Sales Tax State Activity Update - October 2005

A Case of Mistaken Fabrication in Virginia

A contractor seeks correction of an erroneous assessment and refund of a use tax under Va. Code § 58.1-825. The tax was levied against a rock crushing service purchased by the taxpayer. The Court ruled that only the sales tax applied to services and not the use tax.

Background
The Taxpayer arranged for an out of state subcontractor to come to a building site, where the Taxpayer had been contractually engaged by the Federal Bureau of Prisons to construct a building and to crush shot rock from the site into gravel for use in site preparation.

Deeming the crush operation as fabrication of shot rock to gravel, the Commonwealth assessed the taxpayer a use tax under Va. Code § 58.1-604. The taxpayer contends that by the terms of the statute that no use tax is implicated and thereby contests the assessment and payment of the tax.

Analysis
The use tax statute, Va. Code § 58.1-604, reads in pertinent part as follows:

Imposition of use tax. - There is hereby levied and imposed, in addition to all other taxes and fees now imposed by law, a tax upon the use or consumption of tangible personal property in this Commonwealth.

1. Of the cost price of each item or article of tangible personal property used or consumed in this Commonwealth.

With this language considered, the Taxpayer argues that the use tax applies only to purchases of tangible personal property, not services, and the assessment was erroneous.

The Commonwealth characterizes the crushing operations as fabrication. However, fabrication does not implicate the use tax. Fabrication only implicates imposition of the sales tax. Under Va. Code § 58.1-602 a "sale" includes the service of "fabrication." The sales tax statute provides in pertinent part:

Sale means any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration, and includes the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication.

The Commonwealth suggests that the use tax compliments the sales tax and that if fabrication applies to the sales tax then, by inference, it must also apply to the use tax. The court agreed that the use tax may compliment the sales tax, but they are not coextensive. The sales tax cannot be imposed on the purchaser only the seller. The use tax exists to fill the void in the Commonwealth's ability to assess sales tax against purchasers by granting the right to assess purchasers directly. However, the use tax against purchasers is limited to purchases of tangible property.

Conclusion
The fundamental distinction applied in this case is that the use tax does not extend to services.

View the full text on the Virginia Tax Policy Library website.

(Hardaway Construction Corporation of Tennessee v. Commonwealth of Virginia, Department of Taxation, Case No. LR-1165-1, 7/08/2005)

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