Tax Type
Retail Sales and Use Tax
Description
Maintenance contract for parts and labor
Topic
Taxability of Persons and Transactions
Date Issued
06-24-1996
June 24, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This is in response to your letter of March 27, 1996, seeking a revision of the sales and use tax assessments issued to ******* (the Taxpayer).
FACTS
The Taxpayer is in the business of manufacturing, selling, and servicing business machines. An audit for the period May 1992 through April 1995 resulted in assessments of use tax for untaxed purchases and sales tax for failure to charge tax on the full amount invoiced to customers for maintenance agreements, the terms of which provide for both repair/replacement parts and repair labor.
The Taxpayer estimates that the parts portion of each contract constitutes from 5% to 25% of the total charge of the contract depending upon the type of equipment covered. For each contract, the Taxpayer charges and collects the sales tax based on an estimated amount for parts usage. The Taxpayer maintains that its method of tax billing complies with the Virginia retail sales and use tax law and regulations. Nevertheless, the Taxpayer offers to pay an assessment of tax based on the difference between the tax charged and collected on the estimated parts portion of the maintenance contracts and 50% of the tax due on the total amount invoiced. The Taxpayer also seeks waiver of the penalties assessed in this case.
DETERMINATION
Maintenance Agreements
The department's policy with respect to parts and labor maintenance contracts is based upon the fact that such contracts provide for the furnishing of tangible personal property. As such, they are taxable under the provisions of Code of Virginia § 58.1-603, which imposes the sales tax on the "sales price of each item or article of tangible personal property sold" in Virginia. Normally, labor charges for repairing or installing tangible personal property sold are not taxable under the provisions of Code of Virginia § 58.1-609.5(1) and (2) when such labor charges are separately stated from the charges for the property sold. These exceptions do not apply to parts and labor maintenance contracts, however, because at the time such a contract is sold, it is impossible to accurately determine how much of the contract will relate to labor and how much will relate to parts over the term of the contract.
The application of the tax to parts and labor maintenance contracts is clearly set out in Virginia Regulation (VR) 630-10-62.1 (D), copy enclosed. Furthermore, this policy has been in effect since at least 1979. See Section 1-90(c) of the 1979 Virginia Retail Sales and Use Tax Regulations, copy enclosed. In addition, the department has issued numerous public documents (PD) on this subject. See PD's 86-161 (7/31/86), 91-20 (2/22/91), 91-102 (6/28/91), 92-196 (9/30/92), and 96-52 (4/19/96). Concerning the Taxpayer's estimation of the parts usage to calculate the tax, PD 86-161 (7/31/86) specifically states that:
-
- ...regardless of taxpayer's ability in this case to closely estimate or approximate that portion of their service contracts which will represent labor and that portion which will represent charges for tangible personal property, the tax will apply to the total charge for its service contracts. (Emphasis added.)
As the foregoing amply demonstrates, it has been the consistent and long-standing policy of the department that the tax applies to the total amount charged for parts and labor maintenance contracts, regardless of whether the contract specifies separate charges for parts and labor based on an approximation or estimation. Thus, as in the Taxpayer's prior audit in which tax was assessed on the sales price of parts and labor maintenance contracts, the parts and labor maintenance contracts included in the Taxpayer's current audit are subject to the tax based on the total charge for such contracts.
Offer in Compromise
Code of Virginia § 58.1-105 authorizes the Tax Commissioner to settle or compromise tax assessments based only on doubtful liability or doubtful collectibility. Based on the well established policies of the department on maintenance contracts and the extensive public dissemination of those policies, and absent any evidence that the Taxpayer has been misinformed by the department as to how to apply the tax in such instances, I find no reason to conclude that the assessment of tax in this case is of doubtful liability. Furthermore, the Taxpayer has not presented any evidence that the assessment of tax is of doubtful collectibility. Accordingly, I find no basis for acceptance of your offer.
Penalty
The application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer's compliance ratio. For second audits, penalty will generally apply unless the compliance ratios meet or exceed 85% for sales tax and 60% for use tax. As the Taxpayer's compliance ratios are 82% for sales tax and 0% for use tax, penalty applies.
Penalty may also be waived based on evidence of exceptional mitigating circumstances. The Taxpayer has not presented any evidence of exceptional mitigating circumstances as to justify waiver of the assessed penalties.
Based on all of the foregoing, the assessment in this case is valid. The Taxpayer will receive updated bills for the outstanding liabilities with interest accrued to the present. To preclude further interest charges, full payment should be sent to the Department of Taxation, Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880, ATTN ****** within the next 30 days.
Please note that, effective January 1, 1996 and thereafter, parts and labor maintenance contracts are subject to the tax based on one-half of the total charge for such contracts. See Tax Bulletin 95-8 (9/27/95), copy enclosed.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11074R
Rulings of the Tax Commissioner