Tax Type
Retail Sales and Use Tax
Description
Motor vehicle repair business; Labor charges and Billing/invoices.
Topic
Collection of Tax
Computation of Tax
Records/Returns/Payments
Taxable Transactions
Date Issued
05-17-2011
May 17, 2011
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period January 2006 through December 2008. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a motor vehicle repair business that specializes in retail tire sales and repairs. The Taxpayer performs off-site tire repair and replacement services for commercial vehicles. In a typical transaction, the Taxpayer receives a service request and dispatches a service technician to assist the customer. The service technician drives to the customer's site and makes the vehicle operational by repairing or replacing one or more tires on the vehicle. The Taxpayer bills the customer a labor charge as a separate line item on the sales invoice. The labor charge may be listed on the sales invoice as "Road Service Call", "Road Service Per Hour" or "OTR Road Service Per Hour." For purposes of this determination, these charges will be referred to collectively as "road service charges." The labor charge is based on the total amount of time taken by the service technician to perform the service call for each customer. The Taxpayer does not charge retail sales tax on the road service charges. A separate tire dismounting and mounting charge is also billed on the customer's sales invoice.
The Taxpayer was audited and assessed sales tax on the road service charges. The Taxpayer maintains that the charges are not taxable because they are for the technician's direct labor, which varies for each call. The Taxpayer states that the road service charges are not standard or fixed fees. Rather, the amount of each charge is dependent on the nature, difficulty and the amount of time taken to perform the service. The Taxpayer notes that although its computer billing system may use one of several different descriptions for the road service charges on its sales invoices to customers, the charges are always based on a per hour charge, regardless of the description used.
DETERMINATION
Repair and Installation Charges
The Virginia retail sales and use tax is imposed on the "sales price" of tangible personal property. Virginia Code § 58.1-602 defines "sales price" as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale ... without deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever." This definition makes it clear that, absent a statutory exemption in the Code of Virginia, labor or service charges are taxable when made in connection with the sale of tangible personal property.
Virginia Code § 58.1-609.5 2 provides an exemption from the retail sales and use tax for "[a]n amount separately charged for labor or services rendered in installing, applying, remodeling or repairing property sold."
The Taxpayer asserts that its road service charges are associated with the installation or repair of tangible personal property and qualify for the cited exemption. The road service charge is calculated from the time the service person leaves the Taxpayer's place of business until the time the service person returns from the service site. The times used to calculate the road service charges are recorded in a log maintained by the dispatcher or identified by work orders for the service call.
Public Document (P.D.) 09-62 (5/13/09) discusses a business that provided repair services for construction equipment that it sold or leased. The taxpayer offered customers on-site field repair and installation services due to the size of the equipment that required repair. The taxpayer billed customers separate, untaxed mileage or zone charges for the on-site repair services. These charges were held taxable in an audit by the Department. The taxpayer filed an appeal of the audit assessment, contending that the charges were exempt from the tax. Referencing the Department's policy as set out in P.D. 96-88 (5/14/96), the Tax Commissioner ruled that repair services do not commence until the repair person arrives at the job site and the repair services cease when the repair person departs from the job site. While the travel time to and from the repair service site is a charge for labor, any amounts billed for travel time, mileage or similar expenses that are incurred before or after the actual performance of repair services are not exempt.
Virginia courts have consistently required strict construction of sales and use tax exemptions, i.e., where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973). While separate charges for repair and installation labor enjoy the cited statutory exemption, other labor charges billed in the same transaction are taxable unless specifically exempt by law. Thus, other labor or service charges are properly included in the taxable sales price of tangible personal property provided in the transaction, whether separately stated or not.
The Taxpayer notes that the road service charges are not flat or fixed fees but are a charge for direct labor that varies based on the actual amount of time taken to perform the services required. There is no statutory exemption available for direct labor charges or labor charges based on the actual amount of time taken to perform the labor or service. Such charges are taxable regardless of whether the charge is for direct labor or the charge is a set or standard fee. This treatment is consistent with the statutory definition of sales price, which imposes the tax on services that are part of the sale of tangible personal property.
The auditor noted that the audit includes only the road service charges made in connection with sales of tires or similar items. Road service charges billed for repair services in which the tangible personal property provided was incidental to the repair service were not held taxable in the audit. It is also significant that the Taxpayer's invoices include a tire dismounting and mounting charge. This charge was properly treated as an exempt charge in the audit because it was directly related to the actual repair and installation of tires on motor vehicles. In contrast, road service charges are for the service technician's time to travel to and from the repair site.
True Object Test
The Taxpayer states that it is not known at the time a customer calls for service whether a customer's tire will have to be repaired or replaced to make the vehicle operational again. The technician must diagnose the problem at the customer's location and consult with the customer before it is known if the tire will be repaired or replaced. The Taxpayer suggests that the initial service call received from the customer is a "call for service." For this reason, the true object of the transaction should be the provision of an exempt service. The Taxpayer concludes that "[t]he fact that the final transaction may involve the sale of a replacement tire to make the vehicle operational should not change the 'true object' of the original reason for the call."
Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 addresses the application of the sales tax to mixed transactions involving the sale of tangible personal property and the provision of services. A true object test is used to determine the taxability of these types of transactions. Title 23 VAC 10-210-4040 D states:
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- In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
I do not agree with the Taxpayer's contention that the true object test should be applied to these transactions based on the premise that the original reason for the customer's phone call is to request a service. As the Taxpayer states, neither party knows if the service technician will have to repair or replace a tire at the time the service call is taken. Essentially, there is no transaction to which the true object test is applicable. It is only after the service is performed and completed that the taxability of the transaction can be determined under the true object test. The Department acknowledges that a phone request for repair service may result in the Taxpayer invoicing the customer for exempt repair services, but the actual services provided and the tangible personal property transferred with those services determines the true object of the transaction. A phone call for repair service may result in the sale to the customer of tangible personal property that is not incidental to the transaction, as in the case where a customer's tire is replaced. Then, the true object of the transaction is to obtain a tire, which is a retail sale of tangible personal property. Any charges billed in connection with the sale of the tire are subject to the tax, unless exempt by statute.
Further, the Taxpayer's reasoning with respect to the true object test is not consistent with situations in which a customer comes to a business location to have a flat tire repaired. The problem must be diagnosed before it is known whether the tire can be repaired or must be replaced. If a replacement tire is needed, the transaction is treated as a taxable sale although repair or installation services are provided. The Taxpayer sells and repairs tires off-site and in its physical locations. The transactions invoiced under both scenarios are essentially treated the same, the difference being that customers are invoiced a road service charge for the off-site repair services.
Public Document 08-67
The Taxpayer cites P.D. 08-67 (5/22/08) to support its position that road service charges are not taxable. I agree with the Taxpayer's summary of the facts in this determination. The Tax Commissioner agreed that separately stated repair or installation charges are exempt from the tax but also stated that separately stated mileage, road service and similar charges are part of the taxable sales price of tangible personal property transferred to customers in repair transactions. This determination also states that road service charges are not a part of exempt installation or repair labor because the expenses are incurred prior to, in preparation of or after the installation or repair has taken place. Thus, P.D. 08-67 supports the findings in the audit that the Taxpayer's road service charges are subject to the tax.
CONCLUSION
Based on the foregoing, the audit assessment issued to the Taxpayer is correct. The Department's records indicate that the Taxpayer has paid the uncontested portion of the audit assessment. The Taxpayer will be issued an updated copy of bill which is the contested assessment. The updated bill will reflect accrued interest to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
The Code of Virginia sections, regulation and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions concerning this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-3816408723.S
Rulings of the Tax Commissioner