I fabricate and sell steel products, and a separate contractor I hire does the rebar tying and shop drawings, billed separately on my invoice -- do I have to charge sales tax on those separately stated labor charges too?

Plain-English summary

A fabricator and supplier of steel, rebar, and accessories forms raw materials into custom products under customer order specifications; an independent contractor then performs rebar tying onsite before the finished product moves on. An audit assessed sales tax on previously untaxed labor and service charges -- rebar tying and shop drawings -- billed in connection with the fabricator's sales. The fabricator sought a refund, arguing those charges were nontaxable services and that taxing them double-taxed the same materials.

Retailer, not consuming contractor. The fabricator argued it fabricates property exclusively for use in real property construction contracts, so it should only owe tax on its own raw materials cost (the "consuming contractor" treatment). The Department disagreed: 23 VAC 10-210-410 C requires a fabricator who sells tangible personal property to customers -- including contractors -- for their use or consumption to charge and collect sales tax on that sale, and 23 VAC 10-210-560 B likewise requires a fabricator regularly engaged in retail sales of fabricated property to collect tax on the sales price. The fabricator admitted it doesn't itself install the product into real property; instead, it sells the finished, fabricated goods to various contractors and pre-castors who do the installing. That makes the fabricator a retailer/dealer making retail sales -- not the ultimate consumer of the property -- so the retail sales tax framework, not the consuming-contractor framework, applies.

Why the separately stated labor charges are still taxable. Fabrication is "an operation which changes the form or state of tangible personal property" (23 VAC 10-210-560 A). Virginia taxes the "sales price" of tangible personal property, and Va. Code § 58.1-602 defines sales price as the total charge for property or services sold, with no deduction for the cost of materials, labor, service costs, or any other expense. 23 VAC 10-210-560 B makes this explicit for fabrication: tax applies to the total charge for fabricating property on special order, including labor, even if the labor is separately stated on the invoice.

Third-party subcontractor labor doesn't change the answer. The fabricator argued the rebar tying was performed by an independent contractor under a separate agreement and billed as a distinct service -- and that taxing it would tax the same materials twice. The Department rejected this: the tax isn't being imposed twice on the same materials, it's imposed once on the fabricator's total charge for the finished product, and that total charge includes the subcontractor's tying labor and the shop-drawing charges because both are billed in connection with the sale of the fabricated rebar -- regardless of who physically performed the labor or whether it's itemized separately (citing P.D. 97-159).

Outcome. Because the rebar-tying and shop-drawing charges are properly part of the taxable sales price, there was no basis to refund the tax and interest the fabricator had already paid on them. The assessment was upheld, with a revised bill (interest accrued to date) and 30 days to pay before further interest accrues.

What this means for you

Fabricators who sell finished products to contractors rather than installing them themselves

If you don't personally install your fabricated goods into real property, you're very likely a retailer of those goods for sales tax purposes -- required to collect tax on your full sales price -- rather than a consuming contractor who only pays tax on raw materials. Confirm which category you're in before assuming a contractor-style exemption applies.

Anyone separately stating labor, service, or subcontractor charges on an invoice for fabricated goods

Separately stating a charge doesn't remove it from the taxable sales price. Virginia's "sales price" definition and the fabrication regulation both explicitly reach labor and service charges billed in connection with a sale, whether performed in-house or by an independent third-party subcontractor.

Businesses using third-party subcontractors for part of a fabrication job

Using an independent contractor for one piece of the work (like rebar tying here) doesn't convert that portion into a separately nontaxable service. If it's billed in connection with your sale of the fabricated property, it's part of your taxable sales price.

Common questions

Q: I fabricate goods and sell them to contractors who install them -- am I taxed as a contractor or a retailer?
A: If you don't personally perform the installation into real property, you're a retailer/dealer of the fabricated goods and must collect sales tax on your full sales price -- not just pay tax on your raw materials as a consuming contractor would.

Q: I hire an independent contractor to do part of the fabrication-related labor and bill it separately -- is that separate charge taxable?
A: Yes, if it's billed in connection with your sale of the fabricated property. Virginia's sales price definition and fabrication regulation both include labor and service charges, even when separately stated and even when performed by a third-party subcontractor.

Q: Doesn't taxing my labor charges tax the same materials twice?
A: No. The tax applies once, to the total sales price of the finished fabricated product -- which by definition includes labor and service costs, not just the raw material cost.

Citations and references

Statutes and regulations:

• 23 VAC 10-210-410 C -- a fabricator who sells tangible personal property to customers, including contractors, for their use or consumption must charge and collect sales tax on the sale
• 23 VAC 10-210-560 A -- fabrication is an operation that changes the form or state of tangible personal property
• 23 VAC 10-210-560 B -- a fabricator regularly engaged in retail sales of fabricated property must collect tax on the full sales price, including labor, even if labor is separately stated
• Va. Code § 58.1-602 -- "sales price" means the total charge for tangible personal property or services sold, with no deduction for the cost of materials, labor, service costs, or other expenses

Authorities the Department relied on (described here, not linked): P.D. 97-159 (4/8/1997) (fabrication tax applies to the total charge including subcontracted labor, without constituting double taxation on the underlying materials). Note: 23 VAC 10-210-410 is the same regulation implicated in this corpus's other fabricator/contractor-vs-retailer rulings (e.g., P.D. 24-144, P.D. 25-26, P.D. 24-141), though this ruling cites its subsection C for the distinct "fabricator sells to customers" retailer-classification rule rather than a dual-operator primary-purpose test.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-105

Original ruling text

October 23, 2024

RE: § 58.1-1821 Refund 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 assessment issued for the period October 2019 to September 2022.

FACTS

The Taxpayer, a fabricator and supplier of steel, rebar, and accessories, forms raw materials into various steel products pursuant to customer order specifications. The products are then moved to another location onsite where the rebar tying is completed by an independent contractor.

An audit resulted in the assessment of sales tax on untaxed labor and service charges, including rebar tying and shop drawings, in connection with the sales of fabricated tangible personal property. The Taxpayer filed an application for correction, contending the disputed charges are not taxable services.

DETERMINATION

Fabrication - Retailer vs. Contractor

The Taxpayer asserts that it fabricates tangible personal property exclusively for use and consumption in real property construction contracts and, thus, is only required to pay tax on the cost price of raw materials used in fabrication, but not tax on the cost of labor or services provided in connection with a sale.

Title 23 of the Virginia Administrative Code (VAC) 10-210-410 C addresses the tax application for fabricators that sell tangible personal property to customers. The regulation states “A person who fabricates tangible personal property and sells it to customers, including contractors, for use or consumption by them , must add the sales tax to the sales price and collect it from the customer for payment to the state. Raw materials, component parts, and other tangible personal property to be fabricated for sale may be purchased under a resale certificate of exemption.” [Emphasis added.]

Title 23 VAC 10-210-560 B provides that a fabricator regularly engaged in the retail sale of fabricated tangible personal property must collect and pay the tax on the sales price of the property. Contrary to the Taxpayer’s assertion that it is a fabricator exclusively for use and consumption in real property, it admits it does not actually perform installation into real property. Instead, the fabricated tangible personal property is sold to various contractors and pre-castors. As the fabricator and seller, the Taxpayer is a dealer that makes retail sales and not the ultimate consumer of the tangible personal property.

Fabrication Cost

The Taxpayer further asserts that installation and rebar tying labor is performed by a third party pursuant to an independent contractor agreement, which is a service separately stated on its invoices. It believes imposing the tax on such services would subject the same materials to the sales and use tax twice.

Title 23 VAC 10-210-560 A defines fabrication as "[a]n operation which changes the form or state of tangible personal property." In this case, the Taxpayer is the dealer of the fabricated rebar. The Virginia retail sales and use tax is imposed on the sales price of tangible personal property. Virginia Code § 58.1-602 defines “sales price” as “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale ... without deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.” This definition makes it clear that, absent a statutory exemption in the Code of Virginia, labor or service charges are taxable when made in connection with the sale of tangible personal property. Further, Title 23 VAC 10-210-560 B states that “the tax applies to the total charge for the fabrication of tangible personal property on a special order for consideration, including labor, even if charges for labor are separately stated.”

The information provided shows that a third-party contractor is utilized for pre-tying and tying of rebar and the Taxpayer invoices for the services in connection with the sale of tangible personal property. Likewise, separately stated charges for shop drawings, regardless as to whether they were tangible personal property or a service, would also be connected to the sales of the fabricated rebar.

In accordance with Title 23 VAC 10-210-560, charges for rebar tying and shop drawings are subject to taxation when made in connection with a retail sale even if separately stated. Double taxation is not occurring on the materials, but the tax is applicable on the total charge including labor charges by the sub-contractor and for the shop drawings. See Public Document 97-159 (4/8/1997).

Under such circumstances, charges and fees for shop drawings and the separately stated rebar tying labor charge would be subject to the sales tax. Therefore, no basis exists to refund the Taxpayer’s payment of tax and interest on the contested services and labor charges.

Based on this determination, the assessment is correct. A revised bill for the remaining balance, with interest accrued to date will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at or **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR\4658.F

Related Documents

97-159