Tax Type
Retail Sales and Use Tax
Description
Services; Repair and installation; Temporary replacement equipment
Topic
Taxability of Persons and Transactions
Date Issued
10-27-1993
October 27, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to ***************(the Taxpayer).
FACTS
The Taxpayer provides computer maintenance and repair services. An audit for the period May 1988 through March 1991 resulted in an assessment primarily for untaxed purchases of spare devices and parts therefor which the Taxpayer purchased under resale exemption.
In some instances the Taxpayer furnishes its services on a "contractual basis" for which the customer is invoiced one amount with no differentiation between parts and labor. These contracts are taxed in their entirety. In other cases the services are furnished on a "time and material basis" in which charges for parts and labor are distinguished and for which the tax is collected for repair parts sold to customers.
In both situations the Taxpayer provides temporary replacement equipment, or spare devices, if the customers' equipment cannot be repaired within a specified time. These spare devices remain the property of the Taxpayer and are returned to the Taxpayer when the customer's own equipment is repaired and installed.
Furthermore, the Taxpayer will occasionally pull parts from spare devices and sell those parts in the repair of customer-owned property. Subsequently, replacement parts are purchased for the spare devices to again make them operational.
Also, throughout the audit period the Taxpayer erroneously recorded the purchase of parts, including those for the spare devices as well as those specifically purchased for resale to customers, as fixed assets.
The Taxpayer contests the tax on the spare devices and their replacement parts on the basis that charges for these items are invoiced to customers. The Taxpayer also contests the tax on those parts erroneously recorded as fixed assets and indicates that its accounting records have been corrected.
DETERMINATION
Purchase of spare devices
Va. Code §58.1-602 provides that "all sales for resale must be made in strict compliance with regulations applicable to [the Retail Sales and Use Tax Act]." Also, Virginia Regulation (VR) 630-10-32 specifies in pertinent part that tangible personal property withdrawn from resale inventory for purposes other than sale is subject to the tax at the time of withdrawal.
When the Taxpayer furnishes its services on a "contractual basis," it is performing under a parts and labor maintenance contract as addressed in VR 630-10-62.1. This regulation indicates that "persons providing maintenance pursuant to such contracts may purchase repair or replacement parts under a resale certificate of exemption, but are liable for the tax on all items purchased for use in performing the repairs or maintenance." (emphasis added)
In the instant case the spare devices are purchased by the Taxpayer to satisfy its contractual obligations and used by the Taxpayer in providing its services. Unlike property which the Taxpayer sells to its customers, the spare devices remain the property of the Taxpayer and are provided to customers only temporarily. Therefore, I cannot agree that the spare devices represent repair or replacement parts as envisioned in the regulation. Thus, purchases of spare devices used in "contractual basis" maintenance are taxable.
Spare devices used by the Taxpayer in its "time and material contracts" are also taxable as I can find no indication that a separate, taxable charge is made to customers for providing these items. Furthermore, while you indicate that the Taxpayer collects and remits the tax on items purchased to repair equipment, the spare devices are not used to make such repairs. Rather, the spare devices are temporarily made available to customers while their own equipment is being repaired.
Replacement parts for spare devices
Based on the determination that the Taxpayer makes a taxable use of the spare devices, replacement parts for those devices are also taxable regardless that the original parts may be taken from the spares and sold to customers. In this instance, the Taxpayer makes a taxable first use of the parts when the spare devices are loaned to customers. The subsequent sale of those same parts is a separate and distinct transaction which is also taxable.
Erroneous recording of parts
Provided that the Taxpayer can clearly distinguish those parts purchased for resale, the audit will be revised. However, before any such revision is made, it will also be necessary for the Taxpayer to demonstrate that prior year income tax returns were amended or that current year income tax returns reflect the correction of the accounting error.
Accordingly, the auditor will contact the Taxpayer as soon as practicable to review corrections of the accounting errors and revise the assessment as applicable.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6166I
Rulings of the Tax Commissioner