Current through Register Vol. XLI, No. 38, September 20, 2024
108.1. Transition Rules for the Period on or
After March 1, 1989 to June 30, 1989.
108.1.1. Type of Activity. - "Contracting" is
defined for the period March 1, 1989 to June 30, 1989 as the furnishing of
work, or both materials and work, in fulfillment of a contract for the
construction, alteration, repair, decoration or improvement of a new or
existing building or structure, or any part thereof, or for the alteration,
improvement or development of real property. For purposes of this definition,
the term structure shall include, but not be limited to, everything built up or
composed of parts joined together in some definite manner and attached to real
property, or which adds utility to a particular parcel of property and is
intended to remain there for an indefinite period of time.
108.1.1.1. Special Rule for Hourly,
Open-Ended Contract Involving Minimal Materials. - Prior to July 1, 1989, not
all activities relating to the alteration, repair, decoration, or improvement
of a building or structure are contracting. Generally, if a person supplies
labor on an hourly basis in fulfillment of a truly open-ended contract, they
are not contracting, but instead are providing a taxable service. This is true
even if the person also provides a minimal amount of materials, as long as the
materials are incidental to the service being performed. The following three
conditions must be met before such activity is considered to be a taxable
service rather than contracting.
108.1.1.1.a.
Minimal Materials Provided. - The activity must be for labor only, or the value
of the materials supplied must be so minimal that they are incidental to the
overall activity. Activities where the cost of materials are five percent (5%)
or less of the total price will be deemed to involve "minimal" materials. For
activities where the cost of materials are more than five percent (5%) of the
total price, the issue of whether the materials will be classified as "minimal
materials" will be determined on an individual basis, depending on the facts of
each situation.
108.1.1.1.b. Hourly
Basis. - The cost of the activity must be determined on an hourly
basis.
108.1.1.1.c. Open-Ended
Contract. - The contract must be open-ended, so that neither part can determine
or agree to the final cost before performance of the contract is
commenced.
108.2. Examples:
108.2.1. Lump-Sum Contract. - Prior to July
1, 1989, persons engaged in the providing of labor, or of labor and materials,
to a customer for the alteration, repair, decoration or improvement of real
estate, or of a building or structure, under a lump-sum contract are engaged in
contracting, because they do not meet the three conditions, enumerated in
Section 108.1.1.1 of these regulations, necessary to be considered a service
activity.
108.2.2. Cost-Plus
Percentage Contract. - Prior to July 1, 1989, persons engaged in the providing
of labor, or of labor and materials, to a customer for the alteration, repair,
decoration or improvement of real estate, or of a building or structure, under
a cost-plus percentage contract are engaged in contracting because they do not
meet the three conditions enumerated in Section 108.1.1.1 necessary to be
considered a service activity.
108.2.3. Contract With "Not to Exceed X
Dollars" Clause. - Prior to July 1, 1989, persons engaged in the providing of
labor, or of labor and materials, to a customer for the alteration, repair,
decoration or improvement of real estate, or of a building or structure, under
a time and material type contract that contains a "not to exceed X dollars"
clause are engaged in contracting, because they do not meet the three
conditions enumerated in Section 108.1.1.1 necessary for the work to be
considered a taxable service activity.
108.2.4. Maintenance Contracts. - Prior to
July 1, 1989, persons engaged in the providing of labor, or of labor and
materials, to a customer for the alteration, repair, decoration or improvement
of real estate or of a building or structure, under a maintenance contract
which meets all of the following criteria will be considered to be engaged in a
taxable service activity so long as the contract also meets the criteria
outlined in Section 108.1.1.1 of these regulations (minimal materials, hourly
charges, and being open-ended so that neither party can determine the final
cost):
108.2.4.1. The work is performed under
a retainer contract with a broad rather than specific scope of work, which does
not contain a "not to exceed X dollars" clause.
108.2.4.2. The contractor provides a list of
types of craftsmen and equipment with a per hour cost.
108.2.4.3. The work is performed as requested
by the customer on an open-ended job order basis.
108.3. Taxability of Sales. - To
determine whether consumers sales and service tax should be collected from the
customer and remitted, it is necessary to first determine whether the type of
activity involved is contracting or a taxable service by examining the criteria
set forth in Section 108.1 of these regulations.
108.3.1. Sales of Contracting. - A person who
engages in the providing of labor, or labor and materials, to a customer for
the alteration, repair, decoration or improvement of real estate, or of a
building or structure, under a contract which would be classified as
contracting according to the criteria outlined in Section 108.1.1 does not
charge consumers sales and service tax to the customer. The sale of contracting
is exempt from sales and use tax set forth in Section 9.2.17 of these
regulations.
108.3.2. Sales of
Service. - A person who engages in the providing of labor, or labor and
materials, to a customer for the alteration, repair, decoration or improvement
of real estate, or of a building or structure under a contract which meets the
criteria set forth under the special rule for hourly, open-ended contracts
involving minimal materials outlined in Section 108.1.1.1 of these regulations
must collect and remit consumers sales and service tax from the customer or
obtain an exemption certificate or direct pay permit.
108.4. Taxability of Purchases. - In order to
determine whether consumers sales and service tax and use tax should be paid on
purchases for use in these types of activities, it is necessary to first
determine whether the type of activity involved is contracting or a taxable
service by examining the criteria set forth in the previous Section 108.1.
108.4.1. Taxability of Purchases for Use in
Contracting Activity. - Beginning March 1, 1989, except as outlined in Sections
108.5 and 108.6 of these regulations relating to transition rules and Section
109 of these regulations relating to the transition rules for the exemption for
material used in government contracts, a person who engages in the providing of
labor, or labor and materials, to a customer for the alteration, repair,
decoration or improvement of real estate, or of a building or structure, under
a contract, which would be classified as contracting according to the criteria
outlined in Section 108.1 must pay consumers sales or use tax on his purchases
for use in the contracting activity. This includes machinery, equipment,
materials, and services used in the contracting activity. It does not include
labor provided by employees of the contractor. Transition rules are provided in
Sections 108.5, 108.6 and 109 of these regulations.
108.4.2. Taxability of Purchases for use in
Service Activity. - Prior to July 1, 1989, a person who engages in the
providing of labor, or labor and materials, to a customer for the alteration,
repair, decoration, or improvement of real estate, or of a building or
structure, whose activity would be classified as service according to the
criteria outlined in Section 108.1.1 of these regulations is exempt on
purchases for use in his taxable service activity.
108.4.3. Taxability of Purchases for use in
Multiple Activities. - If a person is engaged in both contracting and taxable
service activities or in multiple business activities of any type, it is
possible that he may have to apportion the tax on purchases used in more than
one activity. The apportionment must be performed using a reasonable method
acceptable to the Tax Commissioner. Additional information on apportionment is
provided in Section 9d of these regulations.
108.4.3.1. Example: Company X engages in both
contracting and service activities. Of the total $1,000,000 in gross income
earned by Company X, $600,000 was from contracting and $400,000 was from
service activities. Company X purchases a drill, a ladder, and a backhoe on
April 22, 1989. The drill will be used exclusively in service activities, the
ladder will be used exclusively in contracting activities, but the backhoe will
be used in both contracting and service activities. Since the drill will be
used exclusively in service activities and purchases for use in service
activities are exempt prior to July 1, 1989, no tax is paid on the purchase of
the drill. However, tax is paid on the full price of the ladder, since it will
be used exclusively in contracting activity and beginning March 1, 1989,
purchases for use in contracting activity are taxable. The purchase price of
the backhoe will have to be apportioned between exempt and nonexempt uses. This
is necessary because the backhoe is used in both service activities, for which
purchases for use are exempt, prior to July 1, 1989, and contracting
activities, for which purchases for use are taxable beginning March 1, 1989.
The purchase price of the backhoe was $50,000. One method of apportionment
would be to use the percentage of gross income derived from each activity to
determine the amount of tax due. Since 60% ($600,000 - $1,000,000) of Company
X's income was derived from contracting activities, and purchases for use in
contracting are taxable, 60% of the purchase price of the backhoe will be
taxable for $30,000. At a rate of 6%, Company X would owe $1,800 in sales and
use tax on the backhoe. The method of apportionment used in this example is for
illustration purposes only and may or may not be considered reasonable by the
Tax Commissioner in certain situations.
108.5. Transition Rules for Purchases for Use
in Contracting. - Effective March 1, 1989, purchases made in-state and
out-of-state for both indirect and direct use in contracting activity are
taxable for consumers sales and use tax purposes. However, in some situations,
purchases will continue to be exempt if they are directly used in contracting
activity and fit within the situations outlined in Sections 108.5.1 through
108.5.5 of these regulations.
108.5.1.
Pre-July 1, 1987 Contracts. - Where the contracting activity is performed
pursuant to a binding contract executed prior to July 1, 1987, any purchases of
tangible personal property or taxable services for use or consumption in
connection with such contract or contracts continues to be exempt from payment
of consumers sales or use taxes with respect to the purchase price of such
tangible personal property or taxable services. This exemption is a refundable
exemption unless the contractor has a valid direct pay permit number which is
given to the vendor of the property or service
108.5.2. Pre-February 16, 1989 Contracts or
Firm Bids. - Where the contracting activity is performed pursuant to a binding
written contract that was executed prior to February 16, 1989 or pursuant to a
written contract executed after February 15, 1989 which embodies a firm written
bid for contracting made by the contractor prior to February 16, 1989, tangible
personal property or taxable services purchased for direct use or consumption
with respect to such contract or contracts continue to be exempt from consumers
sales or use taxes under pre-March 1, 1989 rules. This exemption continues to
be a refundable exemption unless the contractor has a valid direct pay permit
number which is given to each vendor. However, tangible personal property or
services purchased exempt for use in fulfilling a contract which is
grandfathered under pre-March 1, 1989 rules which is later used in a contract
other than a grandfathered contract may be partially taxable. See Section
108.5.2.1.
108.5.2.1. Example:
On April 1, 1989 XYZ Corporation Company purchases a
bulldozer for $20,000 with a total remaining useful life of ten years, for use
on a contract signed February 1, 1989 which is grandfathered under pre-March 1,
1989 sales and use tax rules. The initial purchase of the bulldozer is exempt
from sales and use tax because it is being used on a grandfathered contract.
However, beginning April 1, 1990 the bulldozer will be used on other contracts
that are not grandfathered under pre-March 1, 1989 sales and use tax rules. To
determine the amount of use tax due on the bulldozer, the following calculation
is made.
A/B X C = D
A - Portion of useful life remaining after use in
grandfathered contracts
B - Total useful life
C - Cost of equipment
D - Amount subject to use tax
EXF=G
E - Amount subject to use tax
F - .06
G - Use tax on bulldozer
H/J X K = L
H - 9-1/4 yrs.
J - 10 yrs.
K - $20,000
L - $18,600
MXN=P
M - $18,600
N - .06
P - $1,080
The use tax due should be remitted to the Department of Tax
and Revenue on a purchaser's use tax form WV/CST 220.
108.5.3. Pre-February 16, 1989
Material Purchase Contracts. - The purchase of tangible personal property or
taxable services after February 28, 1989 by a contractor will be exempt from
consumers sales and use taxes, when they are purchased pursuant to a written
contract entered into on or before February 15, 1989 irrevocably obligating the
contractor to purchase identified building materials or specified taxable
services in specified quantities. This exemption continues to be a refundable
exemption unless the contractor has a valid direct pay permit number which he
gives to the vendor of the tangible personal property or taxable
service.
108.5.4. Pre-February 1,
1989 Approval of Federal or State Regulatory Body for New Construction. - Where
the contracting activity is performed pursuant to a written contract entered
into before September 1, 1989 for the construction of a new improvement to real
property the construction or operation of which was approved by a federal or
state regulatory body prior to February 1, 1989, tangible personal property or
taxable services directly used or consumed in fulfillment of such contract will
be exempt from consumers sales and use taxes under pre-March 1, 1989 rules.
This exemption is a refundable exemption unless the contractor provides the
vendor of the tangible personal property or taxable services with the
contractor's valid direct pay permit number. Examples of federal or state
regulatory bodies which must approve new construction include, but are not
limited to, the West Virginia Public Service Commission, the West Virginia
Health Care Cost and Review Authority and the Federal Energy Review Commission.
Building permits issued by a local governmental entity are not issued by a
federal or state regulatory body within the meaning of W. Va. Code
'11-15-8a(b).
108.5.5. Pre-February 1, 1989 Federal Grant
for New Construction. - Where the contracting activity is performed pursuant to
a written contract executed after February 15, 1989 but prior to September 1,
1989 for construction of a new improvement to real property for which
construction the owner of the improvement received a federal grant prior to
February 1, 1989, tangible personal property or taxable services directly used
or consumed in fulfillment of such contract will be exempt from consumers sales
and use taxes under pre-March 1, 1989 rules. This exemption is a refundable
exemption unless the contractor provides the vendor of the tangible personal
property or taxable services with the contractor's direct pay permit
number.
108.6.
Transition Rules for Leased Tangible Personal Property Directly Used in
Contracting. - A lease of tangible personal property is generally treated for
consumers sales and use tax purposes in the same manner as a sale of tangible
personal property. Accordingly, a written lease for identified tangible
personal property executed prior to February 16, 1989 and expiring after
February 28, 1989 will be exempt from consumers sales and use taxes during the
period of its primary term, but only to the extent the tangible personal
property is directly used in contracting.
108.6.1. When the leased property is directly
used in contracting only part of the time, periodic lease payments must be
apportioned between the exempt and nonexempt use of the property.
108.6.2. If prior to expiration of the
primary lease term, the lease is extended or renewed, lease payments for
periods beginning the day after the original primary term of the lease ended
shall be subject to consumers sales and use taxes unless some other exemption
applies to the transaction.
108.6.3. The following examples illustrate
application of this rule.
Example 1: On December 15, 1987 the ABC Construction Company
executed a three year written lease for a bulldozer for sole use in its
contracting activity. The primary term of the written lease began January 1,
1988 and expires December 31, 1990. Lease payments for the period March 1, 1989
through December 31, 1990 will be exempt from consumers sales and use taxes
provided the bulldozer continues to be directly used solely in the lessee's
contracting activity.
Example 2: Same facts as example one, except on December 15,
1990, the lessee elects to renew the lease for one year. Lease payments for
periods subsequent to December 31, 1990 are taxable unless some other exemption
applies.
Example 3: Same facts as example one, except that on December
15, 1990 the lessee exercises his option to purchase the bulldozer for its then
fair market value. The purchase price will be subject to consumers sales and
use taxes unless some other exemption applies.
Example 4: On February 15, 1989 the ABC Construction Company
executed a three year written lease for a bulldozer for use directly in its
contracting activity. The primary term of the lease began March 1, 1989 and
expires February 28, 1992. The lease payments will be exempt from consumers
sales and use taxes provided the bulldozer is directly used solely in the
lessee's contracting activity.
Example 5: Same facts as example four, except that on January
1, 1990 the lessee begins using the bulldozer in its coal mining activity. The
lease payments for the period beginning January 1, 1990 will still be exempt
from consumers sales and use taxes, regardless of whether the lessee is a
contract miner or the producer of the coal for severance tax purposes.
Example 6: On February 26, 1989 L&M Construction Company
executed a three year written lease for a bulldozer for use directly in its
contracting activity. The primary term of the lease began March 1, 1989. The
lease payments under the lease are taxable even though the bulldozer will be
directly used in contracting activity because the lease was not executed until
February 26, 1989, rather than on or before February 15, 1989.
Example 7: Same facts as example six, except that the written
lease executed February 26, 1989 embodies an oral agreement of February 10,
1989 to lease the bulldozer. The lease payments are taxable even though there
was an oral agreement on February 10, 1989 to lease the bulldozer. The
transition rules recognize only written contracts.
Example 8: ABC Construction Company entered into a written
three year lease for a bulldozer for direct use in its contracting business.
This lease was executed on February 25, 1989 and the lease term commenced on
that date. The lease provides for monthly rental payments which are due on the
twenty-fifth day of each month. Rent is due in advance. On February 25, 1989
ABC Construction Company paid the first month's rental payment and obtained
possession of the bulldozer. The first month's rental payment is exempt from
consumers sales and use taxes because it was due on February 25, 1989 prior to
the March 1, 1989 change in the law. Payments due for the remaining months of
the rental period will be taxable because the lease was not executed on or
before February 15, 1989.
