The Devil’s in the Details for Virginia Sales Tax on Contractors

November 22, 2013

Keeping track of Virginia’s sales tax rules applicable to construction contractors is no easy task, especially if your business installs or affixes items to real property. There are various factors that must be considered in determining whether purchases and sales engaged in by such businesses are subject to sales tax. The Virginia Tax Commissioner recently issued a ruling addressing when certain “contractors” are considered to be retailers, allowing the property that will be installed to be purchased by the contractor without the addition of sales tax.

Generally, Virginia requires that contractors pay sales and use tax on purchases of tangible personal property used in the performance of a contract. However, an exception applies for businesses that: (1) keep an inventory of materials and items which will become a component part of the product to be installed; (2) maintain a wholesale or retail place of business; and (3) perform installation of the items sold.

This most recent ruling addressed when a business is deemed to be maintaining inventory. The taxpayer in the ruling sold and installed shelves and cabinets. The shelves and cabinets were ordered from a third party and stored by the taxpayer until the time of installation. The Tax Commissioner concluded that the taxpayer failed to meet the inventory requirement because the taxpayer purchased its materials on a job-to-job basis. Furthermore, the Commissioner noted that the taxpayer’s regular stock of trim pieces, parts used to make modifications and leftover materials also were not inventory because these materials did not constitute most of the component items required to produce a finished product. Thus, the taxpayer in the ruling was deemed to be a contractor liable for sales tax on purchases of tangible personal property used in its contracts.

The types of businesses that typically meet the “retailer” exception include sellers and installers of fences, Venetian blinds, window shades, awnings, storm windows and doors, floor coverings, cabinets, kitchen equipment, window air conditioning units, and other similar items. Sellers of these types of products that meet the requirement of the exception have the ability to purchase inventory tax-free by providing their suppliers with a retailer certificate. The seller then must collect tax on the sale of the items to its customers. However, ensuring that your business meets all of the requirements for being a “retailer” is essential in order to mitigate the risks of being issued an assessment for sales tax.

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