Document Number
96-389
Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Equipment
Topic
Taxability of Persons and Transactions
Date Issued
12-26-1996


December 26, 1996


Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear ***********:

This is in response to your letter in which you seek correction of sales and use tax assessments issued to *****, trading as ***** (the "Taxpayer"). Since receiving your letter, the department has reviewed its policy on the application of the tax to certain materials and supplies used by automotive repair businesses.
FACTS

The Taxpayer operates a chain of automotive repair shops which specialize in brake and muffler repairs. Assessments were issued primarily for the period September 1991 through August 1994 on untaxed purchases. The first contested issue is the application of the tax to purchases of certain automotive supplies such as grease, brake pad adhesives, and small hardware pieces (hereinafter referred to as "Transferrable Bulk Supplies"). These items are purchased in bulk and subsequently transferred to customers in small amounts when repairs are made to customer-owned vehicles.

The Taxpayer points out that it charges an all-inclusive flat fee for its work. A typical sale, for example, would be a $***** charge for a brake job. This charge includes all parts and labor. Because the charge for parts and labor are not separately stated, the Taxpayer properly adds the tax to the entire charge. The Taxpayer therefore concludes that the Transferrable Bulk Supplies are taxed at the time of the sale (as part of the total charge) and that such supplies may be purchased exempt for resale.

The second contested issue concerns used automotive equipment which the Taxpayer purchased from another automotive repair business.

DETERMINATION

Automotive Supplies

Code of Virginia § 58.1-603 imposes the sales tax on the gross sales price of each item or article of tangible personal property when sold at retail in the Commonwealth. Code of Virginia § 58.1-602 defines a "retail sale" to be "a sale to any person for any purpose other than for resale in the form of tangible personal property ...."

The application of the tax to repair businesses generally is set out in Virginia Regulation (VR) 630-10-90. In addressing a repairman's sales of tangible personal property, the regulation indicates that "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."

When addressing purchases made by repair businesses, the regulation provides that:
    • Replacement parts, materials and supplies that are transferred to the customer may be purchased under certificates of exemption. The tax must be paid on equipment, tools and all other tangible personal property used in performing the repair work.

With these provisions in mind, the purchase and sale of supplies which are transferred to the customer, especially Transferrable Bulk Supplies, deserve special consideration. One major concern is that customers know what components of the invoice are taxable. A second concern is that items which are purchased by the repairman exempt for resale are properly taxed at the time those items are sold. Accordingly, the application of the tax to purchases of Transferrable Bulk Supplies will depend on how those items are invoiced to customers.

Flat Fee Charges: The Taxpayer's method of invoicing includes, for a flat fee, all parts, supplies, materials, and labor. It is therefore evident that the Transferrable Bulk Supplies and other parts transferred to the customer are properly taxed at the time of the sale. At the same time, the customer is aware the entire charge is subject to the tax. Accordingly, under the Taxpayer's method of invoicing a flat fee, and charging the tax on the entire amount, Transferrable Bulk Supplies may be purchased exempt of the tax for resale.

Separately Stated Charges: As noted in VR 630-10-90, separately stated repair labor is not taxable. Any tangible personal property sold to customers remains taxable. In the event the Taxpayer decides to separately state parts and labor on its invoices, it will be required to separately state the sales price of Transferrable Bulk

Supplies on the invoice to customers and add the tax on this charge. This is because tangible personal property which has been purchased exempt for resale must be taxed when it is sold at retail. Also, by separately stating the Transferrable Bulk Supplies on the invoice, the customer knows that it is a taxable component of the Taxpayer's total charge.

Obviously, it would be excessively burdensome to calculate the sales price for such items as grease and brake pad adhesives. The Taxpayer may therefore calculate the sales price of the Transferrable Bulk Supplies by using a reasonable estimate which reflects the sales price. For example, the separate charge for these Transferrable Bulk Supplies can be listed on the invoice as a percentage of the total bill or some other reasonable estimate which reflects the sales price of these items.

Regardless of how the Taxpayer might reasonably estimate the charge for Transferrable Bulk Supplies, this charge must appear as a separate item on the invoice to customers in the event that the Taxpayer also decides to separately state charges for repair labor. Also, the tax must be added on the charge for Transferrable Bulk Supplies (just as the tax is added on the sale of any other parts).

Transferrable Bulk Supplies: The types of items which constitute Transferrable Bulk Supplies include automotive fluids such as brake fluid, grease and lubricants, windshield washer fluid, anti-freeze and transmission fluid; automotive adhesives and sealants, including gasket seal; automotive light bulbs and electrical wire for automotive repairs; small automotive hardware, including nuts, bolts, washers, cotter pins and similar items. These items, which are transferred to customers, may be purchased exempt from the tax for resale provided that they are taxed at the time of sale to customers.

Non-Transferrable Materials and Shop Supplies: The Taxpayer is deemed to be the taxable user and consumer of all property which it uses in providing its automotive repair services. Such items include shop cleaning supplies (including rags, drop cloths, floor sweep, mops and buckets); paper/plastic seat covers; work clothes, tools, equipment and machinery used in repair work (including repair and replacement parts and supplies for that equipment); soaps, degreasers, and thinners; and sand paper, steel wool, and emery cloth. Accordingly, the Taxpayer must pay the tax on the purchase of these items. The application of the tax to these items is also addressed in the enclosed Public Document 87-275 (12/23/87).

Dual Use Items: It may be that certain bulk supplies and materials are (1) transferred to customers and (2) used by the Taxpayer. For example, lubricants may be transferred to customers in repair work and used by the Taxpayer to repair or maintain its own equipment. The latter use is a taxable use of the lubricant by the Taxpayer. The Taxpayer will therefore need to accrue the tax on that portion of the lubricant which it uses.

Leased Equipment

This issue concerns used automotive equipment which the Taxpayer acquired through a capital lease. As I understand it, the seller ceased its automotive repair operations and disposed of its equipment through a lease transaction with the Taxpayer.

The enclosed Public Document 88-128 (6/13/88) addresses an analogous situation. As discussed therein, Code of Virginia §§ 58.1-603 and 58.1-604 impose the tax on the sale, use, or consumption of tangible personal property in Virginia, including the lease or rental of such property. Accordingly, the lease of equipment, whether it be new or used, constitutes a taxable transaction.

In the instant case, the Taxpayer leased equipment from another automotive repair shop that was terminating its business. If this seller sold all or substantially all of its assets at one time, that sale may have qualified as an exempt occasional sale as addressed in VR 630-10-75. But that is not the case. The seller evidently ceased its repair operations, but it continued in business as a lessor of equipment.

Accordingly, the Taxpayer's lease of tangible personal property from the seller remains taxable.

Summary

Based on this determination, the untaxed purchases of Transferrable Bulk Supplies will be removed from the assessments. Because the uncontested assessments have been paid, this action will result in no outstanding balance for all but one of the assessments. The final assessment, which includes charges for the leased equipment and purchases of transferrable bulk supplies, will be revised accordingly. A revised assessment, reflecting the tax and interest only on the leased equipment, will shortly be issued to the Taxpayer.

Please contact ***** in my Office of Tax Policy at ***** if you have any questions regarding this letter.
                • Sincerely,


                • Danny M. Payne
                    • Tax Commissioner




OTP/9640i


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