June 1, 2022
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the period November 2017 through October 2020. I apologize for the delay in responding to your letter.
FACTS
Under audit, the Taxpayer, an operator of vehicle repair shops in Virginia and other states, was assessed tax and interest due for untaxed sales, untaxed general expense, and fixed asset purchases. The auditor found the Taxpayer was invoicing its customers on a lump sum basis for sales of tangible personal property (car parts) and charges for labor.
The Taxpayer collected and remitted sales tax on the sale of parts, but contends the inclusion of labor charges in the audit should be removed because they are exempt from the tax. The Taxpayer seeks removal of the tax assessed on labor charges based on its internal records, which separate the taxable charges for parts and the exempt labor charges. The Taxpayer also believes that certain sales were exempt from tax based on its reliance on government identification cards or government license plates produced at the time of sale.
DETERMINATION
Charge for Labor
Virginia Code § 58.1-609.5 (2) provides an exemption from the retail sales and use tax for “[a]n amount separately charged for labor or services rendered in installing, applying, remodeling, or repairing property sold or rented.” [Emphasis added.] This statute allows an exemption if the charge for labor or services rendered in installing property sold is separately stated on the customer's invoice. If such charges are not separately stated, the charges become a part of the sales price subject to the tax. When a seller does not segregate a nontaxable installation charge from a taxable charge, but instead combines the two into a single charge, the combined charge is taxable.
The Taxpayer requests the auditor revise the audit to remove the charges for labor from the sales exceptions, based on the Taxpayer’s internal documentation. Because this was a first audit, the assessment will be returned to the audit staff to remove the charges for labor shown on the Taxpayer’s internal records. This treatment is consistent with the Department's prior decisions as reflected in Public Documents 96-68 (4/26/1996) and 07-79 (5/18/2007).
Exemption Certificates, Sales to Government Entities
Virginia Code § 58.1-623 (A) sets out that “[a]ll sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter."
Title 23 of the Virginia Administrative Code (VAC) 10-210-280 (A) states, in part, that:
All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith, from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law… However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
Title 23 VAC 10-210-690 (A) provides the following regulatory requirements for sales made to government entities:
Sales to the United States, or to the Commonwealth of Virginia or its political subdivisions, are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds. Sales made without the required purchase orders and not paid for out of public funds are taxable. Sales to governmental employees for their own consumption or use in carrying out official government business are taxable.
The Taxpayer believes that its acceptance of government identification cards and government license plates should satisfy the requirements found in Title 23 VAC 10-210-280 for tax exemption purposes. Identification cards and license plates do not meet the above requirement.
During the audit, the Taxpayer provided exemption certificates for certain sales that were categorized as exempt on its internal records. These transactions were removed from the exceptions list. The auditor notes that the sales exceptions at issue remained in the audit because the Taxpayer either failed to produce an exemption certificate or an invalid or incomplete exemption certificate was provided. In its appeal, the Taxpayer still does not provide exemption certificates or proof of government payment to prove that the sales were exempt from the tax. Based on the statutory authorities stated above, the Taxpayer was required to charge the tax in the absence of a valid exemption certificate, government purchase order showing direct billing to a government agency, or a government credit card to prove the sales at issue were exempt from taxation.
Virginia Code § 58.1 205 deems any tax assessment issued by the Department to be prima facie correct. Accordingly, the burden is upon the Taxpayer to prove an erroneous assessment. In this case, the Taxpayer has failed to meet its burden of proving that the sales at issue were exempt from the tax.
CONCLUSION
Based on this determination, the audit will be returned to the appropriate field audit staff. The auditor will remove the charges for labor from the sales exceptions as shown by the Taxpayer’s internal documentation.
In addition, because this was a first audit, I will provide the Taxpayer with one final opportunity to correct this issue. Accordingly, the Taxpayer is hereby provided 45 days from the date of this letter to provide the audit staff with the exemption certificates or government purchase orders or government credit card documentation used by its customers for the transactions at issue. Based on the documentation provided, the audit staff will make any necessary adjustments to the assessment. In accordance with P.D. 01-36 (4/11/2001), when a dealer is afforded a “second chance” to secure exemption certificates to support untaxed sales, the Department’s long-standing policy is to more closely evaluate the validity of the certificate because the dealer did not originally rely on the certificate to make the exempt sale.
Upon completion of the revision, the auditor will send a revised audit report and updated bills to the Taxpayer. The bills should be paid within 60 days to avoid the accrual of additional interest.
In addition, the adjustment allowed for labor charges in this determination applies to the audit period at issue only. The Taxpayer is responsible for correctly invoicing its parts and labor charges to its customers for future periods.
The Code of Virginia sections, regulations, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions about this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3957.G