Tax Type
Retail Sales and Use Tax
Description
Taxpayer must charge /collect sales tax on the system commissioning charges.
Topic
Collection of Tax
Taxability of Persons and Transactions
Date Issued
07-02-2007
July 2, 2007
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period January 2002 through December 2004. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is an out-of-state company engaged in the retail sale of heat, ventilation and air conditioning equipment (HVAC). The Taxpayer primarily sells HVAC equipment to retail grocery stores in Virginia and to bidding contractors installing HVAC equipment in such stores. In addition, the Taxpayer provides system commissioning services with regard to the HVAC equipment sold. The commissioning services consist of checking components parts, electrical control panels, and other components once the system is installed to insure that the equipment meets the original engineered and design specifications. The Taxpayer issues separate bills for the commissioning services and the HVAC equipment.
As a result of an audit by the Department, the Taxpayer was assessed tax on charges for commissioning services rendered in connection with the sale of the HVAC equipment. The Taxpayer maintains that the charges qualify as exempt services under Title 23 of The Virginia Administration Code (VAC) 10-210-4040 C.
DETERMINATION
Virginia Code § 58.1-603 imposes the retail sales tax on the gross sales price of tangible personal property sold. Virginia Code § 58.1-602 defines "sales price" as the total amount for which tangible personal property or services are sold, including any services that are a part of the sale. Title 23 VAC 10-210-4040 A explains that charges for services are generally exempt from the retail sales and use tax; however, services provided in connection with the sale of tangible personal property are taxable. Transactions that involve the sale of tangible personal property and the provision of services generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and the tangible personal property are separately stated. The "true object" test is used to determine the taxability of these transactions.
The Taxpayer prepares a written price quote for HVAC equipment and services sold directly to grocery stores and to bidding contractors. The quote provides a list of materials that have been pre-approved by the grocery store construction and engineering departments for the HVAC projects. Page four of the quote specifically lists HVAC system commissioning services as a part of the overall quote. Further, the charge for the system commissioning services is included in the total lump sum price of the materials quote provided to the customer. Although the systems commissioning services are billed separately from the HVAC equipment, the services are provided for purposes of inspecting the equipment. These services are clearly sold in connection with the sale of the HVAC equipment and are taxable as part of the sales price, as defined in Va. Code § 58.1-602.
The Department's policy of taxing services in connection with the sale of tangible personal property is longstanding. The Department has issued several public documents that reflect this policy, e.g., Public Document 97-137 (3/21/97). This document, based on the definition of sales price in Va. Code § 58.1-602 and the provisions in Title 23 VAC 10-210-4040, supports my decision that the commissioning services sold in connection with the HVAC equipment are taxable, regardless of when they are billed.
The Taxpayer cites Title 23 VAC 10-210-4040 C to support its position that the separately stated systems commissioning services should be exempt of the tax. Title 23 VAC 10-210-4040 C interprets Va. Code § 58.1-609.5 2, which provides a specific exemption for "An amount separately stated for labor or services rendered in installing, applying, remodeling or repairing property sold." Although these specified labor and service charges are exempt from the tax when separately stated, other labor and service charges remain taxable when made in connection with the sale of tangible personal property. The Taxpayer contends that the systems commissioning services fall within the scope of services rendered in "applying" property sold.
The Department's policy with respect to exemptions from the sales and use tax is dictated by the rule of strict construction established by the Virginia courts. The Virginia Supreme Court has consistently held that exemption from taxation is the exception. That is, where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See, for example, Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973).
Under this rule of strict construction, the term "applying" must be read in the context of the rest of the exemption, which refers to labor or services rendered in installing, applying, remodeling or repairing property sold. The term "applying" or "application" in the context of the exemption requires the act of applying something to the property sold and does not include inspection or testing of equipment.
In this instance, the Taxpayer did not charge or collect sales tax on charges for system commissioning services. These services were provided in connection with the sale of tangible personal property. Pursuant to the definition of "sales price" in Va. Code § 58.1-602 and the provisions of Title 23 VAC 10-210-4040 C, the Taxpayer is required to charge and collect sales tax on the system commissioning charges.
Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the updated bill.
The Code of Virginia sections, regulation and public document cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/54824T
Rulings of the Tax Commissioner