If I buy custom cabinets with installation from an out-of-state contractor who fabricates and pays tax on the materials in their own state, do I owe Virginia use tax too?

Plain-English summary

A Virginia convenience-store chain bought custom cabinets, including installation, from a Pennsylvania-based contractor (Vendor A) for several of its stores. Under the general Virginia rule, a real property contractor who installs items is treated as the "consumer" of the materials and owes tax on them -- but a special exception in place before July 1, 2017 said certain items (cabinets, countertops, fences, floor coverings, and similar items on a specific list) were sold by a "retailer," not a using-and-consuming contractor, if the seller met a three-part test (maintaining a retail/wholesale location, an inventory of the items, and performing installation incidental to the sale). The Department's auditor applied that exception, decided Vendor A was acting as a retailer, and assessed Virginia CONSUMER USE TAX against the store chain because Vendor A hadn't collected Virginia sales tax on the cabinet sales.

The taxpayer appealed, and the Department changed course after closer review. It found Vendor A didn't actually meet the three-part retailer test as applied to work done in Virginia -- Vendor A built and fabricated the cabinets at its own Pennsylvania facility, ordered materials there, paid Pennsylvania sales/use tax on those materials as a contractor, and simply transported finished cabinets to the Virginia jobsite. That made Vendor A a real property CONTRACTOR with respect to this job (not a Virginia retailer), and under a controlling 2014 precedent involving an analogous Tennessee contractor, the state where the contractor received and used the materials -- Pennsylvania here -- gets the FIRST right to tax them. Virginia's reciprocal credit statute (§ 58.1-611) then lets the contractor (or, as applied here, offsets the Virginia use tax otherwise due) credit the tax already paid to the other state, up to the amount Virginia would have charged. Because Pennsylvania's tax rate (6%) equaled or exceeded Virginia's applicable rate (5.3% or 6%, depending on locality), the credit wiped out the Virginia liability entirely, and the tax and interest already paid on the Vendor A purchases were ordered refunded. (A separate vendor's cabinet purchases, contested by the taxpayer, turned out never to have been part of the audit liability in the first place -- so nothing needed to be refunded there.) The ruling also explains that the July 1, 2017 law change (2017 Acts of Assembly, Chapters 436 and 449) repealed the old retailer-exception language entirely going forward, so this specific "was the seller a retailer or a contractor" analysis is now historical, relevant mainly to audit periods before that date.

What this means for you

Businesses buying custom-fabricated items (cabinets, countertops, etc.) with installation from an out-of-state contractor

Before assuming you owe Virginia use tax on installed items from an out-of-state vendor, check where that vendor actually built/received the materials and whether it paid sales or use tax there as a contractor. If so, Virginia's reciprocal credit (§ 58.1-611) may offset some or all of the Virginia liability -- potentially eliminating it if the other state's rate was equal to or higher than Virginia's.

Businesses with purchases spanning before and after July 1, 2017

The old rule distinguishing "retailers" of listed items (cabinets, countertops, fences, floor coverings, etc.) from consuming contractors was repealed effective July 1, 2017 (see Virginia Tax Bulletin 17-8 / P.D. 17-139). For audit periods straddling that date, expect a different analysis before and after the change.

Accountants and tax professionals

When a client is assessed Virginia use tax on installed property from an out-of-state contractor, check whether the contractor meets Virginia's three-part retailer test (23 VAC 10-210-410 G) as applied to the SPECIFIC Virginia job, not just in general -- a vendor can be a retailer in some contexts and a contractor in others depending on where materials were sourced and fabricated.

Common questions

Q: Do I owe Virginia use tax on cabinets I bought with installation from an out-of-state vendor?
A: It depends on whether that vendor is properly treated as a real property contractor (who owes tax where it obtains/uses the materials) or a retailer (who should collect Virginia sales tax on the sale). If it's a contractor that already paid tax to its home state, Virginia's reciprocal credit may offset your Virginia use tax liability.

Q: What is Virginia's reciprocal use tax credit?
A: Under Va. Code § 58.1-611, a credit is granted for tax already paid to another state on the same property, up to the amount Virginia would otherwise charge -- it can fully offset Virginia use tax if the other state's rate was equal to or higher.

Q: Does the old "retailer exception" for cabinets and similar items still apply?
A: No -- the 2017 Virginia General Assembly (House Bill 1890 / Senate Bill 1308, effective July 1, 2017) repealed that language; audit periods before that date may still need the old analysis, but current transactions don't.

Q: How is it decided whether an out-of-state vendor is a "contractor" or a "retailer" for a Virginia job?
A: Using the three-part test in 23 VAC 10-210-410 G -- whether the vendor maintains a retail/wholesale location, maintains an inventory of the relevant items, and performs installation incidental to the sale -- applied to that vendor's actual operations on the specific job.

Citations and references

• Va. Code § 58.1-610 A (real property contractor deemed consumer of installed tangible personal property)
• Va. Code § 58.1-610 D (pre-2017 retailer exception for cabinets/countertops/similar items, since repealed)
• Va. Code § 58.1-611 (reciprocal credit for tax paid to another state)
• 23 VAC 10-210-410 G (three-prong retailer test)
• Va. Code § 58.1-1833 A (interest on refunded overpayments)
• P.D. 14-43 (3/21/2014) (Tennessee-based contractor precedent applying the first-right-of-taxation/reciprocal-credit analysis)
• P.D. 17-139 / Virginia Tax Bulletin 17-8 (6/29/2017) (explaining the 2017 law change repealing the retailer exception)

Subject

Contractors: Exception For Cabinets - Out of State Contractor, 2017 Law Change

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-48

Original ruling text

April 26, 2023

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

Dear *:

This will reply to your letter in which you request a refund of consumer use tax paid by * (the “Taxpayer”) as a result of an audit for the period of April 2015 through March 2018. I apologize for the delay in responding to your correspondence. The issues of this case are a matter of changing policy in Virginia with regard to real property contractors’ provision of certain tangible personal property. A law change to resolve these issues became effective July 1, 2017 and will be explained later in this letter.

FACTS

During the audit period, the Taxpayer, an operator of a chain of convenience stores with several locations in Virginia, purchased custom cabinets, including installation, from * (Vendor A) for several of its stores. The Department‘s auditor applied the retailer exception to the general contractor rule and concluded that Vendor A operated as a retailer with respect to the sale of cabinets to the Taxpayer. Vendor A, is a Pennsylvania based contractor, did not collect the Virginia sales tax on the sale of the cabinets, and the Taxpayer did not accrue and remit Virginia use tax to the Department, on such purchases. Based on this, the auditor assessed use tax to the Taxpayer on untaxed cabinet purchases occurring prior to July 1, 2017.

The assessment has been paid, and the Taxpayer contends it is not subject to the use tax because the sales tax should have been assessed against Vendor A, considered a retailer by the auditor. The Taxpayer also contests the tax assessed on purchases of custom cabinets from another vendor, * (Vendor B).

DETERMINATION

Contractor or Retailer Designation

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. 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.

During the audit period, Virginia Code § 58.1-610 D, provided an exception to the above general contractor rule that stated:

Tangible personal property incorporated in real property construction which loses its identity as tangible personal property shall be deemed to be tangible personal property used or consumed within the meaning of this section. Any person selling fences, venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings (as distinguished from the floors themselves), cabinets, countertops, kitchen equipment, window air conditioning units or other like or comparable items, shall be deemed to be a retailer of such items and not a using or consuming contractor with respect to them, whether he sells to and installs such items for contractors or other customers and whether or not such retailer fabricates such items.

For purposes of the above exception, a retailer is defined in Title 23 Virginia Administrative Code 10-210-410 G as follows:

[A]ny person who maintains a retail or wholesale place of business, an inventory of the aforementioned items and/or materials which enter into or become a component part of the aforementioned items, and who performs installation as part of or incidental to the sale of the aforementioned items. As so defined, a retailer is not classified as a using or consuming contractor with respect to installations of the aforementioned items. A retailer must treat such transactions as taxable sales except that installation charges when separately stated on an invoice are exempt from tax.

Out-of-State Contractors and Virginia Jobs – Vendor A

The Department has previously issued a public document that is instructive in this case. Public Document (P.D.) 14-43 (3/21/2014) addressed the activities of a commercial interior finishing contractor located in Tennessee. The contractor did not maintain a location or inventory in Virginia, but did perform contracting jobs in Virginia. The contracting jobs included the provision of items included in the contractor exception rule. The Tax Commissioner ruled that the contractor did not meet the three prongs of the retailer test and therefore could not be deemed a retailer in Virginia and would, therefore, be subject to the use tax on all tangible personal property used or consumed in performing the contracting jobs in Virginia. Because the contractor was located in Tennessee and received all tangible personal property used in performing the Virginia contracting jobs in Tennessee, that state was deemed to have the first right of taxation of such property. In order to avoid the payment of use tax on property received in Tennessee and used in Virginia, the contractor was instructed that a credit for Virginia use tax due on the property used in Virginia contracting jobs would apply.

The fact pattern in P.D. 14-43 is similar to that of Vendor A in that it maintained a build and fabricate facility in Pennsylvania where it produced custom cabinetry and shelving, and installed such cabinets and shelving for its commercial customers. Vendor A ordered materials for each job/contract and was required, as a contractor, to pay sales or use tax to Pennsylvania on raw material purchases. When Vendor A performed the job at issue in Virginia, it ordered and received the materials and supplies for the job at its Pennsylvania location. Vendor A then transported the property to the Virginia jobsite. Because Vendor A is a contractor with respect to real property in Pennsylvania, the first right of taxation of tangible personal property used by Vendor A in a Virginia job occurred in Pennsylvania, essentially similar to the Tennessee contractor in P.D. 14-43.

Contractors who perform real property jobs in Virginia are required to pay the tax on purchases of tangible personal property used, consumed, or otherwise provided in accordance with Virginia Code § 58.1-610 A. In order for contractors to satisfy the use tax requirement to Virginia while also paying the sales or use tax required by another taxing authority, Virginia Code § 58.1-611 provides a reciprocal credit as follows:

A credit shall be granted against the taxes imposed by this chapter with respect to a person's use in this Commonwealth of tangible personal property purchased by him in another state. The amount of the credit shall be equal to the tax paid by him to another state or political subdivision thereof by reason of the imposition of a similar tax on his purchase or use of the property. The amount of the credit shall not exceed the tax imposed by this chapter.

During the period of the audit, Pennsylvania’s general sales and use tax rate was 6% and Virginia’s tax rate was either 5.3% or 6% depending on the location of the job. In applying the credit, no additional Virginia use tax would be due on the property consumed in the performance of the Virginia job for the Taxpayer by Vendor A. Therefore, because no additional Virginia sales or use tax is due, the Taxpayer’s purchases of custom cabinets from Vendor A will be removed from the audit.

Vendor B Assessment

The Taxpayer contests the use tax on the purchase of custom cabinets from * (Vendor B). A review of the audit indicates that cabinet purchases from Vendor B were not included in the audit liability.

Law Change

The 2017 Virginia General Assembly enacted House Bill 1890 and Senate Bill 1308 ( 2017 Acts of Assembly , Chapters 436 and 449), which removed the language from Virginia Code § 58.1-610 D that treated sellers of specified items as retailers rather than consuming contractors, regardless of whether such items were installed or fabricated by the seller. The change was effective July 1, 2017. See Virginia Tax Bulletin 17-8, published as P.D. 17-139 (6/29/2017), which discusses the law change in detail.

CONCLUSION

The determination in this instance is consistent with P.D. 14-43. The audit will be returned to the appropriate audit staff for adjustment in accordance with this determination. In addition, a refund of the tax and interest assessed and paid regarding the contested purchases from Vendor A will be refunded as soon as practicable. Interest owed on such overpayment will be included in accordance with Virginia Code § 58.1-1833 A.

To resolve this matter, the Taxpayer submitted an offer in compromise. In accordance with the determination, it is not necessary to consider the offer settlement.

The Code of Virginia sections, regulation, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. 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/1977.J

Related Documents

14-43

17-8