Could a contractor buy school construction materials tax-free using the locality's exemption form and purchase-order instructions?

Plain-English summary

Virginia treated the contractor—not the public school system—as the taxable consumer of the construction materials. The contractor furnished labor and materials to build a bus-garage addition and canopy, permanently installing masonry, plumbing, wiring, flooring, windows, and an overhead door.

A real-property contractor purchased materials for its own use and could not claim resale. The school exemption covered property sold directly to the locality, not property sold to a contractor performing construction services.

The contractor supplied no evidence of official purchasing-agent appointment or that the school's credit was directly bound. The school's Form ST-12 and tax-free purchase-order language therefore did not apply. The contractor should include tax in its bid or material cost, not separately pass it through as tax.

The contractor also had no written proof of alleged Department advice. Virginia's erroneous-advice relief required binding written advice responding to a specific written request with adequate facts.

What this means for you

• Real-property contractors are generally consumers of installed materials.
• A government customer's exemption does not automatically flow through.
• Agency requires formal designation and direct use of the government's credit.
• Build material tax into bids unless a valid direct-purchase structure exists.

Citations and references

• Va. Code §§ 58.1-609.1(4), 58.1-610(A), 58.1-1835, and 58.1-1845(4).
• 23 VAC 10-210-410(A).

Subject

Tax on tangible personal property used or consumed by the Taxpayer.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-128

Original ruling text

July 6, 2011

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 March 2006 through September 2009. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a general contractor located in Virginia. An audit resulted in the assessment of consumer use tax on various purchases of construction materials and other tangible personal property used or consumed by the Taxpayer. The Taxpayer contests the use tax assessed on tangible personal property used or consumed in connection with its real property construction contracts with a local public school system to provide materials, labor, equipment and supplies to construct a bus garage addition at a public school and a canopy at an existing bus garage. The Taxpayer contends that materials used in the performance of such contracts are not subject to taxation.

DETERMINATION

As explained below, I do not find any basis for exemption in this matter.

Real Property Construction Contractor

Under long-standing state law, specifically Va. Code Section 58.1-610 A, any person who contracts in writing or by purchase order to perform construction services with respect to real estate or fixtures thereon, and furnishes tangible personal property in connection with such services is deemed to have purchased such tangible personal property for use or consumption. Such person is the ultimate consumer of such property and is not entitled to the resale exemption on such property. In other words, a real property construction contract is not deemed the sale of tangible personal property. Rather, it is deemed the sale of services with respect to real property. Like all service providers, a real property construction contractor is the taxable user of all tangible personal property that it purchases for its use or consumption in the performance of a real property construction contract. Also see Title 23 of the Virginia Administrative Code (VAC) 10-210-410.

It is my understanding from the auditor that the Taxpayer furnished the necessary labor and materials to permanently construct and install masonry walls, plumbing, wiring, flooring, windows, an overhead door, and other materials into an existing building. Clearly, the contract is for real property construction services. As such and in accordance with state law and the regulation cited, the Taxpayer is considered the taxable user and consumer of all of the materials and other tangible personal property incorporated into the real property.

Purchasing Agent Claim

The Taxpayer claims that it acted as the purchasing agent for the public school system in acquiring the materials assessed in this case. In regard to this claim, no documentary evidence has been offered in support of such claim. Absent evidence that the credit of the public school system was bound directly to the purchases at issue and that the Taxpayer was officially designated as the purchasing agent for the public school system, the Taxpayer is deemed the purchaser of the materials and liable for the tax. Simply put, if the Taxpayer used its own line of credit via company checks or company credit cards to purchase the materials at issue, it is considered the purchaser of such materials, not the public school system, as such purchases do not bind the credit of the public school system.

Local Government Exemption Claim

While Va. Code § 58.1-609.1 4 provides an exemption from the retail sales and use tax for tangible personal property for use or consumption by any political subdivision of the Commonwealth of Virginia, such exemption is only applicable to tangible personal property sold directly to such political subdivision. Such exemption does not extend to tangible personal property sold to a construction contractor for its use or consumption in the performance of a real property construction contract with a political subdivision. Moreover, because the true object of the contested purchase order #20807544-000 is for the sale of real property construction services and is not for the sale of tangible personal property, the political subdivision exemption has no application to the transaction.

Certificate of Exemption, Form ST-12

The public school system voluntarily presented a certificate of exemption, Form ST-12, for the purpose of avoiding the payment of sales tax on materials and supplies for these projects. However, such certificate has no application to the contested transaction. On the face of the Form ST-12 exemption certificate, the certification by the political subdivision of Virginia is limited to tangible personal property purchased or leased for its use or consumption. First, for sales and use tax purposes, the political subdivision did not use or consume the tangible personal property in this case. Rather, the taxpayer as a real property services contractor is deemed the one that used or consumed the personal property that it purchased and incorporated into the real property. Second, the Taxpayer is not selling tangible personal property. Rather, it sells real property construction services, the charge for which is not taxable because such services are not deemed the retail sale of tangible personal property.

Purchase Order Instructions

Instructions on the purchase order provide that the public school system is exempt from all state and local taxes and that the contractor ( i.e. , the Taxpayer) shall not include any such taxes in any invoices under this agreement. While the locality is correct, the locality cannot demand that the Taxpayer avoid its statutory obligations to pay the tax in accordance with Va. Code § 58.1-610 A. As a remedy, Title 23 of VAC 10-210-410 A provides that a contractor does not pass the sales or use tax on to anyone else as a tax. Rather, the contractor should take the amount of the tax into consideration in submitting bids. In other words, the contractor may treat the amount of tax that it pays as a part of the cost of materials if the contract requires a price breakdown of the materials and labor charges. In this manner, the sales or use tax is treated like any other cost of doing business.

Invitation for Bids

The invitation for bids provides notice of the exempt status of the public school system. It also provides that invoices shall not include any costs other than those identified in the purchase order or change orders. The minimum information required for each invoice includes, among other things, the charge for each item. The Taxpayer notes that the invitation for bids does not specify the sales tax. As stated above, the Taxpayer should not separately charge the sales or use tax applicable to the cost of materials that it incorporates into real property. Rather, such tax may be included within the materials charge as a part of its cost.

Erroneous Advice Claimed

In August 2008, the Taxpayer contacted the Department's customer service line and claims that a Department representative verified that no tax was due by the Taxpayer under its contract with the locality and further advised the Taxpayer to submit resale exemption certificates to its suppliers. In regard to this claim, Virginia Code § 58.1-1835 provides that the Tax Commissioner shall abate any portion of tax, interest and penalty attributable to erroneous written advice by the Department under the following conditions:

1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;

2. The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and

3. The facts of the case described in the written advice and the request therefor are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered.

Furthermore, subsection 4 of Va. Code § 58.1-1845 sets out the Virginia Taxpayer Bill of Rights. One of those guaranteed rights is for:

The right to abatement of tax, interest, and penalties, in accordance with § 58.1-1835, attributable to any taxes administered by the Department, when the taxpayer reasonably relies upon binding written advice furnished to the taxpayer by the Department through authorized representatives in response to the taxpayer's specific written request which provided adequate and accurate information.

In considering any verbal advice given, there is always the chance that insufficient facts are provided and thus contributed to inaccurate advice being given or that a misunderstanding occurred with respect to the facts presented. I say this because the policy with respect to the taxation of real property construction services provided to Virginia localities, the state of Virginia, and the federal government is long­standing and well published. Moreover, the above statutory provisions require that the erroneous advice must be in writing. Without the advice being reduced to written form, it is not possible to confirm that a Department employee gave erroneous advice. In this matter, the Taxpayer has not furnished any written proof of the alleged erroneous advice. Absent such written proof, it is not possible to conclude that the Taxpayer reasonably relied upon erroneous advice from the Department during the audit period.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. 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 the address indicated on the updated bill.

Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."

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,

Craig M. Burns

Tax Commissioner

AR/1-4519567894.R