Did Virginia's temporary-storage exemption cover materials fabricated here for an out-of-state government project?

Plain-English summary

Virginia denied the temporary-storage exemption for raw materials fabricated in Virginia and then installed in an out-of-state building. A contractor furnishing and installing property that becomes real estate is the user and consumer of the materials, even when the project owner is a tax-exempt government entity.

The subcontractor bought raw materials, brought them to its Virginia facility, fabricated them into the project product, and then installed that product outside Virginia. Fabrication was a Virginia use, not temporary storage pending shipment.

The temporary-storage exemption also requires that the contractor could buy the property tax-free for the construction use in the destination state. The property was not exempt there because the subcontractor was the user and consumer. The exempt status of the government customer did not flow through to the contractor's purchases.

What this means for you

• Government ownership or reimbursement does not automatically exempt contractor material purchases.
• Real-property contractors are generally taxable users and consumers, not retailers of installed materials.
• Virginia fabrication is more than temporary storage and can defeat the exemption.
• Confirm destination-state exemption before relying on Virginia's contractor storage rule.
• Review the actual furnish-and-install obligations, not merely the prime customer's identity.

Common questions

Q: Did the government customer's exemption cover the subcontractor?
A: No. The subcontractor was the consumer of the construction materials.

Q: Why was the temporary-storage exemption unavailable?
A: The materials were fabricated in Virginia rather than solely stored pending shipment, and the destination-state use was not tax-exempt.

Q: Did title passing to the government change the result?
A: No. The cited contractor rule applied even if title passed directly to the government or the contractor was reimbursed.

Citations and references

• Va. Code §§ 58.1-609.3 1 and 58.1-610 A.
• 23 VAC 10-210-410 J.
• Virginia Public Documents 93-225, 96-274, and 06-148.

Subject

Purchases of tangible personal property made pursuant to a government contract

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-34

Original ruling text

March 15, 2013

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") in which you request a ruling on the application of the retail sales and use tax to purchases of tangible personal property made pursuant to a government contract. The Taxpayer requests clarification of the Department's letter issued to the Taxpayer on March 31, 2005.

FACTS

The Taxpayer states it has a contract with a prime contractor, and the prime contractor has a real property construction contract with a tax-exempt entity. The Taxpayer purchases raw materials for the project and has them shipped to its facility in Virginia. The Taxpayer further states the raw materials are fabricated into product that is installed in a building.

The Taxpayer states that it was paying tax on the purchase of the tangible personal property at issue prior to the issuance of the aforementioned Department letter. The Taxpayer continued to pay the same following receipt of the Department's letter. The Taxpayer now requests guidance regarding the application of the temporary storage exemption in Va. Code § 58.1-609.3 1 to the purchase of the tangible personal property at issue.

RULING

Virginia 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 to the extent required by this chapter.

Title 23 of the Virginia Administrative Code 10-210-410 J states:

Generally, purchases of tangible personal property by contractors in connection with real property construction contracts with the governments of Virginia or the United States or political subdivisions thereof, are sales to such contractors for their own use or consumption and contractors are subject to the tax on such transactions. This applies regardless of whether title to such property passes directly to the governmental entity upon purchase by the contractor or if the contractor is reimbursed directly by the government entity for the cost of such property.

In Public Document (P.D.) 96-274 (10/9/96), the taxpayer contracted to fabricate, deliver and erect steel beams at an airport. The taxpayer contended its contract with the airport qualified as an exempt contract with a government entity. The Department held that the taxpayer's contract to furnish, deliver and install the fabricated product rendered the taxpayer a real property contractor with respect to its contract with the airport and not a retailer. As a contractor, the taxpayer was deemed the user and consumer of all tangible personal property used in the real property construction and was liable for the tax on such property.

Virginia Code § 58.1-609.3 1 states, the retail sales and use tax does not apply to "Personal property purchased by a contractor which is used solely in another state or in a foreign country, which could be purchased by such contractor for such use free from sales tax in such other state or foreign country, and which is stored temporarily in Virginia pending shipment to such state or country."

In P.D. 06-148 (12/8/06), the taxpayer maintained that some of the job materials used in out-of-state jobs qualified for exemption under Va. Code § 58.1-609.3 1. Contractors are eligible for the temporary storage exemption only if the property at issue can be purchased free of the sales tax in another state. The Tax Commissioner determined that the "Virginia's temporary storage exemption is intended to exempt from use tax a contractor's first use of construction materials in Virginia because the construction project or the entity for which the construction project is performed qualifies for sales tax exemption in another state." See, Public Document 93-225 (11/16/93).

Based on the information provided, and in accordance with the aforementioned authorities, the Taxpayer is deemed a contractor with respect to real property construction. The Taxpayer is the user and consumer of the tangible personal property purchased with respect to the real property construction contract at issue and does not make a retail sale of the property to the purchaser. Rather, the Taxpayer fabricates the tangible personal property into a product that is installed in real property construction. Additionally, the Taxpayer does not temporarily store the tangible personal property in Virginia before the fabricated product is delivered and installed in the real property construction outside Virginia. The property at issue is not subject to an exemption from the sales tax in the state where the construction project is located because the Taxpayer is the user and consumer of the property at issue. Accordingly, the exemption provided for in Va. Code § 58.1-609.3 1 is not applicable in this instance, and the Taxpayer is liable for the tax on the purchase of the tangible personal property used in the real property construction.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulation and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/ 1-5181949880.P