Title of Regulation: 23VAC10-210. Retail Sales and Use Tax (amending 23VAC10-210-340, 23VAC10-210-410).

Statutory Authority: § 58.1-203 of the Code of Virginia.

Public Hearing Information: No public hearing is currently scheduled.

Public Comment Deadline: September 15, 2023.

Effective Date: September 30, 2023.

Agency Contact: Joe Mayer, Lead Policy Analyst, Department of Taxation, P.O. Box 27185, Richmond, VA 23261-7185, telephone (804) 371-2299, FAX (804) 371-2355, or email joseph.mayer@tax.virginia.gov.

Basis: Section 58.1-203 of the Code of Virginia authorizes the Tax Commissioner to issue regulations relating to the interpretation and enforcement of the laws governing taxes administered by the Department of Taxation. Section 58.1-601 of the Code of Virginia authorizes the Department of Taxation to administer the Retail Sales and Use Tax.

Purpose: This action is necessary to conform 23VAC10-210-340 to the repeal of § 58.1-626 of the Code of Virginia by Chapter 758 of the 2019 Acts of Assembly. This action is also necessary to conform 23VAC10-210-410 to changes to § 58.1-610 of the Code of Virginia made by Chapters 436 and 449 of the 2017 Acts of Assembly. Without this regulatory change, the regulation would be incorrect and potentially a source of confusion for dealers and their customers. As the Retail Sales and Use Tax plays a critical role in providing revenue for Virginia's General Fund and funding for transportation and public schools, this regulatory change is essential to protect the health, safety, or welfare of citizens by eliminating a potential source of confusion for taxpayers.

Rationale for Using Fast-Track Rulemaking Process: The changes to 23VAC10-210-340 are necessitated by 2019 legislation that allowed Virginia dealers to offer to absorb payment of the sales tax for their customers, as allowed in some other states. The Department of Taxation has implemented the legislation and is not aware of any concerns expressed by affected parties. Accordingly, the changes to this regulation section are expected to be noncontroversial. The changes to 23VAC10-210-410 are necessitated by 2017 legislation that received industry support because it provided administrative simplification to businesses by treating businesses that sell and install the statutorily listed items the same as other contractors. The statutory provision repealed by the legislation had caused confusion among some taxpayers as to whether they should be paying the tax on their purchases of the listed items or collecting sales tax on their sales of the items. The Department of Taxation has implemented the legislation and is not aware of any concerns expressed by the affected parties. Accordingly, the changes to this regulation section are expected to be noncontroversial.

Substance: The amendments allow dealers to absorb payment of the tax charged pursuant to § 58.1-626 of the Code of Virginia, provided that such dealer (i) separately states the sales price of the item and the full amount of tax due on the item at the point of sale; and (ii) remits to the Department of Taxation the full amount of tax due with the return that covers the period in which the dealer completed the sale or transaction. This action also removes language listing the different tax rates in different areas of the Commonwealth to eliminate the need for future amendments of the section whenever there is a rate change. This action removes provisions stating that persons selling and installing tangible personal property that becomes real property after installation, including fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings, cabinets, kitchen equipment, window air conditioning units, and other like or comparable items, are treated as retailers rather than using or consuming contractors. In order to maintain the current numbering of the succeeding subsections of the regulation, the text being removed will be replaced with "Reserved."

Issues: The primary advantage to the public, the Commonwealth, and the agency of the amendments is that this action will conform the regulation to current statutory law. As the regulatory action will update the regulation to reflect current law, there are no disadvantages to the public, the Commonwealth, or the agency associated with this action.

Department of Planning and Budget's Economic Impact Analysis: The Department of Planning and Budget (DPB) has analyzed the economic impact of this proposed regulation in accordance with § 2.2-4007.04 of the Code of Virginia (Code) and Executive Order 19. The analysis presented represents DPB's best estimate of these economic impacts.¹

Summary of the Proposed Amendments to Regulation. Following a periodic review,² the Department of Taxation (Department) proposes to update the regulation to incorporate provisions of (i) Chapters 436 and 449 of the 2017 Acts of Assembly³ that shifted the collection and remittance responsibility of sales and use tax on certain construction materials from installer to the supplier of these items and (ii) Chapter 758 of the 2019 Acts of Assembly⁴ that repealed the restriction prohibiting sales and use tax dealers from absorbing the payment of the tax. The Department also proposes a discretionary change in rules applicable to overcollection of the tax to simplify and to indicate that sales tax rates differ in some areas of the Commonwealth.

Background. Chapters 436 and 449 of the 2017 Acts of Assembly shift the collection and remittance responsibility of sales and use tax on fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings, cabinets, countertops, kitchen equipment, window air conditioning units, or other like or comparable items from the contractor who sold and installed these items to the contractor's supplier or vendor.

Although most consumers are familiar with paying sales tax on their purchases from grocery or department stores, special rules apply to tangible personal property installed on real estate. Examples of these types of items are construction materials for plumbing, electrical, roofing systems, central air conditioning, heating, and heat pump units. Once sold and installed by a contractor respecting real estate, these items lose their identity as a tangible property and become part of the real estate. In that sense, contractors are considered to be the users of tangible personal property as a general rule and pay the sales tax on these items when they obtain them from their supplier or vendor. The supplier or vendor is treated as the sales tax dealer and remits the amount collected from contractors to the Department.

Prior to the 2017 legislative change, however, fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings, cabinets, countertops, kitchen equipment, window air conditioning units or other like or comparable items were specifically exempted from the general rule, and the homeowner was considered to be the user of these items. Therefore, contractors were required to collect sales tax when they sold and installed these items and remit it to the Department. Furthermore, since the homeowner was treated as the user, the contractor was expected to obtain these items from its vendors by using its sales tax exemption certificate so as not to pay double sales tax on them.

According to the Department, the differential sales tax treatment of these specific items listed in the legislation from the general rule created confusion among the contractors. As a result, two national home improvement chains sponsored the 2017 legislative amendments that made the sales tax treatment of such items the same as any other tangible personal property installed on real estate. Pursuant to the legislation, this action removes the regulatory language regarding the exempt treatment of the affected items from the general sales tax rule applicable to tangible property installed on real estate.

Another proposed change incorporates in the regulatory text language from Chapter 758 of the 2019 Acts of Assembly, which repealed the restriction prohibiting retail sales and use tax dealers from absorbing the payment of the tax. Prior to this law change, dealers were generally prohibited from absorbing or advertising or holding out to the public that they will absorb payment of all or any part of the sales or use tax due on a taxable transaction. Under the amended statute, a dealer is now allowed to absorb all, or a portion of the sales tax provided it separately states the sales price of the item and the full amount of tax due on the item at the point of sale and remits to the Department the full amount of tax due. This action would also edit the regulatory text to incorporate the 2019 legislative change.

The last proposed change would remove references, in the rules applicable to overcollection of the tax, to specific areas of the Commonwealth that have a different sales tax rate than the 5.3% generally applicable statewide rate. The proposed text would reference the Department's website on sales and use tax for the statutory rates applicable at different areas of the Commonwealth.

Estimated Benefits and Costs. The main impact of the incorporation of the legislative changes in the regulatory text is to make the text consistent with the statutes and prevent possible confusion from conflicting language. Although the anticipated impact of incorporation of the two changes in regulation is relatively small, the legislative changes themselves appear to be substantial.

The 2017 legislation appears to have eliminated a significant source of confusion with respect to collection and remittance of the sales tax by contractors that sold and installed the specific list of tangible property on real estate. Because of the general rule, most contractors have grown accustomed to purchasing tangible property from their suppliers with sales tax and not collecting the tax from their customers. However, according to the Department, the exemption from this general rule at that time had required the contractors to obtain materials from their suppliers without paying the tax using an exemption certificate and instead collecting the tax from their customers and later remitting the amount collected to the Department. The Department acknowledges that there were significant compliance issues as a result of that exempt treatment of such items from the general rule. Additionally, contractors usually add a markup to the items they resell to their customers. This practice has a direct impact on the amount subject to the sales tax. Since the collection of the sales tax on the certain items affected by the legislation changed from the sales price charged by the contractor to the price charged by the contractor's vendor, a reduction on sales tax due would have likely occurred. However, the Department has no information on the data elements needed to estimate the magnitude of the likely revenue impact (e.g., compliance rates with the exemption to the general rule, statewide vendor sales of affected items, and the markup contractors charge).

Similarly, the impact of the 2019 legislative change that allowed absorption of the sales tax by retailers likely included providing more flexibility in advertising or an additional promotional tool. It is not unusual to hear or see commercials during the sales tax holidays in order to promote sales of items that are temporarily exempt from sales tax under Virginia law. With the 2019 legislation, retailers have been free to absorb the sales tax due for a variety of purposes, such as to promote the goods they sell or to show customer appreciation. To the extent this legislative change enhanced the availability of marketing approaches and had promoted sales, a positive sales tax revenue impact would have likely occurred.

Finally, the proposed edits to the text regarding the overcollection of the tax strike references to specific areas of the Commonwealth that have different sales tax rate than the 5.3% rate otherwise applicable statewide. Instead, the proposed text would reference the Department's website on sales and use tax for the statutory rates applicable at different areas of the Commonwealth. According to the Department, this change would eliminate the need for future regulatory amendments of the section whenever there is a legislative rate change. Thus, this change appears to be mainly editorial in nature and is not expected to create any other economic effects.

Businesses and Other Entities Affected. The proposed amendments to the regulatory text apply to all entities subject to Virginia sales and use tax. Suppliers, contractors and installers of fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings, cabinets, countertops, kitchen equipment, window air conditioning units or other like or comparable items may be particularly affected.

The Code of Virginia requires DPB to assess whether an adverse impact may result from the proposed regulation.⁵ An adverse impact is indicated if there is any increase in net cost or reduction in net revenue for any entity, even if the benefits exceed the costs for all entities combined. As noted, this action incorporates legislative changes that occurred a number of years ago and the proposed discretionary change is editorial in nature with no adverse impact. Thus, no adverse impact on any entity is indicated.

Small Businesses⁶ Affected.⁷ The proposed amendments to the regulatory text do not appear to adversely affect small businesses.

Localities⁸ Affected.⁹ The proposed amendments to the regulatory text do not introduce costs for local governments or affect any locality more than others.

Projected Impact on Employment. The proposed amendments to the regulatory text do not appear to affect employment.

Effects on the Use and Value of Private Property. The proposed amendments to the regulatory text do not affect the use and value of private property or real estate development costs.

Agency's Response to the Economic Impact Analysis: The Department of Taxation agrees with the Department of Planning and Budget's economic impact analysis.

Summary:

The amendments (i) pursuant to Chapter 758 of the 2019 Acts of Assembly, allow Retail Sales and Use Tax dealers to absorb the payment of tax, provided that such dealer separately states the sales price of the item and the full amount of tax due on the item at the point of sale and remits to the Department of Taxation the full amount of tax due with the return that covers the period in which the dealer completed the sale or transaction; (ii) pursuant to Chapter 436 and 449 of the 2017 Acts of Assembly, change the treatment of Retail Sales and Use Tax from being charged to the persons who sell certain items of tangible personal property to those who install such items onto a customer's real property; and (iii) remove language listing the different tax rates in different areas of the Commonwealth.

23VAC10-210-340. Collection of tax by dealers.

A. Generally. The tax must be paid to the state by the dealer, but the dealer must separately state the amount of the tax and add the tax to the sales price or charge. Thereafter, the tax is a debt from the purchaser, consumer, or lessee to the dealer until paid and is recoverable at law in the same manner as other debts.

Identification of the tax by a separate writing or symbol is not required provided the amount of the tax is shown as a separate item on the record of the transaction. For special rules relating to vending machines sales, see 23VAC10-210-6040 through 23VAC10-210-6043.

B. Advertising absorption of tax by dealers. It is a misdemeanor for a dealer to advertise or hold out to the public in any manner, directly or indirectly, that he will absorb all or any part of the sales or use tax, or that he will relieve the purchaser, consumer or lessee of the payment of all or any part of the tax, except as may be authorized under the bracket system or the special provisions relating to vending machine sales. This prohibition does not apply during the sales tax holiday provided under §§ 58.1-609.1, 58.1-611.2, and 58.1-611.3 of the Code of Virginia, nor for the 14 days immediately preceding the commencement of the sales tax holiday. During this 17-day period, dealers may advertise that they will absorb the tax on any or all nonqualifying items. The dealer may not absorb the tax prior to or following the sales tax holiday period and may not advertise that he will do so. A dealer may absorb and assume payment of all or any part of the sales or use tax otherwise due from the purchaser, consumer, or lessee provided such dealer separately states the sales price of an item and the full amount of sales and use tax due on such item at the point of the sale or transaction, and such dealer remits to the Department of Taxation the full amount of tax due with the return that covers the period in which the dealer completed the sale or transaction.

C. Erroneous collection of tax on nontaxable transactions. All sales and use tax collected by a dealer is held in trust for the state. Therefore, any dealer collecting the sales or use tax on nontaxable transactions must remit to the Department of Taxation such erroneously or illegally collected tax unless he the dealer can show that the tax has been refunded to the purchaser or credited to the purchaser's account.

D. Overcollection of the tax. Any dealer who collects tax in excess of a 5.3% (6.0% in the Hampton Roads and Northern Virginia Regions) the statutory rate or who otherwise overcollects the tax, except as may be authorized under the bracket system or the special provisions relating to vending machine sales, must remit any amount overcollected to the state on a timely basis. Failure to do so will result in a penalty of 25% of the amount of the overcollection. For definitions of the "Hampton Roads Region" and the "Northern Virginia Region" see 23VAC10-210-2070. Statutory rates are listed on the Department of Taxation's website at https://www.tax.virginia.gov/retail-sales-and-use-tax.

23VAC10-210-410. Contractors respecting real estate.

A. Basic rules. A contractor is defined as any person who contracts to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, including highways, and in connection therewith to furnish tangible personal property, whether such person be a prime contractor or subcontractor. Unless otherwise noted, the law treats every contractor as the user or consumer of all tangible personal property furnished to him the contractor or by him the contractor in connection with real property construction, reconstruction, installation, repair, and similar contracts.

Tangible personal property incorporated in real property construction which that loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor. Any sale, distribution, or lease to or storage for such a contractor is deemed a sale, distribution, or lease to or storage for the ultimate consumer (the contractor), and not for resale by the contractor. The dealer (supplier) making the sale, distribution, or lease to or storage for such a contractor must collect the tax from him the contractor. No sale to a contractor is exempt on the ground that the other party to the contract is a governmental agency, a public service corporation, a nonprofit school, or nonprofit hospital, or on the ground that the contract is a cost-plus contract.

A contractor must remit the use tax on any tangible personal property purchased exclusive of the tax and furnished to him the contractor except when such property is purchased and furnished to a contractor by a governmental unit or agency. Property which that is exempt from the tax when purchased by a manufacturer, processor, miner, public service corporation, commercial radio, television or cable television operation, farmer, or shipbuilding and repair business may also be furnished to a contractor without such contractor becoming subject to use tax. Contractors may also purchase machinery and tools to be used directly in industrial manufacturing or processing (see 23VAC10-210-920) exempt from the tax.

A contractor, whether he the contractor be a prime contractor or subcontractor, does not pass the sales or use tax on to anyone else as a tax. He The contractor will take the amount of the tax into consideration in submitting bids.

If a supplier of a contractor doing work in Virginia does not collect the Virginia tax from the contractor, the contractor will be liable for the use tax on his the contractor's purchases from the supplier.

B. Person who is a using or consuming contractor and also a seller. A person who is a using or consuming contractor, as explained in subsection A of this section, may also be engaged in the business of selling tangible personal property to customers, including contractors, for use or consumption by them such customers. If so, the person is a dealer with respect to such sales, and is required to obtain a Certificate of Registration.

After obtaining a Certificate of Registration as a dealer because he the contractor is engaged in the business of selling tangible personal property to customers for use or consumption by them the customers, a contractor may purchase the tangible personal property under a resale exemption certificate. He The contractor may not purchase under a resale exemption certificate any tangible personal property which he the contractor knows at the time of purchase will be furnished by him the contractor in connection with any specific contract. If such a person, as a using or consuming contractor, removes from his the contractor's sales inventory for use in the performance of any contract any tangible personal property purchased under a resale certificate, he the contractor must include the cost to him such contractor of such tangible personal property on his the contractor's dealer's return and pay the tax.

C. Fabricator (manufacturer, processor, or miner) who fabricates tangible personal property and sells it to customers. 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.

D. Fabricator (manufacturer, processor, or miner) who fabricates tangible personal property exclusively for use and consumption in real property construction contracts. A fabricator who contracts to perform services with respect to real estate construction, and in connection therewith to furnish tangible personal property for incorporation in real estate construction thereby causing it to lose its identity as tangible personal property by becoming real property, is classified as a using or consuming contractor and must pay the tax on the cost price of the raw materials which that make up such fabricated property. The tax must be paid at the time of purchase to all suppliers who are authorized to collect the tax. In instances where the supplier is not authorized to collect the tax or fails to collect the tax, the tax must be remitted directly to the Department of Taxation on Form ST-7, Consumer's Use Tax Return.

E. Fabricator (manufacturer, processor, or miner) who operates in a dual capacity of fabricating tangible personal property for sale or resale and fabricating for its own use and consumption in the performance of real property construction contracts. A manufacturer, processor, or miner who operates in a dual capacity of fabricating tangible personal property for sale or resale and fabricating for his the manufacturer's, processor's, or miner's own use and consumption in the performance of real property construction contracts shall follow a primary purpose rule based on gross receipts in determining sales and use tax application.

Any person who is principally fabricating tangible personal property for sale or resale shall apply the tax according to subsection C above of this section. Such fabricators should collect and remit the tax based upon the total amount for which tangible personal property and services are sold, except that charges for labor and services rendered in installing, applying, remodeling, or repairing property sold may be excluded from the tax when separately stated or charged. In addition, any person who withdraws tangible personal property from inventory for use and consumption in the performance of real property construction contracts is liable for the tax based on the fabricated cost price of the tangible personal property withdrawn. Fabricated cost price is computable by totaling the cost of materials, labor, and overhead charged to work in process. Freight inward at the plant is treated as an element of the cost of the materials.

Any person who is principally fabricating tangible personal property for his that person's own use and consumption in real property construction contracts shall apply the tax according to subsection D above in this section. In addition, persons who sell tangible personal property to consumers must register, collect, and pay the tax on the retail selling price of the tangible personal property. Such person is entitled to purchase exempt from the tax only that tangible personal property which that can be identified at the time of purchase as purchases for resale. If the person is unable to identify at the time of purchase the tangible personal property which that will be resold, such person is required to pay the tax to his the person's supplier. If at a later date, the person sells the tangible personal property at retail, the tax is collected upon retail selling price. Such persons are not entitled to credit for the tax paid to suppliers since the transactions are separate and distinct taxable transactions.

A person who fabricates tangible personal property, both for sale or resale and for use in real property construction contracts, may apply to the Tax Commission to pay any tax directly to the state and avoid the collection of tax by suppliers, if his such person's purchases are made under circumstances which that normally make it impossible at the time of sale to determine the manner in which such property will be used. (See 23VAC10-210-510 on direct payment permits.)

F. Fabricator's production exemptions, when allowable. Fabricators of tangible personal property may take the status of industrial manufacturers, processors, or miners under 23VAC10-210-920 or 23VAC10-210-960, and when they fabricate fabricating tangible personal property for sale or resale, they such fabricators may enjoy the production exemptions set out in 23VAC10-210-920 or the mining exemptions set out in 23VAC10-210-960. The production and mining exemptions are not available to a fabricator of tangible personal property who fabricates for his the fabricator's own use or consumption (as a contractor or otherwise) and not for sale or resale. However, a fabricator whose principal or primary business is the fabrication of tangible personal property for sale or resale, and who, as a lesser or minor part of this business, fabricates for his such fabricator's own use and consumption, will not be deprived of the production exemptions set out in 23VAC10-210-920, or the mining exemptions set out in 23VAC10-210-960.

G. Contractor or retailer selling and installing tangible personal property that becomes real property after installation (including fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings, cabinets, kitchen equipment, window air conditioning units, and other like or comparable items).

A person selling and installing tangible personal property that becomes real property after installation is generally considered a contractor, except that a retailer selling and installing fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings (as distinguished from floors themselves), cabinets, kitchen equipment, window air conditioning units or other like or comparable items is not classified as a using or consuming contractor with respect to them.

For purposes of this subsection only, a "retailer" shall be deemed to be any person who maintains a retail or wholesale place of business, an inventory of the aforementioned items and/or materials which enter into or become a component part of the aforementioned items, and who performs installation as part of or incidental to the sale of the aforementioned items. As so defined, a retailer is not classified as a using or consuming contractor with respect to installations of the aforementioned items. A retailer must treat such transactions as taxable sales except that installation charges when separately stated on an invoice are exempt from tax.

Persons who are not classified as retailers within the definition set forth above and who sell and install fences, venetian blinds, etc., are deemed to be contractors and must pay the sales tax on such items at the time of purchase.

"Floor coverings" (as distinguished from the floors themselves) include rugs, mats, padding, wall-to-wall carpets when installed by the tack strip or stretch-in methods, and other floor coverings which are not glued, cemented, or otherwise permanently attached to the floor below. Persons selling and installing floor coverings which become permanently attached to floors are deemed to be using or consuming contractors with respect to such items. Such floor coverings include carpet, wood block, cork, tile, linoleum, and vinyl floor coverings when glued, cemented or otherwise permanently attached to floors or plywood and concrete subflooring.

Both retailers and contractors are deemed to be the users or consumers of supplies used in installing tangible personal property that becomes real property after installation. Therefore, retailers and contractors are subject to the tax on their purchases of tacks, stripping, glue, cement, and other supplies purchased.

Subsection B is applicable to persons engaged as contractors with respect to the installation of fences, venetian blinds, etc., and also as sellers of such items at retail to customers, including contractors, on an uninstalled basis for use or consumption by them. Reserved.

H. Retailer selling and installing tangible personal property. Any person who sells tangible personal property at retail and installs such property as part of or incidental to the sale is a retailer and is required to add the sales tax to the sales price. The tax does not apply to installation charges when separately stated on a sales invoice. If the installation charge is not separately stated, the tax must be computed on the total charge.

Retailers are deemed to be the users or consumers of all supplies used in installing tangible personal property. Therefore, retailers are subject to the tax on all such supplies purchased.

I. Construction materials temporarily stored in Virginia. Construction contractors may purchase exempt from tax construction materials for temporary storage in Virginia to be used in exempt construction projects in other states or foreign countries. Contractors entitled to this exemption may obtain certificates of exemption upon written request to the Department of Taxation. The request should include information to show that the construction materials could be purchased by the contractor free from sales or use tax in the other state or foreign country.

This exemption is restricted to construction materials incorporated into exempt real property construction. The tax applies to equipment, tools, supplies, etc., used in performance of the construction contract. The tax applies to all other construction materials, temporarily stored in Virginia, that will be incorporated into real estate construction projects outside Virginia.

J. Government contracts. Generally, purchases of tangible personal property by contractors in connection with real property construction contracts with the governments of Virginia or the United States or political subdivisions thereof, are sales to such contractors for their such contractors' own use or consumption and contractors are subject to the tax on such transactions. This applies regardless of whether title to such property passes directly to the governmental entity upon purchase by the contractor or if the contractor is reimbursed directly by the government entity for the cost of such property.

Only in instances where the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity will such purchases be deemed exempt from the tax.

Contractors are not subject to the use tax when provided with tangible personal property purchased by a governmental entity for use in real property construction contracts. For further information relating to the sales and use tax exemption for purchases by governments generally, see 23VAC10-210-690 on Governments.

For pollution control equipment and facilities, see 23VAC10-210-2070; use tax generally, see 23VAC10-210-6030; highway contractors specifically, see 23VAC10-210-410.