Is a Virginia seller of topsoil, mulch, stone, compost, and soil mixes a real-property contractor when it only sells and delivers the materials without installing them?

Plain-English summary

The Virginia Tax Commissioner upheld sales tax on a business's sales of topsoil mixes, fertilizer, mulch, stone, compost, and similar products to landscapers and developers. The invoices showed that the business sold and delivered the products but did not install them or perform work on the customer's real property.

That distinction controlled. Va. Code § 58.1-610(A) treats a contractor as the taxable user or consumer of materials when it contracts to perform construction, installation, repair, or another service to real estate and furnishes property as part of that work. Here, the seller supplied tangible products without installation, so it was a retailer required to collect sales tax.

The landscaper rule did not change the result. The Department's policy for businesses that sell and install trees, plants, sod, and similar property applies when the business actually performs real-property services. These transactions involved products delivered to customers, not the seller's installation or landscaping work.

The seller's NAICS registrations for specialized local trucking and fertilizer mixing also did not control. The Commissioner looked at the invoices and the substance of the assessed transactions, which showed sales of tangible personal property. The assessments therefore remained correct.

The ruling addressed financial hardship separately. The Commissioner did not waive the tax, penalty, or interest on that basis, but invited the taxpayer to apply for an offer in compromise based on doubtful collectibility with supporting financial information.

What this means for you

Soil, mulch, stone, and landscape-supply sellers

Delivery alone does not make you a real-property contractor. If you sell materials without installing them, treat the transaction as a retail sale and collect Virginia sales tax unless another exemption applies.

Landscapers and developers buying bulk materials

The tax treatment depends on what the vendor contracts to do. A vendor that installs qualifying materials as part of real-property work can be treated differently from a supplier that simply delivers a load of product.

Businesses with service-oriented NAICS codes

An industry code does not override the actual transaction. Invoices, contracts, and the work performed determine whether a charge is for taxable tangible property or a real-property service.

Common questions

Q: Does hauling the product to the customer make the seller a contractor?
A: No. The invoices showed delivery but no installation or real-property work by the seller.

Q: Did the Department's landscape-contractor policy apply?
A: No. The assessed sales were products delivered to customers, not trees, plants, sod, or similar items installed by the seller as real property.

Q: Can financial hardship eliminate the assessment?
A: Not by itself. The taxpayer could pursue an offer in compromise based on doubtful collectibility and provide evidence of its financial condition.

Citations and references

• Va. Code § 58.1-610(A) (real-property contractor treatment)
• 23 VAC 10-210-610 (florists, nurserymen, landscapers, and contractors)
• P.D. 07-171 (Department policy for businesses selling and installing certain landscaping items)

Subject

Real property contractor vs. retailer

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-1

Original ruling text

January 25, 2019

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

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessments issued for the period July 2009 through June 2015. I apologize for the delay in responding to your appeal. I note that the Taxpayer has made payments toward the uncontested portions of the assessments.

FACTS

The Taxpayer provides mulch, organic topsoil, stone, compost, and special soil mixes to landscapers, developers, and retail customers. The Taxpayer also provides hauling and snow removal services to its customers. At issue in the audit are the sales of different mixes of topsoil, fertilizer, and other products (the “products”) to the Taxpayer’s landscaper and developer customers (the “customers”) that are delivered to the customers. During the audit, the auditor found that the Taxpayer made retail sales of the products to its customers and did not charge sales tax. The auditor further determined that these products are consumed by the Taxpayer’s customers. Accordingly, the auditor assessed sales tax on the untaxed sales of the products in the audit.

The Taxpayer contests the assessment of tax on sales of the products to its customers. The Taxpayer states that it engages in on-site and off-site soil processing. The Taxpayer contends that it operates as a real property contractor, and the sales at issue are not subject to the sales tax. The Taxpayer requests a waiver of the applicable tax, penalty and interest for the periods identified in the assessments. The Taxpayer further provides that should the assessments be upheld, payment of the assessments will cause the Taxpayer a financial hardship.

DETERMINATION

Real Property Contractor

Virginia Code § 58.1-610 A provides, in pertinent part, that:

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.

The Taxpayer contends that in accordance with Virginia Code § 58.1-610 it should be treated as a using and consuming contractor with respect to the sales at issue. The sales were held taxable in the audit because the invoices reviewed reflect the sale of the Taxpayer’s products that are delivered to the customers. The invoices do not reflect that the Taxpayer provided installation of the products. With respect to the sales at issue, the Taxpayer is deemed a retailer and not a real property contractor as considered in Virginia Code § 58.1-610. Accordingly, the sales are subject to the sales tax, and the assessment is correct as issued.

Landscape Contractor

Title 23 of the Virginia Administrative Code (VAC) 10-210-610 provides guidance for florists, nurserymen, landscapers and contractors. Title 23 VAC 10-210-610 states, “The tax applies to retail sales of flowers, potted plants, shrubbery, nursery stock, sod, wreaths, bouquets, and similar items.”

Pursuant to Public Document (P.D.) 07-171 (11/7/07), the Department changed its policy regarding the application of the sales and use tax to certain persons that sell and install trees, shrubbery, plants, other nursery stock, sod, silt fence and similar items that become real property upon installation. The Tax Commissioner determined that businesses that perform real property services will be the taxable users and consumers of the trees, plant materials, sod, silt fence, and other similar items and must pay the applicable sales tax when purchasing these items from vendors. If a vendor does not charge the sales tax, the business will be responsible for remitting the use tax on the untaxed purchases to the Department. The policy change was intended to relieve these businesses from the sales tax collection mandated by Title 23 VAC 10-210-610.Prior to the policy change, these businesses were deemed to be making taxable retail sales when furnishing and installing these items under the terms of real property contracts, or as part of real property construction contracts.

Relying on P.D. 07-171, the Taxpayer contends that there are many situations in which its soil processing is more comparable to services provided by a real property contractor or similar business that primarily engages in the provision of real property services exempt from the sales tax collection requirements mandated by Title 23 VAC 10-210-610. The sales at issue are not for the sale of flowers, potted plants, sod, or other similar items. Rather, the Taxpayer is selling and delivering its products to the customers. Additionally, the sales at issue are not for the provision of real property services. As such, I find that the Taxpayer is not considered a landscape contractor as considered in Title 23 VAC 10-210-610 and P.D. 07-171. Accordingly, the sales are not exempt sales as considered in the aforementioned authorities.

NAICS

The Taxpayer states that it is a service-oriented business and that it provides services under NAICS codes 484220 (Specialized Freight (except Used Goods) Trucking Local) and 325314 (Fertilizer (Mixing Only) Manufacturing). In accordance with the Department’s records, the Taxpayer is currently registered under NAICS code 484220. The invoices reviewed during the audit show hauling charges and/or charges for the sale of tangible personal property in connection with hauling services, in addition to other services that were not included in the audit. Additionally, the invoices do not reflect any manufacturing or fertilizer mixing work done by the Taxpayer. Notwithstanding the Taxpayer’s NAICS code registration, the sales at issue are for a tangible product and are subject to the sales tax.

Financial Hardship

The Taxpayer indicates that paying the assessments (less the payment previously paid) will cause a financial burden. As such, the Taxpayer may wish to request an offer in compromise based on doubtful collectibility. The Taxpayer must provide evidence of doubtful collectibility to support a claim of financial hardship.

If the Taxpayer wishes to pursue a settlement based on doubtful collectibility, please complete and return the enclosed OIC-Fee and OIC B - 3 forms to: Tax Commissioner, Virginia Department of Taxation, Post Office Box 2475, Richmond, Virginia 23218-2475. These forms will allow the Department to review and analyze the Taxpayer’s financial situation. Upon completion of the Department’s review, a response will be issued based upon the information provided. If the Department does not receive the completed forms within 30 days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based upon doubtful collectibility.

CONCLUSION

Based upon this determination, the assessments are correct. If the enclosed offer in compromise forms are not provided within the allotted timeframe, revised bills, with interest accrued to date, will be mailed to the Taxpayer. No further interest will accrue provided the outstanding bills are paid within 30 days from the date of the bills. Please remit payment to: Virginia Department of Taxation, 600 East Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessments, you may contact at **.

The Code of Virginia section, regulation and public document cited 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 Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

Related Documents

07-171