Was an out-of-state company that furnished and installed fences in Virginia a retailer required to collect Virginia sales tax?

Subject

Out-of-state fence installer was a Virginia retailer required to collect sales tax

Plain-English summary

Virginia upheld sales tax against an out-of-state company that furnished and installed fences for Virginia customers because the company qualified as a retailer, not a using and consuming contractor. The auditor found that it maintained the type of business location and inventory contemplated by the fence-retailer rule and performed installation as part of its sales.

The company had sufficient Virginia activity to register as a dealer and collect Virginia sales tax. It could buy fencing materials for Virginia jobs under the resale exemption, but it then had to charge and remit tax on the retail sales.

The company did not prove its claim that another state's small-sales threshold made it a contractor for all transactions. It also received no credit for tax paid to that state because there was no evidence that the Virginia customers took title or possession there.

The assessment was correct, but Virginia gave the first-time auditee 45 days to document the portion of lump-sum billings attributable to installation labor. A supported breakdown could remove exempt installation labor while leaving materials, fabrication labor, overhead, and profit in the taxable amount.

What this means for you

• Virginia applies its own retailer rules to fencing furnished and installed in Virginia.
• A lump-sum contract does not prevent the Department from taxing the retail sale component.
• Separately supported installation labor may be exempt, but the taxpayer must provide a reliable allocation.
• Paying tax to another state did not create a Virginia credit without proof of the transaction occurring there as required by the statute.
• Sales tax already collected from customers must be remitted.

Common questions

Did another state's contractor classification control Virginia's treatment?

No. The taxpayer supplied neither supporting authority nor the requested evidence, and Virginia applied its own fence-retailer statute and regulation.

Could the company purchase the fencing materials tax-free?

Yes, for resale on Virginia fencing jobs, because Virginia treated the company as a registered retailer rather than the consumer of the materials.

Was installation labor taxable?

Separately supported installation labor could be removed. The company had 45 days to provide a breakdown and internal calculation records.

Citations and references

• Va. Code §§ 58.1-205(1), 58.1-610(D), 58.1-611, and 58.1-612.
• 23 VAC 10-210-410(D).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-132

Original ruling text

July 12, 2010

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

Dear *:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to * (the Taxpayer) as a result of an audit for the period October 2002 through December 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is an out-of-state dealer that furnishes and installs fencing in Virginia and State A and charges on a lump sum basis. An audit resulted in the assessment of sales tax on untaxed retail sales of fencing made to Virginia customers. The audit also assesses unremitted sales tax collected from Virginia customers.

The Taxpayer contends that it is a contractor with respect to all fencing materials because it has less than $4,800 in retail sales per year in State A and is thus considered a contractor in the state of State A for all of its sales transactions.

DETERMINATION

State A Contractor Claim

Virginia Code § 58.1-205 1 deems any tax assessment issued by the Department to be prima facie correct. This means that the burden of proving an inaccuracy in the Department's assessment is upon the Taxpayer.

The Taxpayer cites no statutory or regulatory authority in support of its contention that it is a State A contractor regarding all purchases of fencing materials. A member of the Department's Appeals and Rulings staff contacted you on two occasions to request proof of the $4,800 threshold claim and proof of how fencing materials were delivered to Virginia. The requested documentation has not been furnished to the Department. As such, the Taxpayer has not met its burden of proving that the threshold claim is sufficient basis for avoiding the assessed tax in this case.

Virginia Retailer Designation

A retailer exception to the contractor statute is found in section D of Va. Code § 58.1-610. This statute provides the following:

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, 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. [Emphasis added.]

Section D of Title 23 Virginia Administrative Code 10-210-410 interprets this statute and defines the term "retailer" for purposes of the above statute to mean "any person who maintains a retail or wholesale place of business, an inventory of . . . (fences) and/or materials which enter into or become a component part of the . . . (fences), and who performs installation as part of or incidental to the sale of the . . . (fences)." [Inserts added.] This regulation goes on to state that such a retailer is not classified as a using or consuming contractor with respect to installations of fences. Rather, "[a] retailer must treat such transactions as taxable sales except that installation charges when separately stated on an invoice are exempt of the tax."

According to the Department's auditor, the Taxpayer satisfies all three retailer criteria and is, therefore, deemed a retailer of fences regardless of whether sold with or without installation. I also understand that the Taxpayer has sufficient activity in Virginia and is thus required pursuant to Va. Code § 58.1-612 to be registered as a dealer for the collection and remittance of the Virginia sales and use tax. Thus, for Virginia retail sales and use tax purposes, the resale exemption is applicable to fencing materials purchased by the Taxpayer for Virginia fencing jobs. As such, the Taxpayer is not considered to be making any taxable use or consumption of fencing materials in Virginia. As a registered retailer of fencing in Virginia, the Taxpayer must charge and collect the Virginia retail sales and use tax for remittance to the Department.

Because no evidence has been presented that the Taxpayer's customers took title or possession of, or otherwise picked up, the fencing materials in State A, the credit for taxes paid in another state pursuant to Va. Code § 58.1-611 is not applicable to the State A sales tax paid by the Taxpayer on its purchases of the fencing materials sold to Virginia customers.

Because this is the Taxpayer's first audit by the Department, I will allow an adjustment to the audit findings to remove the portion of the billings that represent installation labor charges if the Taxpayer furnishes the Department with the following: (a) a breakdown of the sales price of materials and related taxable charges (fabrication labor, overhead and profit) to exempt installation labor costs and, (b) internal records showing how such breakdown was calculated.

CONCLUSION

Based on the information provided, the assessment is correct. An adjustment may be made to the assessment if the requested documentation for material versus installation labor charges is furnished to the Department's auditor within 45 days of the date of this letter. The auditor will contact you to arrange for the receipt of such documentation.

If the auditor receives the requested documentation within the time allotted auditor will review it and decide whether it is sufficient to allow for a revision to the audit. If it is not sufficient, the auditor will advise you by letter and explain any inadequacy. If it is sufficient, the assessment will be revised. If the documentation is not presented within the allotted time, no adjustment will be made to the audit.

Once the audit is revised or it is determined the requested documentation will not be provided within the allotted time, an updated bill with accrued interest will be sent to the Taxpayer. Upon receipt of such bill, the outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Attention: *, 600 East Main Street, 15th Floor, Richmond, Virginia 23219. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3721008874.R