August 21, 2024
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 assessment issued for the audit period July 2019 through June 2022.
FACTS
The Taxpayer, an automobile dealership that also operated a repair shop, was audited for the period at issue. Under audit, exceptions were found for untaxed sales and purchases of tangible personal property. Included in the untaxed sales were diagnostic charges made in connection with automotive repairs.
The Taxpayer filed an application for correction contesting the tax assessed on separately stated diagnostic charges because the testing must be done prior to the actual repair or adjustment of a vehicle component. The Taxpayer argues that diagnostic testing should be considered part of repair labor, which is exempt from the retail sales and use tax. The Taxpayer also believes that the true object of automobile service transactions is for the repair of a vehicle rather than the sale of replacement parts.
DETERMINATION
Diagnostic Testing in Mixed Transactions
The Taxpayer argues that the sale of parts cannot be the true object of an automobile service transaction because a charge for such testing is not always accompanied by the sale of replacement parts. For example, a repair may not require the installation of parts, a facility may not carry or furnish parts, or, in some circumstances, the parts may be provided by a customer.
The repair labor and service exemption of Virginia Code § 58.1-609.5 2 allows an exemption for repairmen that are provided in connection with property sold. On the other hand, the repairmen services exemption of Virginia 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. Thus, the Taxpayer is correct when it states that it would not be required to collect sales tax on diagnostic testing when such testing is not included in a repair that included the provision and installation of parts.
Pursuant to Virginia 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 Public Document (P.D.) 13-223 (12/13/2013), the Department determined that the exemption for services rendered by repairmen do not apply to diagnostic testing charges made in connection with the resulting sale of a repair or replacement part. In P.D. 16-159 (8/5/2016), the Department recognized several factors that have contributed to the long-standing policy to treat the repairmen service exemption as applicable to pure service transactions. These factors are:
1. The services exemption set out in Virginia Code § 58.1-609.5 1 include insurance, Internet access, personal, professional, and repairmen services. The General Assembly grouped these service exemptions together because they, generally, apply to transactions that transfer inconsequential or no tangible personal property. The General Assembly appears to have considered that the repairmen services to be sufficiently similar in character and expression to the insurance, personal, and professional services and should be associated and placed with the exemption.
2. The services exemption makes no mention of any connection to the sale or rental of tangible personal property. Thus, it would be inappropriate to include a service that is associated with the consequential sale of tangible personal property in Virginia Code § 58.1-609.5 1.
3. Virginia Code § 58.1-609.5 2 establishes a separately stated repair labor exemption, which clearly contemplates a specific exemption from the sale or rental of tangible personal property.
Based on these factors, the Department concluded that the General Assembly intended the repairmen service exemption to apply only to pure service transactions.
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, (1973). While separate charges for repair 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.
The Department’s policy has held that the repair labor exemption under Virginia Code § 58.1-609.5 2 is applicable only to labor performed in the actual repair activity and would not be applicable to services performed prior to, in preparation of, or after the actual repair. See P.D. 96-88 (5/14/1996) and P.D. 01-78 (6/14/2001). Diagnostic testing generally occurs prior to an actual repair. 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. See P.D. 13-223, P.D. 17-188 (11/16/2017), and P.D. 22-101 (6/1/2022). The rationale of the Department’s position is that the true object of a mixed transaction for diagnostic testing and the sale of replacement parts is the installation of the replacement parts in order for the vehicle to operate properly.
Recently, the Virginia General Assembly changed its position with regard to certain services connected with the repair of automobiles. Effective July 1, 2023, Virginia Code § 58.1-609.5 8 was amended to add an exemption for amounts separately charged for labor rendered in connection with diagnostic work for automotive repair and emergency roadside service for motor vehicles regardless of whether there is a sale, repair, replacement part, or shop supply charge. For diagnostic services provided after that date, a dealer’s charges or fees for such testing are exempt of the tax when separately stated on the invoice.
Based on this determination, the assessment is correct. The Department’s records indicate that the Taxpayer has paid the assessment in full. As such, no further action is required.
The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at (804) ***** or email at *****@tax.virginia.gov.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/4634.B