Can a Virginia contractor that paid Virginia sales tax on materials used in a North Carolina project get a Virginia credit or refund through a reciprocity agreement?

Plain-English summary

A Virginia contractor asked the Department a ruling question: it performed real property construction in North Carolina for a university that holds a North Carolina direct payment permit. The bid rules required contractors to pay North Carolina sales tax on materials, leave that tax out of their bids, and then get reimbursed for the North Carolina tax paid. This Virginia contractor, however, paid Virginia sales tax on the materials -- and Virginia tax was not part of the reimbursement scheme, leaving it at a competitive disadvantage against North Carolina contractors. It asked whether any Virginia reciprocity agreement could level the field.

The rule. Under Va. Code Sec. 58.1-610 A and 23 VAC 10-210-410, a person who contracts to build, install, or repair real estate and furnishes the materials is treated as the user and consumer of those materials -- not a reseller. The contractor owes tax on the materials it buys, and that is true even when the customer (a nonprofit, a government, or here an out-of-state university) is itself exempt.

The answer. The Commissioner sympathized but found no relief. Nothing in Virginia's statutes relieves the contractor from Virginia sales and use tax on real property construction materials, and Virginia has no reciprocity agreement with North Carolina allowing a credit or refund of Virginia tax properly paid on materials installed in a North Carolina project. The Commissioner suggested the contractor might instead ask North Carolina or the university for reimbursement of the Virginia tax.

What this means for you

As a contractor, you pay tax on the materials you install

You are the consumer of the materials you furnish and install, so the tax follows your purchase -- even if your customer is exempt. Build that cost into your bids.

Virginia has no reciprocity credit for tax paid to Virginia

If you properly pay Virginia tax on materials, another state's reimbursement program will not give you a Virginia credit or refund, and there is no reciprocity agreement to bridge the gap. Watch where you buy and first use materials for an out-of-state job.

Look to the other state or the project owner

Your practical remedy may be to seek reimbursement from the state where the project sits or from the project owner, under that project's tax-reimbursement terms.

Common questions

The customer is a tax-exempt university -- doesn't that exempt my materials? No. A contractor is the taxable user and consumer of materials it furnishes and installs regardless of the customer's exempt status.

Can Virginia credit me for tax another state's program covers? No. Virginia has no reciprocity agreement with North Carolina to credit or refund Virginia tax on materials used in a North Carolina project.

Is there anything I can do? You may seek reimbursement of the Virginia tax from North Carolina or the university under the project's reimbursement arrangement.

Citations and references

• Va. Code Sec. 58.1-610 A -- a contractor who furnishes materials for real property work is the user/consumer of them.
• 23 VAC 10-210-410 -- the contractor is treated as the user/consumer of tangible personal property used in real property contracts, even for exempt customers.
• This is a ruling in response to a request; it applies to the facts presented, and new facts may lead to a different result.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-87

Original ruling text

May 18, 2020

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which * (the “Taxpayer”) seeks a ruling as to the proper Virginia sales and use tax application to Virginia real property contractors performing real property construction projects outside Virginia.

FACTS

The Taxpayer, a Virginia real property contractor, entered into a contract with an out-of-state general contractor to perform real property construction for an out-of-state university (the “University”). The University has been granted a direct payment permit by the state of North Carolina for the accrual and remittance of all North Carolina sales taxes. One of the conditions of the bidding process for the University job was that the contractors and subcontractors should pay sales tax on all materials at the time of purchase and remove all North Carolina sales taxes paid on materials in submitting their bids. In turn, the contractor or subcontractor would submit a separate schedule of North Carolina taxes paid and would be reimbursed accordingly.

As provided in your letter, and as exhibited in Exhibit “M” enclosed with your letter, the direct payment reimbursement process for this project only reconciles sales taxes paid by a contractor or subcontractor of North Carolina sales taxes. The Taxpayer, a Virginia contractor, paid Virginia sales tax on all materials that were used in the North Carolina project. As a result of the bidding process on this North Carolina project, the Taxpayer is at a competitive disadvantage with North Carolina contractors who will be reimbursed for sales taxes paid, while a Virginia contractor who paid Virginia sales taxes will not. The Taxpayer is seeking guidance as to any reciprocity agreement Virginia may have with North Carolina to provide a level playing field with North Carolina contractors.

RULING

Virginia Code § 58.1-610 A provides that a person who contracts to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon and who furnishes tangible personal property is deemed to have purchased the tangible personal property for use or consumption. Title 23 of the Virginia Administrative Code 10-210-410 further provides that “the law treats every contractor as the user or of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts.”

A contractor who enters into a real property construction contract to furnish and install construction materials does not resell the construction materials, but is considered the taxable user and consumer of such materials. This is true regardless of the fact the contractor may be performing real property construction for a nonprofit organization, a governmental organization, or any other customer that may enjoy an exemption from the retail sales and use tax.

In the present case, the Taxpayer performed a real property construction job in North Carolina for which the customer held a direct payment permit with the state of North Carolina. The contract terms for the job required contractors to pay the North Carolina sales tax on all building materials used in the construction project, but not include the North Carolina sales tax on bids to perform the construction project. In turn, the contractor would be reimbursed for all North Carolina sales taxes paid to the state of North Carolina. There are no provisions in the contract with regard to sales taxes paid other than North Carolina sales tax.

While I sympathize with the Taxpayer’s situation, there are no provisions within the Virginia statutes that would relieve the Taxpayer from paying the Virginia sales and use on real property building materials. In addition, there is no reciprocity agreement with the state of North Carolina to allow for a credit or refund of the Virginia sales tax properly paid on real property construction materials installed on a North Carolina project. However, based on the Attachment 2 and 3 enclosed with your letter, and the general reference to the sales tax contained in these attachments, the Taxpayer may wish to contact North Carolina or the University for reimbursement of the Virginia sales taxes that were paid on construction materials.

This response is based on the facts provided in your correspondence and summarized above. Any changes in the facts, or the introduction of new facts, may lead to a different result.

The Code of Virginia and regulation sections cited in this letter are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you should have any additional questions about this ruling you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1189.Q