records of taxable and nontaxable sales, so you can substantiate your proper tax liability if audited.

Q: Is wired-in equipment that a building occupant can unplug and remove considered part of the real estate?
A: Not necessarily. Virginia applies a three-part test -- physical annexation, adaptation to the building's use, and (most importantly) intent to permanently annex the item. Equipment designed to be removable if the occupant relocates generally lacks the clear intent needed to convert it into a real estate fixture, so it stays taxable tangible personal property.

Q: Are my shipping charges taxable?
A: Not if separately stated on the invoice. If you lump shipping together with other taxable charges (including handling), the whole combined charge becomes taxable.

Q: Who does the Department go after if sales tax wasn't properly collected -- the buyer or the seller?
A: Either. The tax is legally imposed on the purchaser, but the seller is required to collect and remit it, and the Department may seek payment from whichever party it needs to under long-settled principles of sales and use tax law.

Citations and references

• Va. Code § 58.1-612 (dealer definition and registration requirement)
• Va. Code § 58.1-623 (burden of proof on the dealer; a valid resale/exemption certificate relieves tax liability on that sale)
• 23 VAC 10-210-280 (exemption certificates must be complete, valid, and applicable to the specific property sold)
• Va. Code § 58.1-633 (dealer recordkeeping requirement, minimum 3 years)
• United States v. Forst, 442 F. Supp. 920 (1977) (use tax exists to capture out-of-state purchases used within Virginia)
• Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941) (three-part fixture test: annexation, adaptation, intent to permanently annex)
• Mullins v. Sturgill, 192 Va. 653 (1951) (intent to make a chattel a permanent accession must affirmatively and plainly appear; doubt means it stays personal property)
• Va. Code § 58.1-609.5(3) (separately stated transportation charges exempt)
• 23 VAC 10-210-6000 (transportation/delivery charge exemption; combined lump-sum charges become taxable)

Subject

Sales or Use : Real Property vs. Tangible Personal Property: Exemption : Sale for Resale -Exemption Certificates, Shipping, Services

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-88

Original ruling text

May 5, 2022

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) requesting a ruling on the application of the retail sales and use tax to materials and services provided by the Taxpayer. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer designs and installs wireless communication systems that enhance radio signal strength within buildings in Virginia. The Taxpayer requests a ruling regarding the application of Virginia’s retail sales and use tax to several common transactions between the Taxpayer and its clients. Each issue will be addressed separately.

RULING

Question 1: Sometimes customers provide sales tax exemption certificates, other times we conduct a direct sale of the installed system. What is the tax application to these transactions?

Pursuant to Virginia Code § 58.1-612, the Taxpayer is considered a “dealer” if it, among other things, sells or offers to sell tangible personal property in Virginia. Any dealer deemed to have sufficient business activity in Virginia, pursuant to Virginia Code § 58.1-612 C or D, is required to register with Department, file returns, and collect and pay over any tax due. See Title 23 VAC 10-210-480. For purposes of this ruling request, the Department assumes the Taxpayer qualifies as a dealer under the statute.

Virginia Code § 58.1-623 provides:

A. All sales or leases are subject to the tax, until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter…

B. The certificate mentioned in this section shall relieve the person who takes such certificate from any liability for the payment or collection of the tax, except upon notice from the Tax Commissioner that such certificate is no longer acceptable. Such certificate shall be signed by and bear the name and address of the taxpayer; shall indicate the number of the certificate of registration, if any, issued to the taxpayer; shall indicate the general character of the tangible personal property sold, distributed, leased, or stored, or to be sold, distributed, leased, or stored under a blanket exemption certificate; and shall be substantially in such form as the Tax Commissioner may prescribe…

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 further explains,

A. All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice…

B. Legitimate use of exemption certificates is vital. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate.

Accordingly, the Taxpayer does not have an obligation to collect and remit sales tax when it receives an acceptable resale exemption certificate from a customer. The Taxpayer should take necessary precautions to ensure that exemption certificates always bear the required information and are applicable to the tangible personal property being purchased. The Taxpayer is required to keep and preserve records of its taxable and nontaxable sales, including exemption and resale certificates, necessary to determine its proper tax liability for at least three years. See Virginia Code § 58.1-633 and Title 23 VAC 10-210-470.

Question 2: If a customer provides an exemption certificate, are we still subject to use tax on purchases.

Virginia’s retail sales and use tax work together to ensure consistent application of a general tax on retail (or final) sales of tangible personal property. The only necessity for the use tax provisions is to include within the sales tax those sales transactions for property which occur outside of the state but are to be used within the state by the purchaser. See United States v. Forst , 442 F.Supp. 920 (1977).

As outlined in response to Question 1, if the Taxpayer is provided a complete exemption certificate and accepts it in good faith, the items for resale can be sold exempt of the sales tax. The Taxpayer would not be responsible for the remittance of tax to the Department when the sale is for resale with a valid exemption certificate on file for the transaction.

It is unclear what purchases the Taxpayer is referencing or why such purchases would be subject to use tax. The Taxpayer would be subject to use tax on purchases of tangible personal property that are for the Taxpayer’s own use or consumption, not for resale to customers, for which Virginia sales tax was not charged, or not charged correctly, on the purchase.

Question 3: Bi-directional amplifiers can be removed by the client, rendering the system nonoperational, while the wiring remains in the building. Are these components considered real property improvements or tangible personal property?

Bi-directional amplifiers are signal boosters that sustain two-way communication throughout a building for either enhanced cellular signal strength or enhanced two-way radio communication. The removal of the amplifier renders the system non-operational. In order to determine whether the amplifier and its wiring are real property improvements or tangible personal property, a three-prong test must be utilized.

In Danville Holding Corp. v. Clement , 178 Va. 223, 16 S.E.2d 345 (1941), the Virginia Supreme Court set forth three general rules to be used in determining whether an article of tangible personal property is a fixture, and thus considered a part of the real estate for purposes of taxation, or remains personal property subject to taxation as business tangible personal property. The three tests are: (1) the annexation of the chattel (property) to the realty, actual or constructive; (2) its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and (3) the intention of the parties, i.e., the intention of the owner of the chattel to make it a permanent addition to the freehold. See Id. at 232.

In order for the rules to apply, it is presumed that the property is annexed to the realty in some form. In its decision, the Court noted that the "intention of the party making the annexation is the paramount and controlling consideration." Id at 232. In addition, the Court stated that each fixture case must be decided according to its particular facts and circumstances.

Annexation to the Realty

In order to meet this test, the annexation of chattel must be actual or constructive. In Danville Holding at 232, the Court concluded "the method or extent of the annexation carries little weight, except insofar as they relate to the nature of the article, the use to which it is applied and other attending circumstances as indicating the intention of the party making the annexation." In other words: so long as chattel is attached to a building to carry out the purpose for which such building was erected, and to increase its value for occupation or use, such chattel may become part of the realty even if it may be removed without injury to itself or the building.

Adaptation to use or purpose of the property or realty

If attached property is essential to the purposes for which the building (or realty) is used or occupied, it would generally be considered a fixture even if its annexation to such building is such that it may be severed without injury to either the chattel or the building.

The intention of the parties

The Court has emphasized the intention of the party making the annexation is the chief test to be considered in determining whether the chattel has been converted into a fixture. Although the intention does not need to be expressed in words, it should be able to be inferred from the nature of the property annexed, the purpose for which it was annexed, the relationship of the party making the annexation, and the structure and mode of annexation.

The intention to make a chattel a permanent accession to the realty must affirmatively and plainly appear. If the matter is left in doubt and uncertainty, the legal qualities of the article are not changed, and it must be deemed a chattel. Mullins v. Sturgill , 192 Va. 653 (1951).

The intent of the improvement is to enhance signal strength throughout the building for the occupant. While the amplifiers are wired into buildings by the Taxpayer, they are components designed to be removable in the instance of the occupant’s relocation. Based on this description, the amplifiers do not appear to be affirmatively and plainly annexed to the realty and would not be deemed a permanent accession to the realty and would remain tangible personal property upon installation.

Question 4: Is shipping taxable and to whom?

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 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.

Therefore, shipping charges are not subject to tax if separately stated. The Department’s longstanding policy is that amounts charged for shipping become taxable when combined in one lump sum with other taxable charges, including charges for handling. The charge for sales tax is made to the purchaser but is required to be collected and remitted from the seller. As such, under long-settled principles of sales and use tax law, the Department may seek payment of the tax from either party.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

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 about this ruling, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at , or via email at **.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1664.C