TECHNICAL ASSISTANCE ADVISORY 90-004 RE: CONSUMERS SALES AND USE TAXES -- APPLICATION OF DEFINITION OF CONTRACTING TO RETAILER OF COMMERCIAL EQUIPMENT AFTER JUNE 30, 1989 This technical assistance advisory, issued pursuant to W. Va. Code § 11-10-5r, is in response to your request for clarification of how the 1989 sales and use tax law changes apply to a vendor of commercial food service and food store equipment. Taxpayer is a retail dealer of new and used food service equipment and commercial food store equipment. A. STATEMENT OF FACTS The facts on which this advisory is based are as follows: In the food service equipment line, taxpayer sells gas and electric ranges, ovens, mixers, drink machines, ice makers, steam tables, dishwashers, reach-in refrigerators and modular walk-in coolers, etc. Virtually all this equipment is installed by plugging it in or wiring it to existing electrical junction boxes. In the case of equipment such as dishwashers, icemakers and gas ranges it may also be connect to existing plumbing or gas lines. In the commercial food store equipment line, taxpayer sells delivers and sets in place various types of shelving, check-out stands and display cases commonly found in supermarkets. The shelving is set upon the floor of the structure. In many cases, one or more units are joined together to form aisles in the stores. Check-out stands re set in place and plugged in to operate the motorized conveyor belts. Taxpayer also sells certain types of display cases, including bakery cases, deli cases, vegetable cases, meat cases and other type of refrigerated and frozen food display cases. Such cases can be joined together to form aisles within the store. Some of these cases are merely plugged in to an existing electrical supply, while others are connected to a condensing unit by copper tubing. Taxpayer also sells modular walk-in coolers to both restaurants and supermarkets. These coolers range in size from approximately 6 feet by 6 feet to as large as 15 feet by 20 feet. Such coolers are assembled from modular panels approximately 4 feet in width and 8 feet in height. Special panels are used for floors and ceilings and for the door to the cooler. To assemble such a cooler, panels are merely laid on the floor without any connection to the realty and fastened together using retractable latches built into the panels themselves. The walls and ceiling of the cooler are then added in the same fashion. As in the case of refrigerated display cases, walk-in coolers are generally connected by copper tubing to a condensing unit. Taxpayer generally enters into purchase order contracts for the sale of equipment to commercial kitchens or supermarkets, which provide for the delivery and installation of the equipment. With regard to equipment such as shelving, ranges, mixers, etc., taxpayer delivers the equipment and places it so that the customer's electricians or plumbers can complete the installation or at times connects it with existing plumbing or gas lines. With regard to modular walk-in coolers or frozen food display cases, taxpayer will install the cooler and connect it to the condensing unit, with the final hookup to the electric utilities performed by the purchaser or the purchaser's electricians. B. ISSUE. The issue raised by these facts is whether for consumers sales and use tax purposes taxpayer is a contractor or is a vendor and installer of free-standing commercial equipment. C. DISCUSSION. Effective March 1, 1989, persons engaging in contracting in this State are required to pay consumers sales and service tax or use tax ("consumers sales and use taxes"_ on all purchases of tangible personal property or taxable services directly used in contracting activity. (Contractors have been subject to tax on purchases not directly used or consumed in contracting since July
1, 1987). "Contracting" was defined in W. Va. Code § 11-15-2  as follows: "(o) 'contracting' shall mean 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." The definition of "contracting" was amended in 1989 by a later Act of the Legislature. As amended, the scope of the work included within "contracting" was on one hand broadened and on the other hand narrowed. Effective July 1, 1989, the definition of "contracting" reads as follows: "(o) 'Contracting.' (1) In general. -- 'Contracting' means and includes the furnishing of work, or both materials and work, for another (by a sole contractor, general contractor, prime contractor or sub-contractor) 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 removal or demolition of a building or structure, or any part thereof, or for the alteration, improvement or development of real property. (2) Form of contract not controlling. -- An activity that falls within the scope of the definition of contracting shall constitute contracting regardless of whether such contract governing the activity is written or verbal and regardless of whether it is in substance or form a lump-sum contact, a cost-plus contract, a time and materials contract (whether or not open-ended, or any other kind of construction contract. (3) Special rules. -- For purposes of this definition: (A) The term 'structure' includes, but is not limited to, everything built up or compose of parts joined together in some definite manner and attached or affixed to real property, or which adds utility to real property or any part thereof, or which adds utility to a particular parcel of property and is intended to remain there for an indefinite period of time. (B) The term 'alteration' means and is limited to alterations which are capital improvements to a building or structure or to real property. (c) The term 'repair' means and is limited to repairs which are capital improvements to a building or structure or to real property. (D) The term 'decoration' means and is limited to decorations which are capital improvements to a building or structure or to real property. (E) The term 'improvement' means and is limited to improvements which are capital improvements to a building or structure or to real property. (F) The term 'capital improvement' means improvements that are affixed to or attached to and become a part of a building or structure or the real property or which add utility to real property or any part thereof and that last, or are intended to be relatively permanent. As used herein, "relatively permanent" means lasting at least a year or longer in duration without the necessity for a regularly scheduled recurring service to maintain such capital improvement. "Regular recurring service" means regularly scheduled service intervals of less than one year. (G) Contracting does not include the furnishing of work, or both materials and work in the nature of hookup, connection, installation or other services if such service is incidental to the retail sale of tangible personal property from the service provider's inventory: Provided, That such hook-up, connection or installation of the foregoing is incidental to the sale of the same and performed by the seller thereof or performed in accordance with arrangements made by the seller thereof. Examples of transactions that are excluded from the definition of contracting pursuant hereto include, but are not limited to, the sale of wall-to-wall carpeting and the installation of wall-to-wall carpeting, the sale, hook-up, and connection of mobile homes, window air conditioning units, dishwashers, clothing washing machines or dryers, other household appliances, drapery rods, window shades, venetian blinds, canvas awnings, free-standing industrial or commercial equipment and other similar items of tangible personal property. Repairs made to the foregoing are within the definition of contracting if such repairs involve permanently affixing to or improving real property or something attached thereto which extends the life of the real property or something affixed thereto or allows or is intended to allow such real property or thing permanently attached thereto to remain in service for a year or longer." The "purchase for resale exemption" in W. Va. Code §
11159(j) was amended by adding the following proviso: "Provided, however, That sales of building materials or building supplies or other property to any person engaging in the activity of contracting, as defined in this article, which is to be installed in, affixed to or incorporated by such person or his agent into any real property, building or structure shall not be exempt under this subsection, ...." The focus of this advisory is on the special rules for contracting set forth in W. Va. Code § 11-15-2(o)(3)(A)-(G). If under those rules taxpayer is found to be a contractor with respect to any or all of the factual situations outlined herein, taxpayer must pay consumers sales or use tax on all of the tangible personal property or taxable services purchased for use or consumption in such contracting activity. To the extent the taxpayer is not engaged in contracting activity but is found to be selling tangible personal property in the form of free-standing industrial or commercial equipment with incidental hook-up, connection, installation or other services, the taxpayer may purchase the tangible personal property asserting the purchase for resale exemption and must collect consumers sales or use tax on his charges to his customers. Emergency legislative regulations were promulgated for these legislative changes in July of 1989. The emergency consumers sales and use tax regulations were recently approved by the West Virginia Legislature (Senate Bill No. 243, approved March 10, 1990). 110 C.S.R. 15, § 107.3.15 defines free-standing industrial or commercial equipment as follows: 107.3.15. Free-standing Industrial or Commercial Equipment. The term "free-standing" industrial or commercial equipment" means equipment which is suitable for and is in fact used for commercial or industrial purposes and which is not connected or attached to the building or structure or real property; can easily be removed without doing substantial damage to the building or structure or real property; and is not essential to the basic or purpose of the building or structure on real property. 188.8.131.52. Actual Connection With or Attachment to. To become part of the building or structure or real property, the equipment must have some physical connection such by bolts, screws, nails, cement, piping, or cable; by contact, where the equipment is necessary to make complete or usable the building or structure or real property; or by attachment on another item of machinery or equipment which has become a part of the building or structure or real property. 184.108.40.206. A refrigerator sold to a restaurant in its kitchen is delivered by the seller and installed by plugging it into an existing electrical outlet or by wiring it directly to the existing electrical system. Under these facts, the refrigerator is free-standing commercial equipment. According to the facts provided, taxpayer performs three basic activities. These activities and the consumers sales tax consequences of each are described below: 1. Taxpayer sells free-standing commercial and industrial equipment such as ranges, mixer, shelving, self-contained coolers, or refrigerators to customers, and sets the equipment in place. The final hookup to plumbing and electricity is performed by the customer. When taxpayer sells free-standing industrial and commercial equipment and merely sets it in place without further hookup, it is engaged in the sale of tangible personal property and must collect the sales tax from the customer or obtain a direct pay permit number or properly executed exemption certificate. Taxpayer must pay sales and use tax on its purchases for use in this portion of its business, except for its purchases for resale. If taxpayer sells and installs industrial and commercial equipment which is not "free-standing" within the definition set forth in 110 C.S.R. 15, § 107.3.15 but, which instead becomes part of the realty, it is engaged in contracting. No sales tax is charged to the customer, but taxpayer must pay consumers sales and use taxes on its purchases for use in its contracting activity. An example of this type of equipment is a range hood which is installed in the wall or ceiling. 2. Taxpayer sells free-standing commercial and industrial equipment, such as ranges, mixers, shelving, self-contained coolers, or refrigerators to customers, sets the equipment in place and performs the basic hookup into existing plumbing and wiring. Taxpayer also sells cooling units which are connected by taxpayer to condenser units by copper tubing that is not attached to the realty. When taxpayer sells free-standing industrial or commercial equipment from its inventory and performs the basic hookup into existing plumbing or electricity, or sells cooling units and connects them to condenser units by copper tubing, it is considered to be a "retail dealer" as defined by 110 C.S.R. 15, § 114, page 169 (1989). As a "retail dealer," taxpayer is engaged in the sale of tangible personal property with incidental installation. It must collect consumers sales tax from its customers on both the sale of tangible personal property and the labor charges, or obtain a direct pay permit number or a properly executed exemption certificate. Taxpayer must pay consumers sales and use taxes on its purchases for use in this portion of its business, except purchases for resale for which it may give a properly executed exemption certificate to its vendor. 3. Taxpayer sells modular walkin coolers that are constructed of panels which are not connected to the realty in any manner, it is considered to be a "retail dealer" as defined by 110 C.S.R. 15 §
114, page 169 (1989). As a "retail dealer" it is involved in the sale of tangible personal property with incidental installation. It must collect consumers sales tax from its customers on both the sale of tangible personal property and any labor charges, or obtain a direct pay permit number or a properly executed exemption certificate. Taxpayer must pay consumers sales or use taxes on its purchases for resale for which it may give a properly executed exemption certificate to its vendors. If taxpayer sells and installs a cooler which becomes part of the realty, it is engaged in contracting. No consumers sales tax is charged to the customer, but taxpayer must pay consumers sales or use tax on its purchases for use in contracting. This Technical Assistance Advisory is issued under W.
Va. Code §
11105r and is subject to the accuracy of the representations contained in the request for its issuance. The conclusions of law reached in this Advisory are based on existing statutory law as interpreted by applicable administrative regulations or administrative decisions or applicable case law decisions. Should the material facts or controlling law change in any manner, you may wish to seek clarification of this Advisory. Tax Commissioner, Charles O. Lorensen, disqualified himself from participating in this matter under Rule 11.1 of the Code of Professional Conduct. Authority to issue this advisory was delegated to Dale W. Steager, General Counsel. _________________________ Dale W. Steager General Counsel Issued: April 3, 1990 Released: August 13, 1990