August 5, 2016
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you request correction of the retail sales and use tax assessments issued to ***** (the “Taxpayer”) as a result of an audit for the period February 2009 through January 2012. I apologize for the delay in responding to your request.
FACTS
The Taxpayer is engaged in a retail tire and automotive service business. An audit resulted in the assessment of consumer use tax on untaxed purchases of tangible personal property and in the assessment of sales tax on untaxed engine diagnostic services charged in connection with the sale of tangible personal property.
The Taxpayer contests the sales tax portion of the audit. The Taxpayer contends that the engine diagnostic service charges are not taxable and disagrees with the Department's position as set out in Public Document (P.D.) 13-223 (12/13/13). The Taxpayer contends that the Department has misread the exemption for services rendered by repairmen enacted under Va. Code § 58.1-609.5 1. The Taxpayer notes that such exemption is broader than the repair labor exemption enacted under Va. Code § 58.1-609.5 2. The Taxpayer disputes the application of the true object test to determine the taxability of services when Va. Code § 58.1-609.5 1 provides an exemption for services performed by repairmen and not other service providers. The Taxpayer objects to the taxability of the diagnostic tests based on the exemption set out in Title 23 of the Virginia Administrative Code (VAC) 4040 D 2 a.
The determination in P.D. 13-223 noted the long-standing policy that treats the exemption for services rendered by repairmen as applicable to those transactions in which such services are not performed in connection with the sale of tangible personal property. Despite this policy, the Taxpayer asserts that it has been audited on several prior occasions and was not previously assessed sales tax on diagnostic charges.
DETERMINATION
Exemption for Services Rendered by Repairmen
Pursuant to Va. Code § 58.1-609.5 1, services rendered by repairmen for which a separate charge is made are exempt from the retail sales tax. In P.D. 13-223, the Tax Commissioner interpreted this exemption as not applicable to transactions for the sale of tangible personal property. The Taxpayer notes that this exemption is set out in Title 23 VAC 10-210-4040 C 2 and believes the General Assembly contemplated that additional charges to the customer for tangible personal property would also be made on the invoice. Without the sale of tangible personal property, the Taxpayer contends that the exemption would not need the separate charge requirement.
Despite the Taxpayer's interpretation of the exemption language, I must recognize several factors that have contributed to the Department's long-standing policy to treat the repairmen service exemption as applicable to pure service transactions. These factors are:
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- · First, the repairmen services exemption is set out in Va. Code § 58.1-609.5 1, which includes exemptions for professional, insurance and personal services and Internet access services. Thus, the General Assembly purposely grouped these exemptions together. These exemptions apply to transactions that transfer inconsequential or no tangible personal property. Thus, the General Assembly seems to have recognized that the repairmen services exemption was sufficiently similar in character and expression as the professional, insurance and personal service exemption and thus should be associated and placed with such exemption. Consequently, when the Internet access service exemption was enacted years later, it too seems to have been recognized as of similar character and expression and thus was placed with the other similarly designed exemptions in Va. Code § 58.1-609.5 1.
- · Second, the repairmen services exemption makes no mention of any connection to the sale or rental of tangible personal property. Nor do the other exemptions in Va. Code § 58.1-609.5 1 make any mention of a connection to the consequential sale of tangible personal property. Thus, it would be inappropriate to include in Va. Code § 58.1-609.5 1 an exemption that is associated with the consequential sale of tangible personal property.
- · Third, while the Taxpayer contends that the purpose of the repairmen service exemption was to provide an exemption for separately stated repair labor, such purpose is unnecessary since a separately stated repair labor exemption already exists in Va. Code § 58.1-609.5 2, which clearly contemplates specific exemptions from the sale or rental of tangible personal property in its statutory language.
Because the repairment services exemption is placed in Va. Code § 58.1-809.5 1 along with other purely service exemptions, I must conclude that the General Assembly intended the repairment service exemption to apply only to pure service transactions, such as those with an inconsequential transfer of tangible personal property or to no transfer of tangible personal property.
Repealed Motor Vehicle Labor and Services Tax
The Taxpayer wants to further demonstrate the General Assembly's intention by referring to the repealed motor vehicle repair labor and services tax (“repair tax”) enacted under House Bill 3202 of the 2007 session of the General Assembly. The Taxpayer contends that this repealed repair tax was imposed upon all services by a motor vehicle repairman regardless of any separate statement of services on the invoice. The Taxpayer further contends that “this would not have been necessary under the Commissioner's ruling,” presumably P.D. 13-223.
The Taxpayer's first contention that the repealed repair tax was to be imposed on all services is not entirely correct. The repealed tax was to apply to all separately stated repair service charges and all charges for the repair of a motor vehicle in which the true object of the repair was a service performed by a repair business. The repealed repair tax, however, was not designed to apply to transactions in which the true object was for the sale of tangible personal property in which both repair labor and repair parts were provided on a lump-sum charge basis, i.e., not separately stated. See P.D. 07-166 (11/1/07). With respect to the second contention, it is not clearly understood; therefore, I am unable to respond to it.
True Object Test
Pursuant to Va. Code § 58.1-609.5 2, an amount separately charged for labor or services rendered in installing, applying, remodeling or repairing property sold is exempt from the retail sales tax. The Taxpayer refers to P.D. 13-223, which cites this exemption as the applicable exemption statute when tangible personal property is sold. The Taxpayer indicates that this exemption, unlike the exemption in Va. Code § 58.1-609.5 1 for repairmen services, is not specifically directed at repairmen, but covers a broader range of businessmen and is more restrictive in the services that qualify for exemption. In P.D. 13-223, I held that the professional service, the repairmen service and the Internet access exemptions set out together in Va. Code § 58.1-609.5 1 are intended to apply when the true object of the transaction is for an exempt service.
The Taxpayer disputes the application of the true object test to determine the taxability of services in light of the repairmen services exemption under Va. Code § 58.1-609.5 1 that is specifically applicable to repairmen but not to other service providers. The purpose of the true object test is to determine whether a mixed transaction (i.e., a transaction consisting of the sale of tangible personal property and services) is for the sale of tangible personal property or for the provision of services. A true object test is not needed for transactions that do not involve a transfer of tangible personal property. When the true object of the transaction is determined to be for the sale of tangible personal property, any services provided in connection with such sale are taxable, unless statutorily exempt.
The repair labor and service exemption of Va. Code § 58.1-609.5 2 clearly allows an exemption for repair services that are provided in connection with property sold. On the other hand, the repairmen services exemption of Va. Code § 58.1-609.5 1 does not explicitly state that such services specifically apply when furnished in connection with the sale of tangible personal property. Rather, Va. Code § 58.1-609.5 1 plainly sets out three “service” exemptions. By grouping the repairmen services exemption with service exemptions that involve transactions with no significant transfer of tangible personal property or no transfer of tangible personal property, I must conclude that the General Assembly of Virginia intended that the repairmen services exemption apply to those transactions in which the primary or sole object of the transaction is for the provision of services. Despite the specific application of the exemption to repairmen, such exemption has been placed with pure service exemptions that have no application to transactions for the consequential sale of tangible personal property.
Customization
The Taxpayer makes a final objection to the assessment by contending that the diagnostic tests constitute customized reports exempt from tax based on the exemption set out in Title 23 VAC 10-210-4040 D 2 a for a nontaxable service. The Taxpayer indicates that each diagnostic test provides a customized report prepared for each individual owner for a specific car. Such reports are not transferable and are of no use on a different vehicle.
While the test results may vary from one test to the next because of the different problems detected, no facts have been furnished to describe how the diagnostic testing is performed or the degree of specialized or unique services provided. It is my understanding that diagnostic testing generally involves scanning a vehicle's computer system to identify trouble codes and may be used to gather operation data from sensors to aid in diagnosing the cause of a problem. Thus, a report customized to the particular problems found in a vehicle's operation could be provided to the customer. In this regard, Title 23 VAC 10-210-4040 B 1 defines taxable services as “[a]ny services included in or in connection with the sale of tangible personal property.” Thus, diagnostic testing services that are included in connection with the replacement of parts of a motor vehicle clearly establish that such services are taxable, despite a treatment as an exempt charge when no tangible personal property is furnished as part of the transaction.
Furthermore, diagnostic testing is preparatory to the actual repair process and is not considered a part of the repair process for sales and use tax purposes. The term “repair” is defined as “an operation that restores a used or worn piece of tangible personal property.” See Title 23 VAC 10-210-560 A. Diagnostic testing is not an operation that restores. Rather, it is a preliminary step before repairing property. Thus, diagnostic testing does not qualify for the repair labor exemption set out in Va. Code § 58.1-609.5 2.
Prior Audits
The Taxpayer claims that it has been audited on prior occasions but never assessed sales tax on diagnostic charges. No evidence has been presented of the prior audits. Therefore, I cannot confirm the Taxpayer's claim. In any event, while this audit may have been the first time that diagnostic testing charges were assessed in an audit of the Taxpayer's sales tax compliance, the Taxpayer still remains liable for the tax as the assessment of such charges does not constitute new policy or a policy change of the Department requiring prospective compliance.
CONCLUSION
I must recognize that the fundamental principle set out by the courts is that taxation is the rule and not the exception. See Winchester TV Cable Co. v. State Tax Commissioner, 216 Va. 286, 217 S.E.2d 885 (1975). The Taxpayer has not established that it is entitled to the exemption that it seeks. Because tax assessments issued by the Taxpayer are deemed prima facie correct, I must also recognize that the Taxpayer carries the burden of proving that an assessment is incorrect. The Taxpayer has not proven that the assessment is incorrect.
Based on the contentions raised and the facts provided, I find no basis to alter the determination set out in P.D. 13-223. Such determination is clearly on point with the issues raised in the instant case. As such, I find that exemption under Va. Code § 58.1-609.5 1 is not applicable to the contested items.
Based on this determination, the assessments issued in the instant case are correct. Updated bills, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill dates to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of these assessments, you may contact ***** at *****.
The Code of Virginia sections, regulations and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6119056967.R