Could Virginia assess masonry contractors purchaser use tax on third-party charges for cutting their bricks?

Subject

Brick cutting was taxable fabrication, but purchaser use tax could not reach the service

Plain-English summary

Virginia abated purchaser use tax on third-party brick-cutting charges even though the cutting itself was taxable fabrication. Cutting changed the bricks' shape and therefore changed their form under the fabrication regulation.

The distinction was who could be assessed and under which tax. The sales-tax statutes expressly reached taxable fabrication services, allowing assessment against the seller. The use-tax statute applied to use or consumption of tangible personal property and did not state that it applied to services. Under the cited circuit-court decision, Virginia could not assess the masonry-contractor purchasers use tax on the untaxed fabrication charges.

What this means for you

• Changing the shape or form of customer-furnished property can be taxable fabrication.
• A service can be subject to sales tax without supporting purchaser use tax under the statutory language applied here.
• The ruling removed only the fabrication-charge issue; the contractors had paid the uncontested audit portions.
• Seller and purchaser liability must be analyzed separately.

Common questions

Was cutting the bricks fabrication?

Yes. It changed the bricks' shape and form.

Was the fabrication service tax-exempt?

No. The ruling said it was a taxable service for sales-tax purposes.

Why were the purchaser assessments removed?

The use-tax statute did not authorize assessment of the purchasers for services under the court decision applied by Virginia.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603(5), and 58.1-604.
• 23 VAC 10-210-560(A).
• Hardaway Construction Corp. of Tennessee v. Commonwealth of Virginia, Department of Taxation, 69 Va. Cir. 59 (City of Richmond Cir. 2005).
• Virginia Public Document 09-15.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-83

Original ruling text

June 4, 2010

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

Dear *:

This will reply to your letter in which you seek the reconsideration of the Department's determination issued to * (collectively, the "Taxpayers"), for the periods January 2003 through December 2006, January 2003 through December 2006, February 2005 through December 2006 and April 2005 through December 2006, respectively. I apologize for the delay in this response.

FACTS

The Taxpayers are masonry contractors that were audited and assessed use tax on fabrication labor charges to cut bricks. The Taxpayers purchase the bricks and provide the bricks to a third party business that cuts the bricks to the Taxpayers' specifications. The bricks are then returned to the Taxpayers and used to construct arches for real property construction jobs. The Department audited the Taxpayers and treated the third party's charges to cut the bricks as, taxable fabrication labor and assessed use tax on the charges. The Taxpayers filed an administrative appeal of the use tax assessments. The Department upheld the assessments in a determination issued as Public Document 09-15 (2/4/09).

The Taxpayers contend that the assessment: of use tax on fabrication labor is erroneous based on a 2005 Virginia circuit court decision. The Taxpayers also continue to maintain that the cutting of bricks is not taxable fabrication labor because the state or form of the bricks is not changed.

DETERMINATION

Fabrication

The Department previously determined that a change in the form of the bricks occurred when the third party cut the bricks for the Taxpayers. This change in the form of tangible personal property (the bricks) constituted "fabrication" as the term is defined in Title 23 of the Virginia Administrative Code 10-210-560 A. Because fabrication is considered a taxable service in accordance with Va. Code § 58.1-602, the assessment of use tax on the brick fabrication charges billed to the Taxpayers by the third party was upheld in the Department's determination. Despite the Taxpayers' assertions, the cutting of bricks is fabrication as the term is used for sales and use tax purposes. When the bricks are cut, the shape of the bricks is changed. This is a change in the form of the bricks, which meets the definition of fabrication.

Court Decision

The Taxpayers cite Hardaway Construction Corporation of Tennessee v. Commonwealth of Virginia, Department of Taxation 69 Va. Cir. 59, 2005 Va. Cir. LEXIS 345 (City of Richmond Cir. 2005) to support their contention that the Department's assessment of use tax on fabrication labor is erroneous. In Hardaway Construction , the Court held that the use tax imposed by Va. Code § 58.1-604 does not apply to services.

Virginia Code § 58.1-603 5 states that the sales tax applies to the "gross sales of any services which are expressly stated as taxable within this chapter." Virginia Code § 58.1-602 defines the term "sale" to include "the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication ...." Thus, sales of tangible personal property and taxable services are subject to the sales tax. However, Va. Code § 58.1-604 states that the use tax applies to "the use or consumption of tangible personal property in this Commonwealth." The lack of language in this statute stating that the use tax applies to services led to the Court's decision in Hardaway Construction . The Court stated that the Department could assess the seller sales tax on untaxed fabrication labor charges but did not have the statutory authority to assess the purchaser use tax on the same untaxed charges.

The relevant facts in the Taxpayers' case are consistent with the facts in the Hardaway Construction decision. For this reason, the fabrication labor charges will be removed from the Taxpayers' audits and the assessments related to this issue abated in full. I note that the Taxpayers have paid the uncontested portions of each of the assessments. Thus, the audit assessments are paid in full.

The Code of Virginia sections and regulation cited, along with other reference documents, 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 concerning this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3244076291.S