W. Va. Code R. § 110-15-112

Current through Register Vol. XLI, No. 50, December 13, 2024

Section 110-15-112 - Materials Produced or Manufactured by Contractors

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October 1, 1990, the exemption for materials purchased by contractors for use in governmental contracts was generally repealed and the use of material purchase certificates became very limited.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.

W. Va. Code R. § 110-15-112