Tax Type
Retail Sales and Use Tax
Description
Services; Repair and installation; Maintenance contracts and warranties
Topic
Taxability of Persons and Transactions
Date Issued
03-24-1997
March 24, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This will reply to your letter in which you seek correction of an assessment issued to your client, *********** (the "Taxpayer"), for the period November 1989 through October 1995.
FACTS
The Taxpayer is a used automobile dealer that sells extended warranties to customers who purchase an automobile. The extended warranties provide that the Taxpayer will replace parts and furnish the necessary labor to make repairs covered under the terms of the warranty agreements.
The Taxpayer was assessed sales tax on sales of the extended warranty plans in an audit by the department. The Taxpayer maintains that prior to a law change effective January 1, 1996, the department's policy of taxing the total charge for warranties providing both parts and labor is erroneous and not supported by law. You suggest that the law change, which calculates the tax on one-half of the total charge for warranty plans providing for both parts and labor, was enacted to clarify the department's former policy on extended warranty plans. For this reason, the Taxpayer seeks the removal of one-half of the taxable warranty charges from the audit.
DETERMINATION
Title 23 VAC 10-210-910 (copy enclosed) defines maintenance contract as "any agreement whereby a person agrees to maintain or repair an item of tangible personal property over a specified period of time for a fee which is determined at the time the agreement is entered into." Paragraph D of this regulation provides that maintenance contracts which provide both repair or replacement parts and repair labor are considered sales of tangible personal property. The full charge for such contracts is taxable at the time of sale regardless of whether charges for parts and labor are separately stated in the contract. This policy was based on the fact that the cost breakdown of parts and labor for this type of maintenance contract could not be determined when the contract was sold.
The department's policy with respect to maintenance contracts and extended warranty plans dates back to July 1, 1969, the effective date of § 1-90 of the Virginia Retail Sales and Use Tax Regulations. Our policy has also been addressed in numerous public documents such as the enclosed copies of P.D. 89-79 (2/23/89) and P.D. 80-20 (9/29/80). The auditor's review of an extended warranty contract furnished by the Taxpayer indicates that the contracts provide coverage for repair or replacement parts and repair labor. Based on our policy prior to the January 1, 1996 effective date of the law change, the auditor correctly held the charges taxable.
While you maintain that the department's interpretation of the law prior to January 1996 is erroneous and not supported by statute, it is the department's position that the application of the law is clear and our regulations have supported this policy since 1969. A large number of public documents that explain our policy have been published and made available to the general public. Code of Virginia § 58.1-203(A) gives the Tax Commissioner "the power to issue regulations relating to the interpretation and enforcement of the laws of this Commonwealth governing taxes administered by the Department." Code of Virginia § 58.1-205(2) states that "[a]ny regulation ... shall be sustained unless unreasonable or plainly inconsistent with applicable provisions of law." The courts have also agreed that the Tax Commissioner's construction of a tax statute is entitled to great weight (see Commonwealth. Dep't of Taxation v. Wellmore Coal Corp., 228 Va. 149, 320 S.E.2d 509 (1984) ). Based on the above, a presumption of validity attaches to the Tax Commissioner's rulings and the burden is on the taxpayer to prove that the ruling is contrary to law or that the Commissioner has abused his discretion and acted unreasonably.
I must also disagree with your assertion that the law change supports your argument that the department's former policy was erroneous. The regulation governing our policy on this issue was promulgated under the Administrative Process Act and the Virginia General Assembly has been aware of our policy. It was not until the 1994 legislative session that a law change was enacted, effective January 1, 1996, to change that policy. The policy has been clear and consistent over the years. The fact that legislation was required to change the department's policy supports our position that our old policy was clear and supported by law.
Based on the above, the assessment is correct. I will allow the Taxpayer sixty days to pay the current balance ************ before additional interest accrues on this account. You may send your payment to ********* in the Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions, please contact *********** at***********.
.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11442S
Rulings of the Tax Commissioner