April 25, 2025
RE: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
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 audit assessment issued for the period January 2020 through December 2022.
FACTS
An audit was conducted on the books and records of the Taxpayer, an automotive repair shop and used car dealer, for the period at issue. As a result of the audit, the Taxpayer was assessed tax and interest on untaxed diagnostic labor and purchases. The Taxpayer filed an application of correction contending that separately stated labor charges were rendered in connection with tax-exempt diagnostic work. In addition, the Taxpayer disputes exceptions to one purchase on which tax was paid and a transaction included twice in the exceptions list.
ANALYSIS
Strict Construction of Exemptions
The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, the Virginia Supreme Court requires strict construction of sales tax exemptions. Where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Community MotorBus, 214 Va. 155 (1973); Commonwealth v. Research Analysis Corporation, 214 Va. 161 (1973); and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973).
Diagnostic Service Exemption
The Taxpayer contends that the separately stated labor charges made in connection with diagnostic work are exempt from tax under Virginia Code § 58.1-609.5 8 and should be removed from the exceptions list. Effective July 1, 2023, the General Assembly enacted House Bill 1677 (Chapter 35, Acts of Assembly), which amended Virginia Code § 58.1-609.5 to provide an exemption from the retail sales and use tax for amounts separately charged for labor rendered in connection with diagnostic work for automotive repair and emergency roadside service for motor vehicles regardless of whether there is a sale of a repair or replacement part or a shop supply charge. See Public Document (P.D.) 23-65 (9/15/2023).
Prior to the law change, amounts charged for diagnostic services were only exempt from the retail sales and use tax when such charges were not made in connection with the sale of tangible personal property, or when the property exchanged was inconsequential to the transaction. See P.D. 13-223 (12/13/2013). In this instance, the transactions at issue occurred prior to the enactment of the new law and were taxable under the Department’s policy in effect during the audit period.
Untaxed Purchase
The Taxpayer contends that an untaxed purchase for an air compressor should be removed from the exceptions list because the supplier adjusted the purchase and collected tax. The Virginia retail sales and use tax applies to the sale or the use of tangible personal property. Virginia Code § 58.1-603 imposes the retail sales tax on the proceeds from the sale, rental, or lease of tangible personal property in Virginia, accommodations furnished to transients, and on any services expressly stated as taxable by Chapter 6 of Title 58.1 of the Code of Virginia. Similarly, Virginia Code § 58.1-604 imposes a use tax on items of tangible personal property used, consumed, distributed, or stored in Virginia for which no retail sales tax has been paid.
Under long-settled principles of sales and use tax law, the Department may seek payment of the tax from either the seller or the purchaser of tangible personal property. See United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977) aff'd, 569 F.2d 811 (4th Cir. 1978), which held that, while “the seller is legally obligated to collect the tax from the purchaser, the statute [Virginia Code § 58.1-625] makes the tax the legal debt of the purchaser.”
With its application for correction the Taxpayer provided documentation indicating payment of sales tax to the vendor. The documents provided, however, do not evidence the payment of the tax on the air compressor to the vendor or the Department.
Duplicate Transaction
The Taxpayer contends that the exceptions list includes two identical transactions that were used to compute the audit liability. Upon review of the audit report, invoice #43811 is listed twice in the exceptions.
DETERMINATION
In accordance with this determination, the assessment will be returned to appropriate field audit staff for review and revision. Transactions that included the sale of tangible personal property in connection with diagnostic work were properly listed as exceptions and will remain in the audit. One of the duplicate exceptions for the same transaction will be removed from the audit. The Taxpayer must provide documentation to show that the tax on the air compressor purchase was paid, either to the vendor or the Department.
The Taxpayer should contact the auditor, *****, at ***** or *****@tax.virginia.gov within 30 days of the date of this letter to set up a mutually agreeable time in order to provide proof that the tax was paid on the air compressor purchase. Once the documentation is submitted, the auditor will make revisions as indicated above. After the revisions are made, the Department will issue a revised audit report. Because the revised audit liability will be decreased and the assessment has been satisfied, a refund with appropriate refund interest will be issued.
The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****@tax.virginia.gov.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/5039.F