Were ceiling-track movable office partitions tangible personal property for resale, or real-property installations making the fabricator liable for use tax on materials?

Subject

Movable office partitions were taxable real-property installations

Plain-English summary

Virginia treated the movable office partitions as permanent real-property installations, so the contractor owed use tax on the cost of the untaxed fabrication materials. The partitions hung from ceiling tracks attached with screws and were secured at the floor; they functioned as interior office walls.

Virginia applied the fixture tests of annexation, adaptation, and intent. The exact attachment method carried limited weight because the systems were physically integrated into the realty. They also were adapted to office use: layouts had to coordinate with HVAC, lighting, fire suppression, cabling, electrical service, and doors, and the walls enhanced privacy and usefulness.

Although marketed as movable, the evidence did not show regular relocation or temporary installation. The brochures instead described long-term usefulness, and no customer lease or agreement established temporary intent. Federal investment-credit treatment of movable partitions as personal property did not control Virginia sales-and-use-tax law.

The narrow exception was convincing, plain written evidence existing at the transaction date that the installation was temporary—for example, a lease stating that specified trade fixtures remained removable tenant property. Without that proof, the assessment was correct.

What this means for you

• “Movable” or removable does not automatically mean tangible personal property for Virginia tax.
• Obtain temporary-installation or trade-fixture language before the transaction, not after an audit.
• Coordinate wall systems with building infrastructure carefully; that integration supports fixture treatment.
• If the installation is real-property work, the contractor pays tax on fabrication materials rather than buying them for resale.

Citations and references

• Va. Code § 58.1-610 A.
• Transcontinental Gas Pipe Line Corp. v. Prince William County, Danville Holding Corp. v. Clement, and Taco Bell of America, Inc. v. Commonwealth Transportation Commissioner.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-83

Original ruling text

May 30, 2014

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

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period August 2008 through December 2011.

FACTS

The Taxpayer specializes in interior construction and also fabricates and installs floor to ceiling movable wall systems (hereinafter, "movable partitions"). As a result of the audit, the Department's auditor determined that the Taxpayer is a consuming contractor in accordance with Va. Code § 58.1-610 A. As such, the audit resulted in the assessment of consumer use tax on various purchases of untaxed materials used to fabricate movable partitions.

According to the Department's auditor, the Taxpayer fabricates movable partitions that are designed and built to move along tracks installed in the ceiling. The auditor indicates that sheet metal screws are used to attach such tracks to the ceilings. The auditor also indicates that the movable partitions fit into the tracks at the top of the partition and are affixed at the bottom of the partition with Velcro (in the case of carpeted floors) or with two-sided tape (in the case of cement floors). The auditor further indicates that the movable partitions may be removed only by removing all of the sheet metal screws attaching the partition to the ceiling. As such, these partitions are not free-standing. Rather, they are integrated into the track mounted in the ceiling and hang from such ceiling track attachment.

The Taxpayer contends that the movable partitions do not constitute permanent installations and should be treated as the sale of tangible personal property. The Taxpayer notes that the Internal Revenue Service (IRS) recognizes movable and removable partitions and walls as not being structural components but tangible personal property. On this basis, the Taxpayer contends that it should be entitled to the resale exemption with respect to its purchases of materials used to fabricate such partitions. As for the Taxpayer's customers, the Taxpayer maintains that the resale exemption should apply to the Taxpayer's sales of movable partitions.

DETERMINATION

Based on the issue presented in this case, it must be determined whether the movable partitions remain tangible personal property or become a part of the real estate. The Virginia Supreme Court has ruled:

Three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to the realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. The intention of the party making the annexation is the chief test to be considered in determining whether the chattel has been converted into a fixture.

See Transcontinental Gas Pipe Line Corporation v. Prince William County , 210 Va. 550, 555 (1970), 172 S.E.2d 757, 761, 762 and Danville Holding Corp. v. Clement , 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941).

In Taco Bell of America, Inc. v. Commonwealth Transportation Commissioner , 710 S.E.2d 478, 282 Va. 127 (2011), the Virginia Supreme Court relied on the above tests in a condemnation action. In that ruling, the items in question included aluminum pans, chairs, frying baskets, a refrigerator, a cooler, a freezer, sinks, warming ovens, work stations and a neon sign. The court stated that "[w]hile the evidence is uncontroverted that all of these items are moveable, whether an item can be removed from the realty is not the test for establishing whether or not it is a fixture." The court further stated that, "while the evidence was undisputed that the items in question could be physically removed from the property, there was also testimony that the items were used for the purpose of the restaurant. In other words, the items were of the type needed for the purpose to which the property was devoted."

In regard to the first test, the court has said that "there must be actual or constructive annexation, the method or extent of the annexation carries little weight...." See Danville Holding at 232. According to the auditor, the movable partitions are attached to tracks that are fastened to the ceiling with screws and are attached to floors with Velcro or tape. According to an architectural details brochure furnished by the Taxpayer, these partitions are fastened to the floor with floor runners that appear to be bolted to the floor with power driven pins. Notwithstanding the auditor's understanding, this brochure indicates that double-sided tape, Velcro or other non-mechanical attachments are not acceptable for use with movable partitions. Regardless of the method of installation, it is clear that these partitions are attached in some manner to the realty and function as interior walls of office buildings.

In regard to the second test, the Virginia Supreme Court ruled in Danville Holding at 232 that "adaptation of the chattel to the use of the property to which it is annexed is entitled to great weight, especially in connection with the element of intention." The court further stated that "[i]f the chattel is essential to the purposes for which the building is used or occupied, it will be considered a fixture, although its connection with the realty is such that it may be severed without injury to either."

While the Taxpayer markets these partitions as movable wall systems that could be repositioned as the need arises for reconstruction, the facts presented provide no conclusive evidence that the contested partitions are temporarily installed or regularly relocated. Rather, based on the brochures and facts presented, it seems that the movable partitions are generally intended for long term use as originally installed and are designed to remain in place until in need of repair or replacement. For instance, in discussing the "churn rate" ( i.e. , how often a company may change its office space over one, five or ten years), one brochure indicates that the movable partitions "are designed for change to remain useful over the long term ." [Emphasis added.] Another brochure demonstrates how clear partitions provide an office space with a sense of openness and light that appears to enhance the ambiance of the office environment while providing privacy to conduct business. Thus, the removal or absence of such partitions would seem to diminish the usefulness and value of the building.

Before any movable partition is installed, it may be likely that the floor and ceiling design would have to accommodate such movable partitions. That is, the ceiling would need to be designed so that the partitions do not interfere with HVAC, lighting, fire suppression, and intercom requirements. The floor would also need to be designed or laid out in a manner that accommodates the addition of such partitions, including electrical requirements, cabling, doorways, etc.

Of additional importance, I would note that the movable partitions need not be structural components of a building. For instance, doors and toilets installed in an office building are easily removed without damage to the building but are essential to the function of an office building and are treated as permanent installations for Virginia retail sales and use tax purposes. Based on all of the foregoing, I find that these partitions are adapted for use in an office building as articles designed to become part of it and thus become essential to the purpose for which office buildings are devoted.

In regard to the third test, the intention of the party may not be known. When there is no agreement ( e.g. , a copy of the customer's building lease) provided to the Taxpayer by the customer at the time of the transaction to establish that the installation of the Taxpayer's movable partitions in an office building is for temporary purposes, the courts allow the intent to be inferred from all of the circumstances. Based on the first two tests discussed above, I must conclude that the movable partitions are annexed to the real property and adapted to the use of such property. I must also conclude that the movable partitions are designed for long term use and enhance the interior space of office buildings. For these reasons and because of the significant cost of materials used to construct the movable partitions (from the Taxpayer's online price book for federal contracts), these facts do not establish an intent for a temporary installation.

Based on the foregoing and the court's rules in these matters, it is my determination that the installations of the movable partitions are intended for permanent use. As such, the Taxpayer is liable for the tax on the cost price of materials used to construct movable partitions as set out in Va. Code § 58.1-610 A. This determination is consistent with Public Document 07-111 (7/19/07), in which folding panel partitions were deemed permanently installed in a building.

The only exception to the determination in the instant case would be if the Taxpayer has convincing and plain written evidence at the time of the transaction to establish that the partitions were installed for temporary purposes. An example of such evidence would be proof that the partition is a trade fixture installed in a leased building in which a contract between a lessor and lessee establishes that certain specifically stated trade fixtures do not become the property of the lessor if removed after the conclusion of the lease.

The Taxpayer relies on the IRS' investment tax credit policy of treating movable partitions as tangible personal property when installed in an office building. According to the information presented, the IRS would treat such movable partitions as a part of the real estate only when the partitions could not be removed without doing at least some damage to the structure itself. The IRS policy appears to be based on a congressional decision to treat such items as personal property for investment tax credit purposes. See S. Rep. No. 95-1263, page 123 (1978). Notwithstanding, such IRS policy has no impact upon how the Department determines this matter for Virginia retail sales and use tax purposes. Rather, the Department must follow the three tests set out by the Virginia Supreme Court as noted above.

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: Virginia Department of Taxation, 600 East Main Street, 23 rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

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 that was eligible for Amnesty benefits under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."

The Code of Virginia section and public document cited is 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 determination, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5578946996.R