07-184 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Tax on the fabrication labor and damage waiver fees not paid by vendors

Topic

Computation of Tax

Records/Returns/Payments

Date Issued

11-21-2007

November 21, 2007

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment

FACTS

The Taxpayer is a contractor and was assessed tax on untaxed fabrication labor, expense items, damage waiver fees and the purchase of a loader. The Taxpayer takes exception to the tax on fabrication labor charges and on damage waiver fees. The Taxpayer claims it relied on the vendors to properly charge the tax on the fabrication labor and damage waiver fees. Further, the Taxpayer believes that a damage waiver fee is insurance on rental equipment and is not taxable. The Taxpayer also contests the tax assessed on the payments in connection with the purchase of a loader.

DETERMINATION

Fabrication Labor

The Taxpayer purchased railings and other similar items from suppliers. The suppliers performed welding work in the fabrication of such items. The suppliers in this case are dealers that hold a certificate of registration authorizing them to collect the tax on their sales. The suppliers collected the sales tax on the materials but failed to charge the tax on the fabricated labor.

Title 23 of the Virginia Administrative Code (VAC) 10-210-560 states, "An operation which changes the form or state of tangible personal property is fabrication. Fabrication is distinguished from repair which is an operation that restores a used or worn piece of tangible personal property . . . The tax applies to the total charge for the fabrication of tangible personal property on a special order for a consideration, including labor, even if charges for labor are separately stated . . . ."

The Department has consistently held that fabrication labor is taxable. In this case, the labor charges included in the assessment are in connection with the fabrication of tangible personal property and therefore are subject to the tax. This policy is longstanding and has been consistently applied, as demonstrated in Public Documents (P.D.) 84-48 (4/16/84) and 97-208 (4/29/97).

Damage Waiver Fees

Virginia Code § 58.1-603 imposes the tax on the "gross proceeds derived from the lease or rental of tangible personal property . . . ." The term "gross proceeds" is defined in Va. Code § 58.1-602 as "the charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services, computed with the same deductions, where applicable, as for sales price as defined in this section . . . ."

There is no provision in the statutory definition of "sales price" that would exclude damage waiver charges. Further, Title 23 VAC 10-210-840 clearly subjects to the tax any charges in connection with the lease of property. Accordingly, damage waiver fees are subject to the tax. This is consistent with the Department's ruling in P.D. 96-364 (12/9/96).

Seller's Responsibility for Collection of the Tax

The Taxpayer states that it relied on the vendors to collect the proper amount of tax on the fabrication labor charges and the damage waiver fees. While Va. Code § 58.1-612 legally requires dealers to collect and remit the sales tax on all sales or leases of tangible personal property, Va. Code § 58.1-625 makes the tax the legal debt of the purchaser. This has been recognized by the federal courts, which have held that "the legal incidence of the Virginia sales and use tax is on the purchaser." See United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977). As such, the Department may proceed against either the seller or the purchaser in instances where the tax has not been collected or paid. Therefore, the Taxpayer's belief that the responsibility for the collection and payment of the tax rests solely with the vendors is incorrect.

Fixed Asset Purchase

The Taxpayer purchased a loader and financed it through a bank. The auditor assessed the tax on the payments made during the audit period because the Taxpayer was unable to provide documentation that the tax was charged on the invoice or self-accrued and remitted directly to the Department. The Taxpayer claims that the original purchase of the loader was prior to the audit period and prior to currently available records.

Virginia Code § 58.1-205 provides that a tax assessment issued by the Department is prima facie correct, and that the burden is upon the taxpayer to prove that the assessment is incorrect.

In this case, the Taxpayer has not provided any documentation to substantiate its claim that the purchase of the loader was outside the audit period. If the Taxpayer can produce vendor certification that the purchase date of the loader was outside the audit period, I will remove the tax assessed on such equipment from the Department's audit. Absent such evidence, there is no basis to revise the Department's audit.

CONCLUSION

Based on the foregoing, the assessment is correct. Notwithstanding this determination, I will allow the Taxpayer 30 days from the date of this letter to provide documentation to the auditor regarding the contested loader.

If the documentation is not received within the allotted time, the assessment will become immediately due and payable, and an updated bill reflecting accrued interest will be issued. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should send its payment to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *****.

The Code of Virginia sections, regulations and public documents cited 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 regarding this determination, you may contact ***** at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-1075727747T

Rulings of the Tax Commissioner