Tax Type
Retail Sales and Use Tax
Description
Auditor properly included mileage and road service charges in the assessment
Topic
Appropriateness of Audit Methodology
Basis of Tax
Subtractions and Exclusions
Date Issued
05-22-2008
May 22, 2008
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period September 2000 through August 2006. I note that the assessment has been paid in full. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a real property contractor specializing in excavation and the preparation of land for building sites. The Department audited the Taxpayer, resulting in the assessment of tax and interest. The Department's auditor extended the audit period beyond three years, as provided in Virginia Code § 58.1-634, because the Taxpayer never filed consumer use tax returns or paid the consumer use tax on its purchases.
The Taxpayer disagrees with the assessment, contending that the audit should be limited to three years. The audit also held taxable trip and road service call charges in connection with vendor service call repairs on the Taxpayer's vehicles. The Taxpayer contends that the audit erroneously taxes separately stated labor and service charges and refers to the Code of Virginia and several rulings by the Tax Commissioner to support its position. The Taxpayer has paid the assessment and requests a refund based on its position.
DETERMINATION
Statute of Limitations
Virginia Code § 58.1-634 provides the limitations period for an assessment of sales and use taxes. Generally, tax must be assessed within three years from the date on which such taxes became due and payable. The statute also authorizes the Tax Commissioner to extend the period to assess tax to six years if there is reasonable cause to believe that a taxpayer was required by law to file a return and failed to do so.
In this instance, the Taxpayer is engaged as a real property contractor providing services in Virginia. While the Taxpayer does not sell tangible personal property, as a contractor the Taxpayer is considered the consumer of all tangible personal property purchased for use in the provision of services to its customers. See Va. Code § 58.1-610 and Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A. As a consumer of tangible personal property, the Taxpayer must pay tax on all purchases used in the provision of its contracting services. If a vendor of a contractor does not collect the tax from the contractor, the contractor is liable for the accrual and payment of the use tax on its purchases from the vendor.
The auditor found that the Taxpayer had not filed any consumer use tax returns. In addition, the Taxpayer could not provide documentation to show tax had been paid on its purchases within the three-year audit period. Having determined that a liability existed for the period under audit, the auditor extended the audit period beyond the three-year limitations period for assessments based on the provisions of Va. Code § 58.1-634. There was reasonable cause to believe that the Taxpayer was required to file consumer use tax returns for the period in question but had not done so. Based on these facts, the auditor properly extended the audit period to six years.
Mileage and Road Service Charges
During the audit period, the Taxpayer's construction vehicles would require the repair or replacement of hydraulic pumps or hoses, drive shafts, alternators, batteries or other various worn or broken parts. The Taxpayer contacted several vendors who performed such repairs by sending service vehicles to the site of the Taxpayer's inoperable construction vehicles. The vendors repaired the Taxpayer's vehicles and routinely charged the Taxpayer for the repair parts, separately stating the labor charges and mileage and road service charges.
The auditor found that the vendor was not charging the tax on mileage and road service charges and held the Taxpayer liable for the tax on these charges. The Taxpayer contends that such charges are part of service and labor charges and are exempt from the tax. The Taxpayer references three sections of the Code of Virginia relating to exemptions for separately stated service, labor and transportation charges.
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- Virginia Code § 58.1-609.5 1
This Code section provides an exemption from the retail sales and use tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made; services rendered by repairmen for which a separate charge is made . . . ."
In accordance with this exemption, the tax is not applicable if the purpose of a service call is to provide repair services without the sale of tangible personal property or if the sale includes tangible personal property as an inconsequential element for which no separate charge is made. Based on a review of the purchase invoices at issue, all invoices include the purchase of tangible personal property that was not inconsequential to the overall charge and for which a separate charge was made. Accordingly, this exemption is not applicable to the transactions in question.
Virginia Code § 58.1-609.5 2
This Code section exempts from the retail sales and use tax an amount separately charged for labor or services rendered in installing, applying, remodeling or repairing property sold.
Based on this exemption, the tax is not applicable to separately stated charges for labor or services in installing or repairing tangible personal property. A review of the purchase invoices at issue indicates the auditor did not apply the tax to any of the separately stated labor charges associated with tangible personal property sold to the Taxpayer and installed in the repair of the Taxpayer's vehicles.
Virginia Code § 58.1-609.5 3
This Code section provides an exemption from the retail sales and use tax for separately stated transportation charges. Title 23 VAC 10-210-6000 interprets this exemption and provides that the tax does not apply to transportation or delivery charges added to a taxable sale, provided such transportation charges are separately stated on the invoice to the customer. These charges, commonly known as "transportation-out," are charges for the delivery of tangible personal property from a seller to a purchaser. A review of the Taxpayer's purchase invoices shows that the audit did not apply the tax to any such transportation charges.
The foregoing is supported by the Tax Commissioner's determination in Public Document (P.D.) 96-88 (5/14/96), which provides that charges for travel and accommodation (e.g., hotel/motel) expenses are not deemed exempt transportation charges, as these expenses do not represent costs for shipping goods to retail customers. This same decision is also provided in P.D. 01-78 (6/14/01) that is referenced by the Taxpayer. The Taxpayer is correct in its contention that this determination supports the exemption of separately stated service and labor charges. However, P.D. 01-78 specifically references P.D. 96-88 and explains that travel expenses, which are inclusive of mileage and road service charges, are not a part of exempt installation or repair labor, as such expenses are incurred prior to, in preparation of, or after the actual installation or repair labor process.
Both documents further provide that such travel expenses also do not constitute "services rendered by repairmen" because the actual repair services are not provided until after the repairman arrives at the job site and cease when the repairman departs from the job site. Further, P. D. 01-78 also specifically states that while travel expenses do not constitute services rendered by repairmen, such expenses do constitute "other expenses" that must be included in the taxable sales price of tangible personal property. Virginia Code § 58.1-602 defines "sales price" as:
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- the total amount for which tangible personal property or services are sold, including any services that are a part of the sale valued in money or otherwise... without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever. [Emphasis added.]
Based on a review of the Taxpayer's purchase invoices, I find that the auditor properly included mileage and road service charges in the assessment. The charges are included in the sales price of the property sold to the Taxpayer.
CONCLUSION
Based on a review of the audit report and all the information presented, I find no basis to revise the Department's assessment. Accordingly, the Taxpayer's refund request is denied.
I note that a representative from the Department's Office of Compliance, ****** ******* corresponded with the service provider listed in the Taxpayer's letter. In that letter, the representative reinforced the Department's position that while separately stated labor charges are not subject to the tax when tangible personal property is sold and installed, mileage and road service charges, even if separately stated become a part of the cost of the tangible personal property sold and are subject to the tax.
The Code of Virginia sections, regulations and public documents 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 Tax Policy, 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/1-1374096265.Q
Rulings of the Tax Commissioner