Was a company that sold and permanently installed made-to-order shelving and cabinets a retailer or a contractor?

Plain-English summary

Virginia classified the shelving-and-cabinet company as a real-property contractor, not a retailer. The company ordered products to each customer's specifications, stored them only until the installation date, permanently installed floor rails, and then attached the shelving or cabinets to those rails.

Virginia's regulation has a retailer exception for businesses that sell and install cabinets and comparable items, but the business had to satisfy the definition of retailer—including maintaining qualifying inventory.

The made-to-order products were not inventory because they were purchased job by job and only temporarily stored before delivery and installation. The trim pieces and modification parts also were insufficient: qualifying component inventory had to contain most parts necessary to fabricate a finished product, while these supplies covered only occasional minor fitting work.

As a contractor, the company was the taxable consumer of the shelving, cabinets, rails, and other tangible property used in the installation. It had to pay tax when purchasing those items and was prohibited from charging its customers sales tax on the installed project. That result did not change when installation was separately stated, included in the project price, or separately calculated but not stated on the invoice.

What this means for you

• Job-specific products held briefly before installation are not necessarily retail inventory.
• A small stock of trim or surplus parts may fail the inventory test if it cannot supply most components of the finished item.
• Real-property contractors pay tax on their material purchases and generally do not charge customers sales tax on the installed job.
• Separately stating installation does not change the classification when the business remains a contractor.
• Review both physical installation and inventory practices before deciding whether the cabinet-and-shelving retailer exception applies.

Common questions

Q: Why did the made-to-order products not count as inventory?
A: They were ordered for specific customers and temporarily stored only until each job was ready.

Q: Did the trim and modification parts create inventory?
A: No. They represented only a few components and were not enough to fabricate the finished shelving or cabinets.

Q: Who paid the sales or use tax?
A: The company paid tax on the tangible property it purchased and consumed in the installation.

Q: Could the company charge sales tax to its customer?
A: No, regardless of whether installation was bundled, separately stated, or separately calculated.

Citations and references

• Va. Code § 58.1-610 A.
• 23 VAC 10-210-410 A and G; 23 VAC 10-210-560.
• Virginia Public Documents 98-21, 98-36, 88-270, 90-42, and 09-157, discussed in the ruling.

Subject

Retailer vs. Contractor

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-204

Original ruling text

November 1, 2013

Dear *:

This is in response to your letter submitted on behalf of your client ("Company") requesting a ruling as to the Retail Sales and Use Tax implications of Company's sale and installation of shelving units and cabinets.

FACTS

Company is engaged in the sale and installation of shelving units and cabinets. Based upon its customer's detailed specifications, Company orders the shelving or cabinets from a third party, which ships the order to Company. Company must store the shipped products at its location until they are ready to be installed at the customer's premises.

In order to mount the shelves or cabinets, Company must permanently install rails in the floor, which are attached to one another by a tongue-and groove insertion. The shelves and/or cabinets are fit on a carriage which is then affixed to the rails. Occasionally, Company must install trim pieces or make minor modifications to the shelves in order to fit the intended space. Company maintains an inventory of parts for this purpose, but almost never bills its clients for the cost of the additional work.

Company's billing practices vary, with the company occasionally invoicing the installation separately, and sometimes including the installation in the total project price. Occasionally, Company uses third party installers for the installation of the shelves or cabinets.

Company presents the following inquiries with respect to its transactions:

Is Company required to collect a sales tax from the customer on the invoiced cost of shelving and cabinets if the installation is included in the total project price and not separately stated?

If Company's invoice separately states the cost of installation, is Company required to pay or collect a sales tax on such separately stated cost?

If Company's invoice does not separately state the cost of installation, but provides the customer with a calculation of the separate cost, is Company required to pay or collect a sales tax on the portion of the invoice applicable to installation?

ANALYSIS

Va. Code § 58.1-610(A) provides:

"Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption. Any sale, distribution, or lease to or storage for such person shall be deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale, and the dealer making the sale, distribution, or lease to or storage for such person shall be obligated to collect the tax...

The regulation interpreting this provision, 23 VAC10-210-410(A) further provides:

Tangible personal property incorporated in real property construction which loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor. Any sale, distribution, or lease to or storage for such a contractor is deemed a sale, distribution, or lease to or storage for the ultimate consumer (the contractor), and not for resale by the contractor.

There is an exception to this general rule which applies to contractors engaged in the sale and installation of tangible personal property that becomes real property after installation. Subsection (G) of this regulation provides:

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 fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings, cabinets, kitchen equipment, window air conditioning units, and other like or comparable items is not classified as a using or consuming contractor with respect to them. Emphasis added .

For purposes of the exception to the general contractor rule, subsection (G) defines retailer as "any person who maintains a retail or wholesale place of business, an inventory of the aforementioned items and/or materials which enter into or become a component part of the aforementioned items, and who performs installation as part of or incidental to the sale of the aforementioned items." The regulation goes on to provide that businesses that are not classified as retailers within the foregoing definition are deemed to be contractors who must pay the tax on installation items at the time of purchase and prior to incorporation into the realty.

23 VAC10-210-560 provides that an operation which changes the form or state of tangible personal property is fabrication. The regulation further provides that persons regularly engaged in the fabrication of tangible personal property for sale at retail are required to collect and pay the tax on the sales price of the property.

Retailer vs. Contractor

The Taxpayer believes that it meets the three-pronged retailer test set forth in 23 VAC10-210-410(G), because it: 1) maintains a retail or wholesale place of business; 2) performs installation; and 3) maintains an inventory of materials which enter into or become a component part of the shelving.

While there is no question that the taxpayer performs installation of cabinets and shelving, the Taxpayer has not shown that it maintains an inventory of materials, as contemplated by the regulation. Taxpayer contends that the products at issue are shipped to the Company, which maintains an inventory of these made to order products until they are ready to be installed. Further, Taxpayer contends that it maintains an inventory of parts for the purpose of installing trim pieces or modifying the shelves when necessary to fit the customer's intended space.

Despite Taxpayer's contention, the ordered cabinets or shelving units that are stored by the Taxpayer until installed do not qualify as inventory. The Department has consistently held that the purchase of equipment on a job-to-job basis that is temporarily stored in a warehouse until it is ready to be delivered to the jobsite and installed does not constitute an inventory. Public Document ("PD") 98-21 (February 11, 1998). For example, in PD 98-36 (February 24, 1998), a general contractor ordered kitchen equipment from its suppliers after entering into a contract with a customer for its installation. The contractor had the equipment shipped to its warehouse for temporary storage until ready for delivery to and installation at the jobsite. Because the contractor did not sell kitchen equipment, or the material or component parts of those items, the Tax Commissioner determined that the contractor did not maintain an inventory, as required under 23 VAC10-210-410(G). Similarly, given that in the instant case, Company stores its customers' cabinetry and shelving until ready to be installed, it does not maintain an inventory, as contemplated by the Department in 23 VAC10-210- 410(G).

With respect to the trim pieces and parts used to modify the shelves to fit the intended space, the Department has consistently held that an inventory may consist of finished products or component parts used to fabricate finished products. In PD 88-270, (October 14, 1988), in setting forth the test to be used in determining whether there are sufficient component parts to constitute an inventory, the Tax Commissioner declared that an inventory must contain most of the parts necessary to fabricate a finished product. Thus, where a fabricator maintained little or no inventory of aluminum and fabric, which were major components of the awnings he was fabricating, he could not complete an awning contract, and therefore did not meet the inventory requirement.

The Department has also opined that surplus materials that remain at the end of a project are not inventory. Therefore, surplus materials retained by a contractor at the end of certain projects that would be reallocated to other projects did not satisfy the inventory requirement. (PD 90-42, March 19, 1990). Further, where a taxpayer held surplus construction materials from prior construction jobs, none of which were part of any retail inventory, nor held out to the public for retail sale, the inventory requirement was not satisfied. (PD 09-157, October 16, 2009).

In the case at issue, the contractor occasionally installs trim pieces or modifies shelves using a supply of parts for this purpose. Because these trim pieces and other parts constitute only a few of the parts necessary to fabricate the finished cabinets, they would not qualify as inventory.

As the Company does not meet all three criteria of the retailer definition, it cannot be classified as a retailer for purposes of this regulation. Given these facts, Company is deemed a contractor with regard to these transactions. As a contractor, the Company is liable for the tax on its purchases of tangible personal property furnished in connection with its installation contract. The Company is prohibited from charging its customers the sales tax on the invoiced cost of shelving and cabinets, regardless of whether the installation charge is included in the total project price, separately stated, or calculated and provided to the customer, but not separately stated.

I hope this has addressed your questions concerning the Retail Sales and Use Tax implications of the sale and installation of shelving and cabinets. The Public Documents cited in this letter are available online on the Department's website in the Laws, Rules and Decisions section, available at www.tax.virqinia.qov. If you have additional questions concerning this matter, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner