Rulings of the Tax Commissioner

June 1, 2022

Re:    § 58.1-1821 Application:  Retail Sales and Use Tax 
    
Dear *****:

This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessments issued to two of its locations for the periods October 2017 through September 2020 and November 2018 through September 2020. I apologize for the delay in responding to your letter. 

FACTS

The Taxpayer, a full center automobile repair center with multiple locations in Virginia, was audited for the period at issue. As a result, the Department issued the Taxpayer assessments for tax and interest due on untaxed sales and untaxed purchases. The untaxed sales held as exceptions during the audit include services sold in connection with the sale of tangible personal property and untaxed sales made without a valid exemption certificate on file. The Taxpayer disputes the tax liability related to its untaxed sales made to one customer that is now out of business, charges for services made in connection with the sale of tangible personal property, and the sampling method used to perform the audit. 

DETERMINATION

Exemption Certificates

Virginia Code § 58.1-623 (A) sets out that “[a]ll sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter."

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 (A) states, in part, that: 

All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith, from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law… However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

The Tax Commissioner has previously ruled in Public Document 98-29 (02/20/1998) that the absence of an exemption certificate at the time of a sales transaction or the acceptance of an incomplete or invalid exemption certificate indicates that the certificate was not accepted in good faith. Thus, exemption certificates obtained after the start of an audit cannot be accepted "in good faith" and as a result are subject to greater scrutiny by the Department. Accordingly, such certificates are acceptable only if the Department is able to confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during audit.

In the instant case, the Taxpayer did not have an exemption certificate on file from ***** (the “Customer”). During the audit, the Taxpayer attempted to contact the Customer to obtain an exemption certificate and learned that it had gone out of business. Because it was not able to obtain an exemption certificate from its customer, the Taxpayer has not met its burden of proving that the sales made to the Customer are exempt.  

Services

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.]  The definition of sales price is clear that service charges are taxable when made in connection with the sale of tangible personal property.  

Title 23 VAC 10-210-4040 addresses the application of the sales and use tax to services and states: “Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable.”

The Taxpayer believes that the charges for labor included in the audit should be removed from the assessment. The auditor notes that the charges included in the audit as taxable services in connection with the sale of tangible personal property consisted of diagnostic fees, roadside service fees, and hazardous waste disposal fees. 

The Department has previously addressed the taxability of these fees when charged in connection with the sale of tangible personal property. See Public Document (P.D.) 17-188 (11/16/2017), P.D. 16-159 (8/5/2016), P.D. 13-223 (12/13/13), P.D. 11-74 (5/17/2011), and P.D. 04-166 (10/2/2004). These documents address the basis for why the fees assessed in the audit are not considered exempt labor charges. Based on the Department’s longstanding policy, I find no basis to revise the assessments to remove these taxable service fees charged in connection with the sale of tangible personal property. 

Sampling

The purpose of the audit sample is to determine a factor for errors within a representative select period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. Every effort is made to select objectively the sample periods that are representative of the period being audited.

Upon review of the audit report and the information presented, I find no basis to invalidate the sample and extrapolation. For an item to be removed from the audit sample, the Taxpayer must prove that the transaction is isolated in nature and not a normal part of the Taxpayer's business activity.  

The Taxpayer states that it became aware of the requirement to charge and remit sales tax on roadside service fees at the end of the period referenced as September 2019. The Taxpayer believes that it is punitive to extrapolate the error factor in the remaining audit period, after it began collecting and remitting sales tax for transactions involving these fees.  

While the Taxpayer states that it became aware of the requirement to collect sales tax on roadside service charges and began doing so around September 2019, the exceptions list contains exceptions for untaxed roadside service charges after this period. For example, the audit report for the Taxpayer’s Petersburg location includes multiple exceptions for untaxed roadside service fees for the period December 2019 (Line items 148, 171, 172, 190, 225, and 229). The audit report for the Taxpayer’s Richmond location includes exceptions for untaxed roadside service fees for the period February 2020 (Line items 9, 16, 17).  As such, it is likely that there are other transactions similar to those at issue in periods outside the sample. Removing the transactions at issue from the sample period would skew the sample and nullify its validity.

Financial Hardship

The Taxpayer indicates that paying the full amount of the assessments will cause a financial burden. As such, the Taxpayer may wish to request an offer in compromise based on doubtful collectibility. The Taxpayer must present evidence of doubtful collectibility to support a claim of financial hardship. If the Taxpayer wishes to pursue a settlement based on doubtful collectibility, please complete and return the enclosed OIC - Fee and OIC B - 3 forms to:  Tax Commissioner, Virginia Department of Taxation, Post Office Box 2475, Richmond, Virginia 23218-2475. These forms will allow the Department to review and analyze the Taxpayer’s financial situation. Upon completion of the Department’s review, a response will be issued based upon the information provided. If the Department does not receive the completed forms within 30 days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based upon doubtful collectibility.

CONCLUSION

In conclusion, the Department has a clear and longstanding policy regarding the basis for assessing tax on taxable service fees charged in connection with the sale of tangible personal property. Also, there is no basis to revise the assessments to remove the untaxed sales made to the Customer. In addition, the Taxpayer has failed to meet its burden of proving that the sample contains isolated transactions that are not a part of its business activities. Based on this determination, the assessments are correct. Updated bills, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessments are paid within 60 days from the date of this letter.

The Code of Virginia sections, regulations, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions about this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/3934.G