HD47 - Sales and Use Taxation of Modular Housing

Executive Summary:
The 1999 General Assembly approved House Joint Resolution 742 (“HJR 742”) requesting the Department of Taxation (“TAX”) to: (i) examine the sales tax laws and policies as they apply to modular housing sales and service transactions and (ii) recommend whether administrative or legislative changes are needed for the modular housing industry to achieve tax parity with the conventional or site-built housing industry. In response to this request, TAX invited several industry associations and other interested parties to meet and discuss the issues relating to the current sales and use taxation of modular housing. Industry participants of this study expressed a range of views. Some in the modular housing industry declared that the current taxing structure has worked well for the past 28 years. For others in the modular housing industry, however, the current taxing structure poses significant inequities.

Current Policy

Generally, modular housing is taxed in one of two ways: (1) on the cost price of raw materials which make up the modular home when sold with installation, or (2) on the retail sales price of the modular home when sold without installation. Special rules apply when a manufacturer sells in both manners.

Accordingly, the proper tax treatment on modular housing transactions depends largely on whether installation services are included as a part of the sale. For example, if the seller contracts to furnish and install a modular home on a permanent foundation, the transaction is treated as a real property services transaction. In such instances, the seller is generally liable for the tax on the cost of materials. However, if a modular home is sold without installation services to a consumer, the transaction is treated as a retail sale of tangible personal property, and the tax applies to the retail sales price of the modular home.


Although modular homes are generally taxed the same as conventionally built homes (e.g., when a modular housing manufacturer acts as contractor by selling and installing its homes), there are instances in which modular homes are taxed more than conventionally built homes. In the latter instance, however, the statute does not allow any deviation from the sales price concept set out in the Virginia Retail Sales and Use Tax Act. Unfortunately, a disparity of taxation can be created when modular housing is sold at retail.

For instance, modular homes are potentially subject to higher sales and use taxation than conventionally built homes when the modular home is sold at retail (i.e., without installation) to the final consumer. The tax applies not only to the materials costs but also to the fabrication labor, overhead, and other costs associated with assembling the sections in a factory setting (i.e., tax applies to the total sales price). This contrasts with conventionally built homes in which the tax application is limited to the cost of raw materials and other material components of the home.

Study Group’s Findings

The study group, consisting of industry representatives and TAX, explored several ways to correct the perceived tax inequities under the existing laws. Thorough consideration was given to whether modular housing manufacturers should be treated as final consumers in all transactions. However, such treatment would create constitutional and jurisdictional concerns with out-of-state manufacturers who have no substantial nexus with Virginia as to require them to register with TAX for sale or use tax purposes.

The study group also considered whether the statute should be amended to define “modular housing” as “real property.” It was found that this would be problematic as it would conflict with the “sales price” concept set out in the Virginia Retail Sales and Use Tax Act (i.e., sales tax is a tax on retail sales of tangible personal property and therefore is not a tax on real property) and could potentially create a substantial tax loophole.

The modular housing industry has also indicated that a consistent tax treatment is desired for the sale of its products that are subject to the retail sales and use tax. To provide for a consistent tax treatment, the study group decided that any new proposed legislation should include not only modular housing, but non-dwelling modular structures, such as modular restaurants, branch banks, churches, and the like. However, mobile offices and mobile homes would be excluded as such structures are subject the motor vehicle sales and use tax administered by the Department of Motor Vehicles.

The study group further determined that taxing only the actual value of building materials, even if delineated on the manufacturer’s invoice under a retail sales transaction, would be problematic as it would be in direct conflict with the “sales price” concept established in the Virginia Retail Sales and Use Tax Act. Furthermore, such taxing method would be difficult or impossible to implement unless absolutely accurate cost accounting records are maintained to determine the actual cost of each modular housing section produced.


After careful consideration of the above issues and findings, TAX and industry came to a consensus on a legislative proposal to make a substantive change in the current taxing structure for the purpose of:

• establishing tax parity between the modular housing industry and conventional home builders,

• ceasing multiple taxation of modular housing,

• establishing a tax environment in which competition between in-state and out-of-state modular housing manufacturers is placed on a more equal footing, and

• creating a fair tax environment in Virginia to encourage existing modular housing businesses to continue and expand operations in Virginia.

The legislation proposed in this report (see Part VIII and Appendix J of this report) would achieve the objectives sought by the modular housing industry as it would establish a new taxable base of 60% of the sales price when a modular building, as defined in the legislative proposal, is sold at retail (i.e., without installation) to the final consumer. If this legislative proposal is enacted, TAX estimates that state and local revenues will be negatively affected.

Based on data received from the Virginia Manufactured Housing Association, TAX estimates that the proposed legislation will result in a negative fiscal impact on state and local revenues in the amounts of $495,900 for the fiscal year 2001 and $568,000 for the fiscal year 2002. However, some in the modular housing industry assert that the net fiscal impact of the proposed legislation will not be negative because of industry practices and the belief that the proposal will generate additional tax revenues from increased business performance of the modular housing industry.