Could a Virginia church appoint its construction contractor as purchasing agent so project materials used the church's sales-tax exemption?

Subject

Church could not pass its building-material exemption to a construction contractor

Plain-English summary

Virginia ruled that a nonprofit church could not make its contractor's construction-material purchases exempt by naming the contractor as purchasing agent. The proposed addendum would have bound the church's credit and made it ultimately liable for authorized purchases.

The church exemption was narrower than government purchasing rules. It covered building materials only when the church installed them through its own staff or volunteers and did not hire another person or entity to install them. A contractor-installed project fell outside that language.

Rules allowing federal, state, or local governments to designate a contractor as purchasing agent did not apply to a church. The contractor remained the user or consumer of all tangible property incorporated into its real-property construction contract and owed sales or use tax on those purchases.

What this means for you

• A nonprofit customer's exemption does not automatically pass through to its construction contractor.
• The church exemption applied only when the church itself installed the materials under the rule then in effect.
• Binding the church's credit and using an agency label did not change the statutory limitation.
• Real-property contractors generally pay tax on materials they use or consume.

Common questions

Would a purchasing-agent addendum make the materials exempt?

No. The church contracted for installation, which the exemption expressly excluded.

Why did government purchasing-agent guidance not apply?

It addressed governmental entities, while the church statute imposed a separate self-installation condition.

Who owed tax on the materials?

The construction contractor, as the consumer of property used in the real-estate contract.

Citations and references

• Va. Code § 58.1-609.10(16).
• 23 VAC 10-210-410.
• United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-4

Original ruling text

January 13, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter, submitted on behalf of * (the "Taxpayer"), in which you request a ruling regarding a nonprofit church's ability to designate a construction contractor or subcontractor as its purchasing agent in order to receive the church's sales and use tax exemption on purchases of construction materials.

FACTS

The Taxpayer was awarded a construction contract by a church. The church is contemplating designating the Taxpayer as its purchasing agent by contractual addendum. The objective of this designation would be to allow the Taxpayer to use the church's tax exempt status when purchasing construction materials for the project. This addendum would state that the church's credit is bound on all purchases which it authorizes the Taxpayer to make on its behalf and that the church is ultimately liable for the payment.

RULING

Virginia Code § 58.1-609.10 16 provides, in pertinent part, an exemption to non-profit churches from the sales and use tax for "building materials installed by the church, and for which the church does not contract with a person or entity to have installed ...." Under principles established by the courts, taxation is the rule and exemption is the exception. Therefore, exemptions from the sales and use tax are strictly construed. The narrow language of the law specifically grants an exemption for construction materials only to the qualifying church in those instances in which it installs those materials through its own staff or volunteers. The exemption is not available when the materials are installed by a contractor or other party pursuant to a contract.

The Taxpayer's letter cites United States v. Forst , 442 F. Supp. 920 (W.D. Va. 1977) as a reference for the discussion of the Commonwealth's requirements for the conveyance of agency status. In its description of the qualifications, the case relies on the guidance provided in Title 23 of the Virginia Administrative Code (VAC) 10-210-410(J) (formerly VR 630-10-27), which states:

Generally, purchases of tangible personal property by contractors in connection with real property construction contracts with the governments of Virginia or the United States or political subdivisions thereof, are sales to such contractors for their own use or consumption and contractors are subject to the tax on such transactions .... Only in instances where the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity will such purchases be exempt from the tax.

Title 23 VAC 10-210-410(J) and the Forst decision address the ability to convey agency status by the federal and state governments only. The exemption under Va. Code § 58.1-609.10 16 for nonprofit churches contains provisions that go beyond the exemption applicable to the federal and state governments by specifically stating the construction materials must be installed by the church and not by a third party contractor. Therefore, Title 23 VAC 10-210-410(J) is not applicable to the situation presented by the Taxpayer.

In conclusion, as a construction contractor in Virginia, the Taxpayer is generally considered to be the provider of services with respect to real estate. Accordingly, under Title 23 VAC 10-210-410, the Taxpayer is required to pay the sales or use tax on all tangible personal property used for or incorporated into its real property construction contracts.

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 and regulation sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library 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 ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3721008955.M