Tax Type
Consumer Use Tax
Retail Sales and Use Tax
Description
Consumer use tax on untaxed purchases
Topic
Appropriateness of Audit Methodology
Assessment
Tangible Personal Property
Date Issued
08-07-2014
August 7, 2014
Re: Request for Reconsideration: 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 April 2007 through March 2010. This case is being treated as a reconsideration of an administrative appeal that was previously filed by the Taxpayer. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a telephone services provider in Virginia. The Department audited the Taxpayer and assessed consumer use tax on untaxed purchases from ***** (the "Supplier"). The Taxpayer appealed the tax assessed on the transactions with the Supplier on the basis that the transactions were for exempt repair services. This issue was addressed in the Department's appeal determination issued to the Taxpayer as Public Document (P.D.) 12-79 (5/9/12). There were no adjustments made to the audit with respect to this issue.
The Taxpayer now contests the use tax assessed on the transactions with the Supplier on the basis that the charges are for a parts and labor maintenance contract. As such, only one-half of the charges in the audit are subject to the tax rather than the full amount of each charge. The assessment on the transactions with the Supplier has been paid; therefore, the Taxpayer seeks a refund of the tax and interest paid on the disputed portion of the charges billed by the Supplier.
DETERMINATION
The Taxpayer and the Supplier are parties to a "Master Repair and Return Agreement" (the "Agreement"). Under the terms of the Agreement, the Supplier furnishes repair and replacement services for various telecommunications parts and components used by the Taxpayer to provide telephone services. The Taxpayer maintains that the use tax assessment on the transactions with the Supplier is erroneous based on the provisions of Va. Code § 58.1-609.5 9, which states:
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- Beginning January 1, 1996, maintenance contracts, the terms of which provide for both repair or replacement parts and repair labor, shall be subject to tax upon one-half of the total charge for such contracts only. Persons providing maintenance pursuant to such a contract may purchase repair or replacement parts under a resale certificate of exemption.
The current statute for the taxation of maintenance contracts was enacted by the 1994 Virginia General Assembly to provide taxpayers sales and use tax relief on purchases of parts and labor maintenance contracts. Prior to the enactment of this statute, charges for maintenance contracts that provided for both tangible personal property (parts) and repair labor were treated as fully taxable by the Department. The rationale behind taxing the total amount charged for parts and labor maintenance contracts was that the breakdown of taxable parts and exempt labor cannot be determined at the time such a contract is executed. The Department's treatment of parts and labor contracts was also consistent with Va. Code § 58.1-609.5 2, which requires that repair labor charges must be separately stated to qualify for exemption. A separate amount for the value of the repair labor that will be provided under a parts and labor agreement cannot be stated in the contract because it cannot be determined prior to the provision of maintenance parts and services.
Title 23 of the Virginia Administrative Code (VAC)10-210-910 interprets Va. Code § 58.1-609.5 2 and defines the term "maintenance contract" as "an agreement whereby a person agrees to maintain or repair an item of tangible personal property over a specified period of time for a fee that is determined when the agreement is made. A maintenance contract may provide for labor only, parts only, or labor and parts." (Emphasis added.)
I concur that the Agreement with the Supplier is a contract for the repair and replacement of various telephone network components over a specified period of time. However, I do not agree that the Agreement constitutes a maintenance contract in accordance with the statutory language in Va. Code § 58.1-609.5 9. The statute states that one-half of the total charge for parts and labor maintenance contracts is subject to the tax. Further, the definition of maintenance contract in Title 23 VAC 10-210-910 refers to "a fee that is determined when the agreement is made." There is no total charge specified in the Agreement and there is no predetermined fee that is payable when or after the contract is signed. Based on the cited authorities, the Agreement cannot be treated as a parts and labor maintenance contract for retail sales and use tax purposes.
In this case, the Agreement between the Taxpayer and the Supplier is a pricing agreement. The Supplier agrees to provide to the Taxpayer various repair services as well as replacement and substitute parts at fixed prices that are set out in the contract. The prices vary for the different parts and components that are covered in the Agreement. While it is true that the individual prices for the parts covered under the contract are agreed to in advance, there is no set fee or total charge that applies to all the parts and services provided under the contract. Whenever a part is repaired, replaced or substituted, an invoice is issued to the Taxpayer. The Supplier bills the Taxpayer charges for repair or replacement parts in numerous separate transactions throughout the term of the Agreement. The pricing for the parts varies with each transaction and type of part.
The Agreement contains other characteristics that support a conclusion that it is a fixed pricing contract. The Agreement states that the Taxpayer is not obligated to purchase any parts or services from the Supplier. The Agreement has fixed pricing requirements but allows the Supplier to request price changes in writing to the Taxpayer. There is contract language that limits the amount of price increases based on a price index published by the U.S. Department of Labor. The Agreement states that meetings to review and agree on price adjustments will be held between the Supplier and the Taxpayer. The Agreement describes invoicing and payment procedures to be followed by both parties. Finally, the Agreement provides for an audit of the Supplier's pricing of services and deliverables for all customers for the preceding year to identify what, if any, prices charged to the Taxpayer have been decreased.
There are other factors that demonstrate the Agreement should not be treated as a parts and labor maintenance contract with respect to the application of the retail sales and use tax. As previously stated, there is no set or predetermined fee or charge for the Agreement. Typically, the fee or charge for a qualifying parts and labor agreement must be paid in advance or is paid in installments. Based on the large number of transactions and the varying amounts of the charges billed to the Taxpayer by the Supplier, it is highly unlikely that the parties would agree to a parts and labor maintenance contract with a fixed charge or fee that is determined at the time the contract is signed. Both the statute and the regulation that interprets it clearly contemplate an exemption for one-half of a predetermined fee or charge that is billed for maintenance contracts. The legislature's 1994 enactment of Va. Code § 58.1-609.5 9 is a direct result of the Department's former policy of taxing the entire charge for parts and labor maintenance contracts. The law change was intended to provide taxpayers an exemption for repair labor charges at an assumed rate of one-half the total charge for such contracts.
There is no basis to apply the tax to only one-half of the Supplier's charges in the audit. The Agreement merely governs the pricing of the Supplier's products and services and each charge for repair or replacement parts and services is invoiced to the Taxpayer as a separate transaction. Each transaction should be taxed in accordance with Virginia law and regulations. As such, the Supplier may bill each transaction by separately stating the parts and the exempt repair labor. The appropriate sales and use tax may then be charged on only the parts amounts billed in each transaction.
CONCLUSION
The audit assessment on the charges billed by the Supplier is correct and there is no basis to issue the refund requested by the Taxpayer. The Code of Virginia section and regulation cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions concerning this response, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5343578541.S
Rulings of the Tax Commissioner