Tax Type
Retail Sales and Use Tax
Description
Services; Separately stated charges
Topic
Taxability of Persons and Transactions
Date Issued
03-21-1997
March 21, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************
In your letter of January 29, 1997, you request reconsideration of our prior determination (P. D. 96-80, 5/8/96) which upheld the sales and use tax assessment issued to ********** (the Taxpayer).
FACTS
The Taxpayer fabricates and sells unfinished and finished bookcases and cabinets to retail consumers. An audit for the period November 1992 through September 1995 resulted in an assessment of sales tax on untaxed finishing charges made in connection with retail sales of the Taxpayer's products.
You maintain that the finishing charges, or refinishing charges as you refer to them, are for services and should not be subject to the tax. It is your contention that at the time of sale two separate and distinct transactions occur, one for the sale of the raw product and the other for finishing services, if the purchaser so chooses. When the Taxpayer applies a stain to the product, it lists separate charges on the invoice for the product and the finishing services but has not taxed the charge for staining the product. You indicate that there are other companies which follow the same practice as the Taxpayer.
DETERMINATION
Finishing charges in connection with the sale of products
As stated in my prior determination, the statute requires the application of the retail sales and use tax to the gross sales price of tangible personal property, including any services that are part of the sale. Although the customer has the option of buying an unfinished or finished product, the decision to buy the Taxpayer's product in a finished condition does not constitute two separate and distinct transactions. Rather, the object sought by the customer in such instances is a finished product in a single transaction.
In these types of transactions, the Taxpayer is required to charge and collect the sales tax on the total charge (i.e., the gross sales price) for the finished product, including any separately stated finishing charges. The Taxpayer may, however, buy the product exempt of the tax pursuant to a resale exemption certificate, Form ST-10. In addition, stains and other finishing materials may be purchased exempt of the tax when such materials are only applied to furniture sold by the Taxpayer.
I would note that the auditor does not recall seeing any invoices for "refinishing" charges, such as charges for refinishing the surface of old or worn furniture owned and brought in by customers. Accordingly, none of the charges at issue are for refinishing. Rather, the only finishing charges assessed in the department's audit are for staining furniture, cabinets, bookcases and other wooden products in connection with the sale of these Products by the Taxpayer. Accordingly, the tax assessed on finishing charges in this case is correct.
Tax treatment is not new
The taxation of service charges in connection with the sale of tangible personal property is not new and has been in effect since the original enactment of the retail sales and use tax in 1966. The only exceptions are those found in Code of Virginia § 58.1-609.5 (copy enclosed), but none of those service exemptions are applicable to the charges at issue.
For instance, the Taxpayer is selling a product; therefore, the finishing charges at issue cannot be considered personal service transactions since the sale of the product is not an inconsequential element of the transaction and is separately billed. Accordingly, the first exception listed under the above cited statute is not applicable.
The second exception listed under the above cited statute is also not applicable. When selling stained furniture, the true object of the transaction is for the sale of a finished product. As the customer desires finished property before taking possession and title to the item, the product is not ready for delivery to the customer until the Taxpayer has applied a stain to it. In such instances, the finishing services do not represent charges for installing, applying, remodeling (reconstructing) or repairing the furniture sold. Rather, the finishing services when provided in connection with the sale of tangible personal property are considered taxable fabrication labor as that term is defined in 23 VAC 10-210-560 (copy enclosed). This is because the finishing services change the state of the product from an unstained product to a stained product. Furthermore, the stain applied to the product becomes integrally connected to the product and enhances the value of the Taxpayer's product.
Based on the foregoing and the fact that none of the other exceptions listed under Code of Virginia § 58.1-609.5 are applicable, no exemption applies to the charges at issue regardless of whether separately stated or not.
Similar businesses
Although I am sympathetic to your concerns about other businesses who fail to properly tax finishing charges made in connection with the sale of furniture, I must recognize that the statute clearly does not provide an exemption for such charges. The department consistently applies this policy in all audit situations.
Refinishing or finishing charges when independent of sale of products
When a customer brings in used furniture for the Taxpayer to refinish only, the transaction is for exempt services. If a customer who purchased unfinished furniture from the Taxpayer decides at a later date to purchase finishing services from the Taxpayer, the tax will not apply to such charges.
In such instances, the Taxpayer is liable for the tax on purchases of finishing materials used and consumed in the provision of such service transactions. If the Taxpayer buys finishing materials exempt of the tax, it must remit the use tax on those materials used and consumed.
Ruling requests
As provided in 23 VAC 10-210-20 (copy enclosed), anyone who has a question about the application of the tax to a specific situation is encouraged to write the department for a written ruling. In this case, it has not been shown that the Taxpayer previously sought a ruling from the department concerning the application of the tax to the charges at issue. As the Taxpayer has been registered for collection of the sales tax since November 1980, I would note that the Taxpayer has had sufficient time to request a ruling from the department to ensure that it is properly charging the sales tax but failed to do so.
In the absence of a ruling request, I would note that the regulations have long stated that "any services included in or in connection with the sale of tangible personal property" are treated as taxable services. See 23 VAC 10-210-4040 (formerly VR 630-10-97.1), copies enclosed. Although there is no regulation to address the specific charges at issue, I feel that the services regulation cited above is completely adequate in setting out the tax application in this instance.
Conclusion
As the Taxpayer has not furnished any new information, the decision reached herein is my final determination. The Taxpayer will soon receive an updated bill for the outstanding liabilities of **********. To preclude further interest charges, full payment of these liabilities should be sent to the department within the next 30 days at the address indicated on the bill.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12226R
Rulings of the Tax Commissioner