Tax Type
Retail Sales and Use Tax
Description
Uncollected, Unreported Taxes, Fabrication
Topic
Collection of Tax
Tangible Personal Property
Date Issued
03-12-2013
March 12, 2012
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 issued to ***** (the "Taxpayer") for the period January 2006 through April 2012.
FACTS
The Taxpayer operates as a welder. The Department's audit disclosed that the Taxpayer was fabricating tangible personal property and providing repair parts for repair services without charging or collecting the retail sales tax. In some instances, the Taxpayer's invoices reflected lump sum charges for fabrication and repair charges and other times separately stated the repair parts on repair invoices. The Taxpayer considers itself to be a contractor and has paid the tax on all purchases used in welding and repair services. The Taxpayer seeks a waiver of the Department's assessment, stating it was not aware of its responsibility to collect the sales tax on sales of fabrication or repair parts. The Taxpayer also states that it is experiencing financial difficulties and may have to close its business if required to pay the audit assessment.
DETERMINATION
Fabrication
Virginia Code § 58.1-602 defines the term "sale" to include "the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication, ...." Title 23 of the Virginia Administrative Code (VAC) 10210-560 A defines fabrication as "[a]n operation which changes the form or state of tangible personal property ...." Paragraph B of the same regulation interprets the statute cited above and states in part:
-
- The tax applies to the charges for the fabrication of tangible personal property for users or consumers who furnish, either directly or indirectly, the materials used in the fabrication work.
The Department has traditionally held that tangible personal property that is cut, sawed, shaped, bent, threaded, welded, bored, drilled, punched, machined, sheared, or otherwise subjected to an operation which changes the property's form or state is considered to have been fabricated. These operations are deemed to be a taxable fabrication services in accordance with the statute and regulation cited, and the charge for such services is subject to the sales tax
The Department has issued a number of public documents that address the taxation of fabrication labor or services. In Public Document ("P.D.") 86-242 (11/28/86), the Tax Commissioner ruled that the cutting or shaping of lumber constitutes fabrication because such activities change the state or form of the lumber. In P.D. 90-14 (1/11/90), an operation in which two steel beams were spliced or welded together was deemed to be fabrication because it changed the state or form of the steel beams.
Accordingly, the Taxpayer's welding charges at issue are deemed to be taxable fabrication charges and have been properly subjected to the sales tax by the auditor.
Repair Services
Virginia Code § 58.1-609.5 2 provides that the tax shall not apply to transactions for an "amount separately charged for labor or services rendered in ... repairing property sold." Title 23 VAC 10-210-3050 provides that repair charges are taxable only to the extent of the tangible personal property furnished in transactions where the charge for parts and labor are stated separately. If the parts and labor charges are not separately stated, the entire charge is taxable. The repair parts that are actually resold to the customer may be purchased exempt from the tax under the resale exemption.
The Department's audit disclosed that the Taxpayer was not charging the tax on
separately stated repair parts used in repair services. Accordingly, I find that these sales were properly included in the Department's audit.
Tax Paid to Vendors
The Taxpayer questions the application of the tax to sales when the sales tax has already been paid to suppliers. In this instance, the Taxpayer should have registered for the collection of the tax on its retail sales of repair parts. Accordingly, the Department's audit properly held taxable those sales where the retail sales tax should have been collected. With regard to sales taxes paid to suppliers on its purchases of repair parts, the Taxpayer should apply for a refund of sales taxes paid to its vendors as advised by the Department's auditor for all periods within the three-year statute of limitations.
Unaware of Responsibility to Collect Sales Tax
In addressing the issue of being unaware of the responsibility to collect the retail sales tax, Va. Code § 58.1-204 states that the Department is required to publish regulations and written rulings or other interpretations of Virginia law that are of interest to taxpayers and practitioners. The Department has published regulations in 1966, 1969, 1979, 1985, and 1997 that were widely distributed and made freely available to the general public. The regulations provide guidance in the registration of dealers and the application of the tax to retail sales and consumer purchases of tangible personal property. While you indicate that you were unaware and uninformed about the sales tax, the foregoing demonstrates that the Department has disseminated information on the sales tax which was readily available to the Taxpayer. Additional resources available to the Taxpayer are the Customer Services Unit at (804) 367-8037, Live Chat or Secure Email through the Department's website located at www.tax.virginia.gov.
Financial Hardship
Virginia Code § 58.1-105 grants the Tax Commissioner the authority to accept an offer in compromise to settle claims of disputed or doubtful liability or doubtful collectibility. In this instance and based on the foregoing authorities, I find no cause for an abatement of the tax and interest based on doubtful liability.
The Taxpayer states that payment of the assessment would be a serious financial hardship that could cause the business to close. The Taxpayer, however, has not submitted the required financial statements that reflect or verify an inability to pay the assessment. Without such information, the Department is unable to consider an offer in compromise based on doubtful collectibility.
I have enclosed a Financial Information Statement for Businesses. Once completed, this form will allow the Department to review and analyze the Taxpayer's financial situation. If the Taxpayer would like to pursue an offer based on doubtful collectibility, it should complete this form and submit it to the Department along with a letter seeking waiver of the balance due based on doubtful collectibility. Upon completion of the Department's review, a response will be issued based on the information and documents presented.
The completed forms supporting the Taxpayer's claim of doubtful collectibility should be sent to: Offer in Compromise Team, Collections Section, Virginia Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880. You may also contact a member of this team at (804) 786-2101. If the Department does not receive a completed form within 45 days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based on doubtful collectibility, and collection action will resume on the outstanding balance of the assessment.
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 there are any questions regarding this matter, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5209203656.Q
Rulings of the Tax Commissioner