November 16, 2017
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of the retail sales and use tax assessments issued to ***** (the “Taxpayer”) for the period January 2013 through June 2016. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a motor vehicle repair shop that was audited by the Department. The Taxpayer contests the assessment of retail sales tax on untaxed environmental and labor charges that were billed to customers. In addition, the Taxpayer contests the assessment of retail sales tax on discrepancies found in the auditor's reconciliation of gross sales reported on the Taxpayer's sales tax returns with the gross sales reported by the Taxpayer for income tax purposes.
DETERMINATION
Virginia Code § 58.1-205 provides that an assessment of a tax by the Department is deemed prima facie correct. As such, taxpayers have the burden of proving that an assessment issued by the Department is incorrect. Keeping the cited authority in mind, I will address the issues raised in the Taxpayer's appeal.
Labor Charges
The Taxpayer states that labor charges were improperly assessed in the audit. The Taxpayer contends that the charges are for the direct labor of the repair technician, the charge varies with each vehicle serviced and the charge is billed by the hour.
According to the Taxpayer, some of the labor charges are diagnostic fees. The audit report states that, in addition to certain labor charges, environmental charges were assessed in the audit.
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. (Emphasis added.)
Absent a statutory exemption in the Code of Virginia, labor or service charges are taxable when billed in connection with the sale of tangible personal property. Virginia Code § 58.1-609.5 2 provides one such 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.”
In Public Document (P.D.) 11-74 (5/17/11), the Tax Commissioner ruled that road service charges billed by a motor vehicle repair business were taxable. The road service charges were billed in connection with repair services that included the provision of repair or replacement parts. The charges were calculated from the time a service person left the place of business until the time the service person returned from the service site. The determination states that the road service charges did not represent the actual cost of repair labor because repair services do not commence until the repair person arrives at the job site. While the travel time to and from the job site was a charge for labor, there was no statutory exemption for this type of charge.
The 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 statutory exemption cited, other labor charges billed in the same transaction are taxable unless specifically exempt by law. Thus, charges for other types of labor or services are properly included in the taxable sales price of the tangible personal property that is billed in the transaction, regardless that the labor or service charges are billed separately.
Public Document 16-159 (8/5/16) addresses charges for engine diagnostic services and states that such charges are taxable when made in connection with the sale of repair parts. The charge for diagnostic services is exempt from the sales tax only in cases where there is no sale of tangible personal property, i.e., repair or replacement parts. If the Taxpayer provides diagnostic services to a customer that decides not to have the necessary repairs made to a vehicle, the charge is exempt from the tax. Consistent with the Department's policy on labor and service charges and the definition of “sales price” in Virginia Code § 58.1-602, the diagnostic fees or charges are a taxable service when billed in connection with the sale of tangible personal property.
It is not clear if the Taxpayer contests the environmental charges that were assessed in the audit. However, the environmental charges were properly assessed in accordance with P.D. 06-115 (10/16/06). I understand that the auditor provided the Taxpayer a copy of this document.
Underreported Sales
The auditor notes that the Taxpayer did not maintain adequate records during the period that was audited. The auditor, following standard auditing procedures, attempted to reconcile the gross sales amounts reported on the sales tax returns filed by the Taxpayer. The Taxpayer was unable to provide income tax returns or other accounting records to facilitate the sales reconciliation for the audit period. Virginia Code § 58.1-633 A states that:
Every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.
The Taxpayer maintains that it paid the proper amount of sales taxes due for each monthly period assessed in the audit. Due to the lack of available records for the audit period, the assessment was based on a comparison of the gross sales reported on the Taxpayer's sales tax returns filed in 2012 to the gross sales reported on the Taxpayer's 2012 income tax return. The auditor determined that the gross sales amounts from the Taxpayer's sales tax returns were underreported by 26% for 2012. This percentage was applied to the gross sales amounts reported on the Taxpayer's sales tax returns filed during the audit period. The resulting amounts were assessed as unreported sales.
The Taxpayer has provided copies of federal income tax returns for the tax years 2013, 2014 and 2015. A review of these returns reveals that the gross sales amounts reported for income tax purposes exceed the gross sales amounts reported on the sales tax returns filed for the same periods. In fact, the sales exception amounts listed and assessed in the audit are understated based on the gross sales amounts reported on the 2013, 2014 and 2015 income tax returns. The Taxpayer has not provided sufficient documentation that explains the difference in the amounts reported for income tax and sales tax purposes. Based on the provisions of Virginia Code § 58.1-205, the Taxpayer has not met its burden of proving that the assessment is incorrect with respect to this issue.
CONCLUSION
Based on the foregoing, the audit assessment issued to the Taxpayer is correct. The Taxpayer will be issued updated copies of bill numbers ***** and *****. The bills will reflect accrued interest to date and should be paid within 30 days to avoid the accrual of additional interest.
The Code of Virginia sections and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions concerning this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1090.S