Is labor to cut customer-furnished bricks into shapes for masonry arches taxable fabrication in Virginia?

Subject

Taxable fabrication labor

Plain-English summary

Virginia upheld sales tax on the brick-cutting charges. Masonry contractors bought the bricks, supplied them to the taxpayer, and asked the taxpayer to cut them into shapes used for brick arches. Virginia's definition of a sale expressly includes fabricating tangible property for a consumer who furnishes the materials.

The regulation defines fabrication as an operation that changes tangible property's form or state. Cutting the bricks changed their shape, so the work was fabrication rather than an exempt service. The ruling noted Virginia's longstanding treatment of cutting, sawing, shaping, bending, welding, drilling, machining, and similar changes as taxable fabrication.

The customers were real-property contractors, who are treated as users and consumers of materials bought for construction contracts. The taxpayer therefore had to collect retail sales tax on its charges to cut the contractor-furnished bricks.

What this means for you

• Customer ownership of the raw material does not make fabrication labor exempt.
• Cutting or shaping property can be taxable when it changes the item's form or state.
• Fabricators serving real-property contractors should determine whether the contractor is the taxable user or consumer.
• A general dictionary definition does not override Virginia's sales-tax regulation.

Common questions

Why was brick cutting treated as fabrication?

Because cutting changed the shape, and therefore the form, of tangible personal property.

Would the result change because the contractor supplied the bricks?

No. The statute and regulation specifically tax fabrication for consumers who furnish the materials directly or indirectly.

Citations and references

• Va. Code § 58.1-602.
• 23 VAC 10-210-560 A and B.
• Va. Code § 58.1-603(5).
• 23 VAC 10-210-410.
• Va. Code § 58.1-203 A and § 58.1-205(2).
• P.D. 86-242, P.D. 90-14, P.D. 09-15, and P.D. 10-83.
• Commonwealth, Department of Taxation v. Wellmore Coal Corp., 228 Va. 149, 320 S.E.2d 509 (1984).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-77

Original ruling text

May 26, 2011

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

Dear *:

This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to * (the "Taxpayer") for the period January 2006 through May 2009. I apologize for the delay in this response.

FACTS

The Taxpayer cuts bricks that are used by masonry contractors to construct brick arches. The contractors purchase and furnish the bricks that the Taxpayer cuts to their specifications. The Taxpayer returns the cut bricks to the contractors and the bricks are then used to construct arches. The Department audited the Taxpayer and assessed retail sales tax on the labor charges billed to the contractors for cutting the bricks. The Department treated the Taxpayer's charges to cut the bricks as taxable fabrication labor. The Taxpayer maintains that the cutting of bricks does not constitute fabrication as the term is defined in the dictionary and that the cutting of bricks is an exempt service.

DETERMINATION

Fabrication

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, ...." Title 23 of the Virginia Administrative Code (VAC) 10-210-560 A defines fabrication as "[a]n operation which changes the form or state of tangible personal property ...." Paragraph B of the same regulation mirrors the statute cited above and states in part:

The tax applies to the charges for the fabrication of tangible personal property for users or consumers who furnish, either directly or indirectly, the materials used in the fabrication work.

The Department has traditionally held that tangible personal property that is cut, sawed, shaped, bent, threaded., welded, bored, drilled, punched, machined, sheared, or otherwise subjected to an operation which changes the property's form or state is considered to have been "fabricated." These operations are deemed to be a taxable fabrication service in accordance with the statute and regulation cited, and the charge for such services is subject to sales tax.

The Department has issued a number of public documents that address the taxation of fabrication labor or services. In Public Document ("P.D.") 86-242 (11/28/86), the Tax Commissioner ruled that the cutting or shaping of lumber constitutes fabrication because these activities change the state or form of the lumber. In P.D. 90-14 (1/11/90), an operation in which two steel beams were spliced or welded together was deemed to be fabrication because it changed the state or form of the steel beams.

More recently, the Department issued determinations in P.D. 09-15 (2/4/09) and P.D. 10-83 (6/4/10) that state the cutting of bricks constitutes "fabrication" as the term is defined in Title 23 VAC 10-210-560 A. These determinations state that when the bricks are cut, the shape of the bricks is changed. The resulting change in the shape of the bricks is a change in the form of tangible personal property. Thus, the cutting of bricks meets the regulatory criteria used in the definition of fabrication. Virginia Code § 58.1­603 5 imposes the sales tax on "the gross sales of any services which are expressly stated as taxable within this chapter." As fabrication is a taxable service in accordance with Va. Code § 58.1-602, the assessment of retail sales tax on the brick fabrication charges billed by the Taxpayer to its customers is proper.

The Taxpayer's customers are primarily real property contractors. In accordance with Title 23 VAC 10-210-410, real property contractors are considered the users and consumers of all purchases made in the performance of real property construction contracts. As such, the Taxpayer is required to charge and collect the retail sales tax on its charges to cut bricks purchased and furnished by real property contractors.

Definition of Fabrication

The Taxpayer contends that the definition of the term fabrication found in the dictionary does not support the conclusion that the cutting of bricks is fabrication. Virginia Code § 58.1-203 A gives the Tax Commissioner "the power to issue regulations relating to the interpretation and enforcement of the laws of this Commonwealth governing taxes administered by the Department." Virginia Code § 58.1-205 2 states "Any regulation ... shall be sustained unless unreasonable or plainly inconsistent with applicable provisions of law." The courts have agreed that the Tax Commissioner's construction of a tax statute is entitled to great weight. See Commonwealth, Dep't of Taxation v. Wellmore Coal Corp. , 228 Va. 149, 320 S.E.2d 509 (1984). A presumption of validity attaches to the Tax Commissioner's rulings and the burden is on the taxpayer to prove that the ruling is contrary to law or that the Commissioner has abused his discretion and acted unreasonably.

The Department's reliance on the regulatory definition of fabrication for purposes of administering the sales and use tax is longstanding. The fabrication regulation is reasonable and consistent with existing provisions of the law. Despite the Taxpayer's assertions, the cutting of bricks is deemed to be fabrication for retail sales and use tax purposes.

CONCLUSION

Based on the Department's longstanding policy and the authorities previously cited, the assessment is correct. An updated bill with interest accrued to date will be mailed to the Taxpayer. Payment should be made within 30 days from the date of the bill to avoid the accrual of additional interest. Please remit payment to: Virginia Department of Taxation, Main Street Centre, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attention: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections, regulations and public documents 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,

Craig M. Burns

Tax Commissioner

AR/1-4554166713.S