July 20, 2021
Re: § 58.1-1821 Application: Retail Sales and Use Tax
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period August 2014 through July 2017. The Department’s records indicate the assessment is paid in full. I apologize for the delay in responding to your letter.
The Taxpayer, an automotive repair shop, was audited by the Department. The Taxpayer’s invoices to its customers showed a lump sum charge for a service (e.g. an oil change) and did not separately state the costs for materials and labor. However, the Taxpayer calculated and collected sales tax as related to the materials. As a result of the audit, an assessment was issued for the sales tax on the full amount of the lump sum charge on the invoices because the labor charges were not separately stated. The Taxpayer appeals, contending it’s billing system allowed them to separately state materials and labor in the calculation of sales tax, but did not separately state the charges on the invoice printed and provided to the customer. Alternatively, the Taxpayer argues that it should be considered a consuming contractor, which would not require separately stated labor charges on the invoice.
Virginia Code § 58.1-603 imposes the retail sales tax on every person engaged in the business of selling tangible personal property in Virginia. The sales tax due is determined based on the sales price of the property being sold. Virginia Code § 58.1-602 defines “sales price,” in part, as:
The total amount for which tangible personal property or services are sold, including any services that are a part of the sale…and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or services costs, losses or any other expenses whatsoever.
Virginia Code § 58.1-609.5 2 provides an exemption from the retail sales and use tax for “[a]n amount separately charged for labor or services rendered in installing, applying, remodeling or repairing property sold.” In addition, Title 23 of the Virginia Administrative Code 10-210-3050 states, “any person engaged in the business of repairing tangible personal property is required to register to collect and pay the tax. If the dealer performing the repair work does not separately state, itemize or segregate at a fixed or retail price, the parts, materials and supplies sold, the tax will apply to the total charge including repair labor.”
Generally, services are not subject to the retail sales and use tax. However, services rendered in connection with the sale of tangible personal property become taxable services. Here, while the Taxpayer’s accounting system allows for the separate statement of labor and materials in regard to the calculation of the sales tax on materials, it does not separately state the materials and labor on the invoice to the customer. Invoices are issued showing a lump sum amount for the service provided. Under such circumstances, the entire charge becomes taxable, including the labor costs, in accordance with the definition of sales price and the regulation.
The Taxpayer also asserts that, in the alternative, it should be considered a consuming contractor pursuant to Virginia Code § 58.1-610 D, which would not require separately stated labor charges on invoices. However, Virginia Code § 58.1-610 relates to situations involving real estate, or tangible personal property incorporated into real property to the extent it loses its identify as tangible personal property. Here, the Taxpayer operates an automotive repair shop. Such activities do not meet the standards set forth under Virginia Code § 58.1-610.
Based on the above authorities and analysis thereof, the assessment is correct. The Taxpayer has paid the assessment, therefore no further action is required.
The Code of Virginia sections and regulation cited are available on-line in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Craig M. Burns