How did Virginia tax a glass contractor's government sales when glass was sold alone versus furnished and installed in real property?

Subject

Tax on property sold with and without installation.

Plain-English summary

Virginia distinguished exempt government retail purchases from taxable contractor purchases used in real-property installation. The glass business sold mirrors, windows, shower products, glass, hardware, and other items either for customer pickup or with installation.

When a federal, Virginia, or Virginia local government bought glass without installation, the retail sale was exempt if made under the required official purchase order and paid directly from public funds. Sales to government employees or purchases lacking those conditions remained taxable.

When the glass contractor furnished and installed property into a building or other realty, the transaction was an exempt construction or installation service to the customer—but the contractor became the taxable user and consumer of the glass and supplies. It owed tax on cost and treated that tax as a job expense rather than passing it to the government as sales tax.

The same contractor-consumer rule applied whether the business contracted directly with a government agency or served as a subcontractor on a government building. A different result could apply when the government itself directly purchased the property with public funds and furnished it to the contractor.

What this means for you

• Separate retail sales of property from real-property installation contracts.
• Confirm official purchase orders and direct public-fund payment for government retail exemptions.
• A government customer does not automatically exempt a contractor's material purchases.
• Contractors generally owe tax on the cost of property they permanently install into realty.
• Build contractor tax into pricing as an expense rather than separately billing it as customer sales tax.

Common questions

Was glass sold over the counter to a local government exempt?

Yes, when the official-purchase-order and public-fund requirements were met.

Did a federal installation contract exempt the contractor's materials?

No. The contractor remained the consumer unless the government directly purchased and furnished the property.

Citations and references

• Va. Code §§ 58.1-609.1(4) and 58.1-610(A).
• 23 VAC 10-210-690(A), 10-210-410(A), and 10-210-693(H).
• United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-280

Original ruling text

December 22, 2.010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request a ruling as to the application of the retail sales and use tax to tangible personal property used or sold by * (the Taxpayer).

FACTS

The Taxpayer is a glass and glazier contractor that also sells mirrors and other products at retail. The Taxpayer maintains a retail shop where inventory of glass, hardware and various metal extrusions are maintained. The Taxpayer sells windows, products for maintenance of glass and glass products, shower doors for replacement, and shower enclosures, many of which are special order items. All items are available for pickup by customers or may be installed by the Taxpayer. The Taxpayer indicates that all items become real property upon installation either by the customer or by the Taxpayer.

The Taxpayer collects sales tax on retail sales of tangible personal property sold without installation. For all installed sales, the Taxpayer remits the use tax on the cost of materials and supplies used. The Taxpayer asks for two rulings with respect to government sales.

RULING

For tangible personal property sold without real property installation services to federal, Virginia or local governments of Virginia, Va. Code § 58.1-609.1 4 exempts tangible personal property for use or consumption by the United States, the Commonwealth of Virginia, or any political subdivision of the Commonwealth.

Interpreting this law, subsection A of Title 23 of the Virginia Administrative Code (VAC) 10-210-690 provides the following:

Sales to the United States, or to the Commonwealth of Virginia or its political subdivisions, are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds . Sales made without the required purchase orders and not paid for out of public funds are taxable. Sales to governmental employees for their own consumption or use in carrying out official government business are taxable. [Emphasis added.]

For tangible personal property sold with real property installation services, subsection A of Title 23 VAC 10-210-410, which interprets the law set out in subsection A of Va. Code § 58.1-610, provides the following:

A contractor is defined as any person who contracts to perform construction, reconstruction, installation, repair or any other service with respect to real estate or fixtures thereon, including highways, and in connection therewith to furnish tangible personal property, whether such person be a prime contractor or subcontractor. Unless otherwise noted, the law treats every contractor as the user or consumer of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts.

This regulation goes on to state, "No sale to a contractor is exempt on the ground that the other party to the contract is a governmental agency , a public service corporation, a nonprofit school, or nonprofit hospital, or on the ground that the contract is a cost-plus contract." [Emphasis added.] The regulation further states, "A contractor must remit the use tax on any tangible personal property purchased exclusive of the tax and furnished to him." An exception to this rule is when such property is purchased and furnished to a contractor by a governmental unit or agency. That is, a contractor is not liable for the tax when tangible personal property is, purchased directly by a government unit or agency of the United States, Virginia, or a political subdivision of Virginia and furnished to the contractor, provided such purchase is paid for directly out of public funds as required by subsection A of Title 23 VAC 10-210-690.

On the other hand, when a contractor is the user and purchaser of the tangible personal property and only its credit is involved in the purchase, the United States District Court in United States v. Forst , 442 F.Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978) concluded that such contractor is the purchaser and the Virginia sales and use tax constitutionally applies to the transactions.

Of additional importance is subsection H of Title 23 VAC 10-210-693, which sets out the application of the sales and use tax to government contractors. This regulation specifically provides that a contractor that contracts with a government entity for real property construction, installation or repair and furnishes the tangible personal property for use in such construction, installation or repair is deemed to have purchased the tangible personal property for use and consumption and is liable for the sales and use tax on such property.

With these rules in mind, I will now answer the specific rulings you present.

Ruling #1 - Local Governments of Virginia

The Taxpayer indicates that some localities in Virginia issue blanket purchase orders for the replacement and repair of glass on an as-needed basis. The purchase orders state that the local government is tax-exempt and will not pay Virginia sales and use tax. When the local government purchases glass, the Taxpayer does not charge the sales tax on such retail sales of glass ( i.e. , when no installation is provided or arranged by the Taxpayer). Provided the local government purchases are made pursuant to required official purchase orders paid for directly with public funds as required in subsection A of Title 23 of VAC 10­210-690, no sales or use tax will apply to such retail sales of glass to local governments of Virginia.

The sales and use tax will also not apply to a charge for real property construction or installation services, such as a charge for furnishing and installing glass for buildings. Such a service does not constitute a transaction for the sale of tangible personal property but constitutes a transaction for exempt services. In such instances, the person furnishing and installing tangible personal property that is incorporated into the realty is deemed by subsection A of Title 23 VAC 10-210-410 and Va. Code § 58.1-610 to have purchased such property for use or consumption. Accordingly, the Taxpayer is deemed a consuming contractor when it contracts to furnish and install glass for buildings and other real property structures. In such instances, the Taxpayer is liable for the tax as a contractor. The tax is computed on the cost price of the glass and other supplies used or consumed in the repair or replacement of glass in buildings. In addition, the Taxpayer does not pass on the tax as a tax but takes the tax into account like any other expense when it bids or contracts for a job.

Ruling #2 - United States and Virginia Governments

The Taxpayer contracts either (a) directly with government agencies of Virginia or the United States or (b) subcontracts with contractors. The Taxpayer currently pays the use tax on the materials installed and used in these projects. The Taxpayer claims, however, that such federal and Virginia government contracts should be fully tax exempt for both sales and use taxes based on the exemption set out by Va. Code § 58.1-609.1 4.

The Taxpayer's practice of paying sales and use tax on the cost price of materials that it furnishes and permanently installs in the realty is correct regardless of whether it contracts directly with a government agency of Virginia or the United States, or subcontracts with a prime contractor to furnish and install glass in government buildings. As noted above, Virginia law treats every contractor (including a subcontractor) as the consumer of tangible personal property that it permanently affixes to real estate. As a consuming contractor and purchaser of items to be annexed to realty, the Taxpayer is liable for the tax on the cost price of items so annexed to realty.

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 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 ruling, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda D. Foster

Deputy Tax Commissioner

AR/1-4477425357.B