Could a development holding company combine its LLCs in one Virginia use-tax audit, and were sign posts and a carpet runner taxable?

Plain-English summary

Virginia required the development LLCs to be handled as separate sales-and-use-tax entities. The holding company had initially agreed to one audit under its use-tax registration, but an LLC is a separate legal entity for Virginia sales-tax purposes. The Department returned the audit so the LLCs could be registered and, if warranted, separately audited and assessed within the applicable limitations period.

The company did not provide enough information to allocate the submitted invoices between its own activity and the LLCs. The ruling therefore did not simply accept its proposed reassignment of every purchase.

Virginia also upheld tax on two challenged purchase categories. Sign posts were taxable components of manufactured signs even though installed in the ground. The carpet runner was tangible property consumed by the company in real-property contracting, and any lump-sum charge combining taxable property and labor remained fully taxable under Department policy.

Common questions

Q: Can a parent company use one sales-tax registration for separate LLCs?
A: Not on these facts. Each LLC was a separate legal entity required to register.

Q: Did permanent installation make the sign posts or carpet runner exempt?
A: No. The sign posts were sign components, and the contractor was the taxable consumer of the carpet runner.

Citations and references

• Va. Code § 58.1-602.
• 23 VAC 10-210-4070 and 23 VAC 10-210-410(G).
• Virginia Public Documents 10-197 (August 30, 2010) and 98-157 (October 12, 1998).

Subject

Taxpayer assessed use tax on its untaxed purchases, as well as those of the LLCs.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-131

Original ruling text

August 10, 2012

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

Dear *:

This reply is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period March 2005 through January 2011. I apologize for the delay in responding to your letter

FACTS

The Taxpayer is a holding company for a residential property land development corporation. The parent corporation organized several limited liability companies (LLCs) in Virginia based on the location of each development. The Taxpayer and the LLCs were not registered to collect and remit the retail sales and use tax in Virginia during the audit period. However, the Taxpayer registered to accrue and remit use tax during the audit review. The Taxpayer agreed to an audit including the LLCs, using the Taxpayer's use tax registration number. The Taxpayer was assessed use tax on its untaxed purchases, as well as those of the LLCs.

Although the Taxpayer initially agreed to the audit procedure, it now protests the assessment on the basis that an audit should have been conducted separately on itself and on each of the LLCs. The Taxpayer argues the assessment assumes that all of the LLCs were operating during the audit period. The Taxpayer contends that some locations closed during the audit period. The Taxpayer contends that the assessed purchases were either made by the LLCs or are not subject to use tax.

DETERMINATION

Limited Liability Companies

The Tax Commissioner has previously addressed the issue of LLCs as separate legal entities in Public Document (P.D.) 10-197 (8/30/10). In that document, the parent corporation is a developer who built and furnished a hotel. In citing P.D. 98-157 (10/12/98), the Tax Commissioner ruled that an LLC is a separate legal entity for sales and use tax purposes. As such, the Tax Commissioner determined that the LLC, in that instance, was a dealer and a separate company from the parent corporation.

The Taxpayer presents a contract and several invoices to support its argument that tax assessed in the audit should be assessed to the LLCs. However, based on the information provided, I am unable to determine if the transactions represented on the invoices are separate from the Taxpayer's financial activities and attributable to the LLCs.

In addition, the LLCs remain unregistered for the tax as of this letter date. As separate legal entities, the LLCs are each required to register for the tax in Virginia. Therefore, the audit will be returned to the audit staff. The LLCs will be registered and, if warranted, audits conducted within the applicable statute of limitations for assessing tax to determine the applicable financial activity related to each LLC. Separate assessments will be issued to the LLCs, as appropriate.

Sign Posts

The 2005 Session of the Virginia General Assembly enacted HB 2774, which amended the definition of tangible personal property in Va. Code § 58.1-602 to include manufactured signs. This effectively changed the status of sign manufacturers from contractors to retailers when they sell and install manufactured signs regardless of the fact that the sign may be attached to or become part of real property. The regulation in Title 23 of the Virginia Administrative Code (VAC) 10-210-4070 applies the tax to the charge for the manufacture or fabrication of signs, outdoor boards and similar items. The tax applies to the total charge for the finished product including the labor involved in the construction or painting of the sign, boards, etc. The tax does not apply to separately stated installation charges.

The Taxpayer presents an invoice for its purchase of signs and sign posts. On the invoice, the vendor separately charges tax for signs but did not apply the tax to the separately stated charge for the sign posts. The vendor also did not charge the tax on the separately stated installation labor. The Taxpayer disagrees with the auditor's assessment of the tax on the charge for the sign posts and states that the charge is for installation labor. Additionally, the Taxpayer argues the sign posts are not taxable because they are permanently affixed to the ground upon installation.

Although the Taxpayer states the charge is for installation labor, the invoice clearly indicates the assessed amount is for the purchase of sign posts. The vendor correctly charged sales tax on the signs but failed to tax the posts upon which the signs are attached. Pursuant to the foregoing authorities, the tax applies to the sign posts as a component of the sign. Accordingly, I find that the auditor correctly assessed the Taxpayer's purchase of the sign posts.

Carpet Runner

The Taxpayer also presents an invoice and the accompanying purchase order for a carpet runner. Although the purchase order states that the amount is for labor and the runner, the invoice indicates the same charge for the runner only. The Taxpayer also argues that the carpet runner is permanently attached to stairs, thereby qualifying the purchase as exempt.

Title 23 of the VAC 10-210-410 G states, "A person selling and installing tangible personal property that becomes real property after installation is generally considered a contractor, except that a retailer selling and installing ...floor coverings (as distinguished from floors themselves), are not classified as a using or consuming contractor with respect to them."

The regulation provides that retailers are persons who maintain a retail or wholesale place of business and inventory of or components of the aforementioned item. The regulation goes on to state that persons who are not classified as retailers within the foregoing definition are deemed to be contractors and must pay the sales tax on such items. Additionally, the Department has a long standing policy that deems lump sum charges that include both a taxable and exempt component as subject to the tax in their entirety.

The Taxpayer purchased the carpet runner for its use in the provision of contracting services. In accordance with the foregoing statute, the Taxpayer is considered to be the final consumer of all tangible personal property used in the provision of its services. As the final consumer, the Taxpayer is liable to pay sales tax or accrue use tax on all tangible personal property used when providing contracting services with respect to real property. Although I am unable to determine if labor is included in the purchase amount, based on Department policy, if labor is included in the charge, the entire amount would remain taxable. Accordingly, based on the foregoing authority, the Taxpayer was correctly assessed use tax. I find no basis to remove this purchase from the audit.

The Code of Virginia sections, regulations and public document 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 determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4769845648.M