Tax Type
Retail Sales and Use Tax
Description
Repair charges taxable
Topic
Appropriateness of Audit Methodology
Property Subject to Tax
Date Issued
10-29-1982
October 29, 1982
Re: § 58-1118 Application/Sales and Use Tax
Dear ****************
This will reply to your letter of October 24, 1980 and your hearing of April 24, 1981 in which you petitioned for correction of sales tax assessed as the result of a recent audit.
FACTS
***** is a machine shop which is engaged in a variety of activities including repair, fabrication, and over-the-counter retail sales of tangible personal property.
In repair and fabrication transactions, charges far labor and tangible personal property were separately stated and tax was collected on the charge for the tangible personal property only. The audit assessment resulted primarily from failure to collect sales tax on fabrication labor charges.
Determination
§58-441.2 (b) of the Code of Virginia defines a "sale" as including "the fabrication of tangible personal property for customers who finish, either directly or indirectly, the materials used in the fabrication." Virginia Code §58-441.3(a) excludes from the definition of "sales price," for purposes of computing the amount on which the sales tax applies, "the amount separately charged for labor or services rendered in...repairing property sold." Therefore, the law, in its differing treatment of the two, makes a distinction between the tax treatment of fabrication and repair. §§ 1-37 and 1-90 of the Virginia Retail Sales and Use Tax Regulations further clarify this difference.
Fabrication is any operation which changes the state or form of tangible- personal property, and the entire charge for fabrication, including the materials and the labor which go into the finished product, is subject to the sales tax. Examples of typical types of fabrication which you might perform include threading a screw, boring holes in a metal dowel, constructing a shaft, cutting clothes line, poles, and malting metal brackets or bolts. The total charge for these types of transactions is subject to the tax.
Repair charges are taxable only to the extent of the tangible personal property furnished in transactions where the charge for parts and labor are stated separately. If the parts and labor charges are not segregated, the entire charge is taxable. In either fabrication or repair, the parts which are actually resold to the customer may be purchased exempt from the tax under the resale exemption.
Supplies used in performing the fabrication or repair, such as paint, tape, welding supplies, tools, and similar items, are consumed by you in performing the repair or fabrication and are subject to the tax at the time of purchase. In instances where you sell items at retail and consume them in performing repairs or fabrication, you may purchase the item exempt from the tax and report use tax on the cost price when you consume the item (or collect the sales tax if the item is retained). A good example of this would be oxygen which you sell as well as consume in welding activities in conjunction with repair or fabrication.
In some instances, a single transaction may involve both fabrication and repair. For example you may have a customer who requests that a trailer hitch be repaired, and in order to perform the repair you must make a pin for the hitch. Making the pin constitutes fabrication. The total charge for this fabrication, including materials and labor, is subject to the tax. This total charge would therefore represent the charge for a part furnished in the repair process. The labor required to install the part would not be subject to the tax if separately itemized on the customers invoice.
A bill for this example might read as follows:
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- Trailer Hitch Repair
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Make hitch pin $30.00*
Materials 20.00
Labor 10.00
Trailer hitch (from your inventory) 80.00*
Installation on vehicle of repaired
hitch (labor only) 140.00
250.00
Tax (computed on $110.00) 4.40
$254.40
*Amount subject to, sales tax
Based upon the above, I find no basis for adjusting your audit. Inasmuch as we have not received a response to our letters of July 16 and September 4, 1981 in which we requested that you furnish us with the names of your customers who have been audited by the department, we cant reduce the assessment to reflect those charges which you indicate may have been picked up in audits of your customers.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner