May 11, 2022
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****,
This will reply to your letter in which you protest the sales and use tax assessment issued to ***** (the “Taxpayer”) as a result of an audit for the periods January 2014 through December 2016. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer provided industrial saw blade sharpening services. In some cases, a metal alloy was added as a bearing surface to adjust the blades size in order for the sharpened blades to fit onto the existing saws properly. Also, plastic was melted onto the tips of the sharpened blades to prevent injury during transport. When deterioration or warping made a blade unusable, the Taxpayer facilitated orders for new blades for its customers though a third party vendor.
The Taxpayer was audited by the Department, resulting in an assessment of use tax on the Taxpayer’s purchases of the metal alloy and plastic. The Taxpayer appeals, asserting that the materials were not taxable supplies used in its business.
DETERMINATION
Virginia Code § 58.1-609.5 provides that the retail sales and use tax shall not apply to certain enumerated service transactions, including “professional,… or personal service transactions which involve sales as inconsequential elements for which no separate charges are made” and “services rendered by repairmen for which a separate charge is made.”
Service Provider
Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A clarifies that while charges for services are generally exempt from the sales and use tax, services provided in connection with sales of tangible personal property are taxable. In subsection D, the regulation describes the “true object” test used to determine whether a transaction involving both services and the provision of tangible personal property constitutes an exempt service or a taxable retail sale. The true object test states:
If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
Subsection E of the regulation provides details of the tax responsibilities of a service provider.
A service provider is the taxable user and consumer of all tangible personal property purchased for use in providing exempt services. If a supplier fails to collect the tax from a service provider, the provider shall remit use tax to the department… Any service provider who also makes retail sales of tangible personal property must register as a dealer with the department and collect and remit the tax on its sales… When making bulk purchases of items, some of which will be used in making retail sales, a person may purchase all such items exempt from the tax using a certificate of exemption, Form ST-10. The person shall remit use tax to the department on any tangible personal property purchased for resale but used in providing exempt services based on the cost price of the items used.
Under this regulation, the overall statutory scheme requires that a provider comply in one of two ways. First, the provider should pay the tax when purchasing an item of tangible personal property if it is used in performing the service, it is inconsequential to the ultimate customer, and the charge for the item is not separately stated on the invoice. Second, the provider may purchase the tangible personal property exempt from tax but charge the customer sales tax on either the separately stated charge for tangible personal property or on the entire transaction.
Repair Business
A repair is defined as an operation that restores a used or worn piece of tangible personal property. See Title 23 VAC 10-210-560. Transactions involving repair businesses are governed by Title 23 VAC 10-210-350, which provides:
A. Sales. Any person engaged in the business of repairing tangible personal property is required to register and to collect and pay the tax. If the dealer performing the repair work does not separately state, itemize or segregate at a fixed price or retail price, the parts, materials and supplies sold, the tax will apply to the total charge including repair labor.
B. Purchases. Replacement parts, materials and supplies that are transferred to the customer may be purchased under certificates of exemption. The tax must be paid on equipment, tools and all other tangible personal property used in performing the repair work.
Put another way, if a taxpayer is performing services as a repairman, it must charge customers sales tax on tangible personal property sold or transferred to the customer in connection with the repair labor, but the taxpayer may purchase those items exempt from the tax with a valid exemption certificate. Conversely, the repairman must pay tax on purchases of equipment, tools, and all other tangible personal property used in performing the repair but not transferred to the customer.
Differentiating Between Services and Repairs
In LZM, Inc. v. Va. Dep’t of Taxation, 269 Va. 105, 606 S.E.2d 797 (2005), the Supreme Court of Virginia considered the meaning of repair and maintenance contracts under a related regulation. The Court drew a distinction between those services that are required to prevent or correct a defect and those that are regularly required to maintain an item’s immediate function. The Court was reluctant to label a service as a repair or maintenance if it did not reduce the likelihood of a defect in the future.
Saw Sharpening
The Department has applied similar reasoning in a case in which a company sharpened saws used by an interior door business. In Public Document (P.D.) 87-142 (5/11/1987), the Department found that, if the transaction involved the restoration of a used or worn piece of tangible personal property to its original condition, and did not involve the sale or transfer of a significant amount of tangible personal property, the total charge for such saw sharpening qualified for the service provider exemption. However, if the saw company also provided replacement parts, or materials and supplies in connection with its saw repairs, it must collect and report tax on the total charge for such repairs, (unless given a certificate of exemption by its customer) including repair labor, to the extent such repair labor charges were not separately stated, pursuant to the repair business regulation.
In this case, it is clear that the metal alloy and plastic are tangible personal property pursuant to Virginia Code § 58.1-602 and that the property was used in connection with the same transactions as the Taxpayer’s services. The only remaining issue is whether the Taxpayer should have paid tax on its purchase of the tangible personal property, or charged tax to its customers on the separately stated charges for the property, or on all of its service charges if not separately stated.
Based on the facts provided, the Taxpayer was not supplying a significant quantity of tangible personal property (very small amounts of metal alloy and plastic tips) in its performance of blade sharpening. Further, sharpening is regularly required to maintain a saw blade’s immediate function and does not prevent or correct a defect in the blade. Once the blade reaches a point where it can no longer be sharpened and fitted with metal alloy, it becomes unusable and a new blade is required. The Taxpayer’s service does not require replacement parts or reduce the likelihood that a blade will need to be sharpened again in the future. Sharpening merely renders the blade useful again. Under these circumstances, the transaction more closely approximates business activities of a general service provider.
Because the transactions described more closely resemble activities included in the service provider regulation under Title 23 VAC 10-210-4040, the use of the metal alloy and plastic appear to be inconsequential elements of its service, and no separate charge was made on invoices for these materials, the Taxpayer’s customers were purchasing a sharpening service. Accordingly, the Taxpayer was considered the ultimate user and consumer of the property and was required to pay tax on its purchase of the metal alloy and plastic. Further, if a supplier failed to charge the sales tax in connection with the purchase, the Taxpayer was required to remit the use tax to the Department.
The Taxpayer did not pay sales or use tax when purchasing either the metal alloy or plastic. Therefore, the tax assessed on these purchases in the audit is proper and the assessment is upheld. Because the assessment has been paid in full, no further action is required.
The Code of Virginia sections, regulations, and public document cited are available online at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s website. If you have any questions regarding this determination, please contact ***** in the Office of Tax Policy, Appeals, and Rulings at *****, or via email at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1735.C