W. Va. Code R. § 110-15-108

Current through Register Vol. XLI, No. 45, November 8, 2024

Section 110-15-108 - Contracting: Transition Rules

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.

W. Va. Code R. § 110-15-108