Were a sod farm's sales to its affiliate exempt as resale transactions?

Plain-English summary

Virginia split a sod farm's sales to its wholly owned affiliate into two groups. Sales of sod that the affiliate actually resold to customers were removed from the audit after the farm supplied a facially valid resale exemption certificate.

The remaining sod was used by the affiliate in contracts to furnish and install sod as part of real-property work. Under Virginia's contractor rule, the affiliate was the taxable user or consumer of that sod, so those purchases were not sales for resale. The Department returned the audit for revision rather than cancelling the entire assessment.

Common questions

Was collecting tax from the affiliate's customers enough to protect the farm? No. Virginia treated the upstream sales as taxable until the farm established resale treatment with an acceptable certificate.

Is installed sod treated as inventory for resale? Not when a contractor uses it in real-property installation work. The ruling treated the contractor as the consumer.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, 58.1-623, and 58.1-610
• 23 VAC 10-210-410 and 23 VAC 10-210-610
• P.D. 07-171

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-123

Original ruling text

June 26, 2018

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

Dear *:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the “Taxpayer”) for the period January 2009 through December 2014. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates a sod farm. The Taxpayer grows sod and sells it to its wholly owned affiliate, who then resells the sod to customers or enters into real property contracts for the sale and installation of the sod. The Department’s audit disclosed that the Taxpayer was selling the sod to its affiliate exempt of the tax without a valid resale certificate of exemption. The Department’s audit held the Taxpayer liable for the sales tax on all of its sales. The Taxpayer disagrees with the audit results, contending that all of the sales are for resale and are not subject to the sales tax. The Taxpayer seeks a waiver of the assessment, contending that its affiliate charges the tax on sales to its customers.

DETERMINATION

Sales for Resale

Virginia Code § 58.1-603 imposes a tax upon every person who engages in the business of selling at retail or distributing tangible personal property in Virginia. Virginia Code § 58.1-602 defines "retail sale" to mean “a sale to any person for any purpose other than for resale in the form of tangible personal property or services….”

Further, Virginia Code § 58.1-623 A states that all sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the customer a certificate to the effect that the property is exempt under the Retail Sales and Use Tax Act in Title 58.1 of the Code of Virginia . Subsection B of this statute further also provides, "The certificate mentioned in this section shall relieve the person who takes such certificate from any liability for the payment or collection of the tax, except upon notice from the Tax Commissioner that such certificate is no longer acceptable."

In this instance, the Taxpayer states that the sales at issue are erroneously subjected to the tax because all of its sales were for resale to its affiliate, who then charged and collected the tax on sales of sod to its customers. The Department’s auditor states that while the Taxpayer’s affiliate did charge and collect the tax on sales of sod to its customers, the Taxpayer, in making sales to its affiliate, failed to maintain a valid resale exemption certificate on file. I note that the Taxpayer has provided a facially valid resale certificate of exemption with its protest. Accordingly, the specific sales that were for resale will be removed from the audit.

Real Property Transactions

Title 23 of the Virginia Administrative Code (VAC) 10-210-610 treats a transaction to furnish and install plants and trees as a retail sale of tangible personal property. In Public Document (P.D.) 07-171 (11/7/07), the Department changed its policy regarding transactions that become real property upon installation. Construction contractors, landscape contractors and other persons that perform real property services such as construction site preparation, excavation, erosion control, drainage and irrigation system installation, debris removal and similar services are no longer treated as retailers with respect to the furnishing and installation of trees, shrubbery, nursery stock, plants, sod , silt fence and similar items. These businesses are to be treated as the taxable users or consumers of the trees, plant materials, sod , silt fence and similar items and must pay the applicable sales tax when purchasing these items from vendors or suppliers. This policy is consistent with Virginia Code § 58.1-610 and Title 23 VAC 10-210-410.

Title 23 VAC 10-210-410, discusses the contractor rule and states in section A:

The law treats every contractor as the user or consumer of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts.

This same regulation further states that:

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 . The dealer (supplier) making the sale, distribution, or lease to or storage for such a contractor must collect the tax from him. [Emphasis added].

While a portion of the Taxpayer’s sales to its affiliate were for resale, the balance of sales were to the affiliate for its use and consumption as a real property contractor. Accordingly, these sales were not for resale, and the tax should have been applied to the sales charges to the affiliate. Accordingly, based on the cited authorities the assessment associated with these transactions is correct and there is no basis to remove them from the Department’s audit.

The Department’s audit will be returned to the appropriate field audit staff for a revision of the audit consistent with the foregoing determination. A revised assessment will be issued, and the Taxpayer will have 30 days from the bill date to submit payment. If payment is not made within the allotted time, additional interest will accrue on the unpaid balance.

The Code of Virginia sections, regulations and public document cited are available on-line in the Laws, Rules and Decisions section of the Department’s website located at www.tax.virginia.gov . If you have any questions regarding this determination, please contact * of the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/670.J