Current through Register Vol. XLI, No. 38, September 20, 2024
112.1. The consumers sales and use tax laws
provide that where a person produces a natural resource product or manufactures
tangible personal property which such person then uses or consumes in the
performance of contracting activity in this State, such person must pay
consumers sales or use tax on the gross value of the natural resource product
or manufactured product so used or consumed by such person in such contracting
activity. The three exceptions to this rule are as follows:
112.1.1. Prior to October 1, 1990, where the
natural resource product or manufactured product is actually installed,
affixed, or incorporated into a building, structure or real property in
fulfillment of a contract with the government of the United States, the
government of this State or a political subdivision thereof, or with a public
corporation created by the West Virginia Legislature or by a governmental
entity pursuant to an Act of the Legislature, the product is deemed to have
been sold to the governmental entity for which the contracting is being done
even though it is directly used or consumed by the contractor in contracting
done for the governmental entity. As of October 1, 1990, the exemption for
materials purchased by contractors for use in governmental contracts was
generally repealed and the use of material purchase certificates became very
limited. See Section 109 of these regulations for additional information on the
transition rules relating to the taxation of materials for use in governmental
contracts.
112.1.2. Where the
manufacturer-contractor (or natural resource producer-contractor) enters into
two separate and distinct written contracts in arm's length transactions with
the contractor (customer), one for the furnishing of materials and the other
for the furnishing of contracting work with respect to new construction or to a
capital improvement to a building or structure or real property.
112.1.2.1. The contract to furnish materials
and the contract to furnish contracting work shall not be treated as separate
and distinct contracts for purposes of the consumers sales and use taxes unless
it is established by the contractor through clear and convincing evidence that:
112.1.2.1.a. Each contract was an
arm's-length transaction;
112.1.2.1.b. The performance of one contract
was not dependent upon the award of the other contract;
112.1.2.1.c. The award of one contract was
not dependent upon the award of the other contract; and
112.1.2.1.d. Title to the materials passed to
the contractor (customer) prior to the time the materials were incorporated
into the capital improvement to a building or structure or real
property.
112.1.2.2. The
burden of proving that Section 112.1.2 of these regulations applies shall be
upon the contractor.
112.1.2.3.
Example. XYZ Co., a public utility, is planning to construct a new electric
power generating facility in West Virginia. The XYZ Co. is subject to the West
Virginia Business and Occupation Tax on its entire business conducted within
the State and is exempt from the West Virginia Consumer Sales and Service Tax
on its purchases under Sections 9.4.1 and 9.4.4 of these rules. In constructing
the plant, XYZ Co. will purchase major items of equipment, including the
boiler; turbo generator, pumps, motors, piping, etc. by entering into contracts
for the acquisition of materials and equipment with one or more equipment
vendors. XYZ Co. may also enter into construction contracts for all or part of
the facility. Under these facts, the consumer sales and use taxes are imposed
on the acquisition of materials used in constructing the boiler as follows:
a. If XYZ Co. purchases the materials from a
materials vendor and erects the boiler itself, it will owe no consumers sales
or use tax on the purchase of the materials.
b. If XYZ Co. purchases the materials from a
materials vendor and contracts with a contractor other than the materials
vendor to construct the boiler, XYZ Co. will owe no consumers sales or use tax
on the purchase of the materials. The contractor will also owe no consumers
sales or use tax on the construction contract tax because contracting services
are exempt under Section 9.2.17 of these rules.
c. If XYZ Co. requests separate bids for the
materials and for construction of the boiler and the same
contractor-manufacturer is awarded both the materials and erection contracts,
the Tax Commissioner will recognize the separate contracts and XYZ Co. will not
owe the consumers sales or use tax on the purchase of the materials. The charge
for erection will also be exempt because contracting services are exempt under
Section 9.2.17 of these rules.
d.
If XYZ Co. enters into one contract covering both the procurement of materials
and construction of the boiler with a contractor-manufacturer of boilers, the
contractor-manufacturer will owe the consumers sales and use tax on the fair
market value of the boiler which it manufactured as well as on the purchase
price any tangible personal property or taxable services which it used directly
or indirectly in rendering the tax exempt contracting service.
112.1.3. Where the
natural resource product or manufactured product is physically produced or
manufactured on the job site where the contracting activity is taking place,
and such product is directly used or consumed in contracting activity at that
job site, the raw materials used or consumed in such contracting activity are
taxable and the gross value of the product or manufactured product is not
separately taxed.
Example 1: ABC Asphalt Company enters into a subcontract with
the general contractor of a large shopping mall for ABC Company to pave the
mall's parking lot. ABC Asphalt Company moves its portable asphalt plant to the
job site. The asphalt manufactured by the plant is used solely in fulfilling
the shopping mall contract. The asphalt mix which ABC Asphalt Company purchases
is taxable because it is tangible personal property which ABC Asphalt Company
uses or consumes in its contracting activity. The exemption for tangible
personal property directly used or consumed in manufacturing activity does not
apply to asphalt mix (and other similar property) because the asphalt mix is
directly used or consumed in contracting activity and the product is
manufactured on the job site.
Example 2: Same facts as example one, except that ABC Asphalt
Company utilizes the portable asphalt plant to also manufacture asphalt which
it sells other contractors. Under these facts, the asphalt mix is a raw
material used in manufacturing tangible personal property. ABC Asphalt Company
must collect consumers sales and service tax from the contractors who purchase
part of the manufactured asphalt. ABC Company must also pay consumers sales and
service tax on the gross value of the manufactured asphalt which it consumes in
its contracting activity.
Example 3: ACE Heating and Contracting (ACE) Company has a
contract to install a heating and air conditioning system in a ten story office
building that is being constructed. ACE has a metal shop at which it fabricates
standard sizes of duct work which it uses in its contracting business. It also
sells duct work to other contractors. The gross value of duct work which ACE
fabricates at the shop and uses in its contracting activity is subject to
consumers sales and service tax. ACE also fabricates duct work at the job site.
ACE will not pay consumers sales and service tax on the gross value of the duct
work which it fabricates on the job site, but will pay consumers sales and
service tax or use tax on the sheet metal which it uses at the job site to
fabricate the duct work. ACE will not pay consumers sales and service tax or
use tax on the sheet metal which is uses at its shop to fabricate duct work,
because this sheet metal is a raw material used to fabricate (manufacture duct
work).
Example 4: XYZ Construction Company (XYZ) produces limestone
which it manufactures into various limestone products. It uses a portion of
these limestone products in its contracting activity. XYZ must pay consumers
sales and service tax on the gross value of the limestone products which it
manufactures and uses in its contracting activity.
112.2. Where the contractor is the
manufacturer or compounder of ready-mix concrete or asphalt plant mix used in
the performance of a contract, the ready mix concrete or asphalt plant mix is
compounded at the job site, the tax applies to the cost of the ingredients that
become a component part of the ready-mix concrete or the asphalt plant mix and
to the portable mixer. "Mixed at the job site" as used herein means mixed in a
portable plant or mixer set up at or near the job site for use solely in
connection with the job for which the concrete or plant mix is prepared and
used and from which plant no concrete or plant mix is produced for
sale.
112.3. Determination of
"Gross Value". - Whenever a person partially or wholly consumes or uses
tangible personal property in contracting in this State which he produced or
manufactured in this State or in another state, the gross value thereof for
consumers sales and use tax purposes shall correspond as nearly as possible to
the gross proceeds which such person would have received from the sale of such
natural resource product or manufactured product to another person in an
arms-length transaction, as that term is defined for federal income tax
purposes. Such value shall be determined by application of the following rules
in the order stated:
112.3.1. The value of
the natural resource product or the manufactured product consumed or used shall
be equal to the selling price, at the place of use or consumption, of similar
products of like quality and character offered for sale in similar quantities
by persons unrelated to the taxpayer.
112.3.2. In the absence of sales of similar
natural resource products or similar manufactured products by other persons as
a guide to value, gross value shall be equal to the average price at which
sales of the same or a similar product are made during the taxable year to
customers of the producer or manufacturer.
112.3.3. In the absence of sales to customers
of the taxpayer as a guide to value, gross value shall be determined by first
determining the cost of the product and adding thereto the average markup
realized by the producer or manufacturer of the product being valued. The cost
of the product shall include every item of cost attributable to that particular
product, including all direct and indirect overhead costs.
