Tax Type
Retail Sales and Use Tax
Description
Installation charges; Charges not separately stated on invoice
Topic
Basis of Tax
Date Issued
11-22-1994
November 22, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This will reply to your letter of May 23, 1994 in which you seek correction of a
sales and use tax assessment for ******** (the "Taxpayer") for the period November 1990 through October 1993.
FACTS
The Taxpayer, a food distributor, purchased storage racks from an out-of-state vendor for use in its warehouse located in Virginia. The vendor charged sales tax on the material portion of the contract but failed to charge tax on certain separately stated charges related to the purchase of the racks. The auditor reviewed the purchase invoices and determined that certain charges were for assembling the racks and assessed tax on the charges. You contend that the charges are for installation and, therefore, are not subject to the tax.
You also request abatement of penalties assessed, maintaining that the Taxpayer's compliance level demonstrates its good faith effort in paying the taxes due.
DETERMINATION
Assembly vs. Installation Charges
Code of Virginia §58.1-603 imposes a sales tax on "the gross sales price of each item or article of tangible personal property when sold at retail or distributed in this Commonwealth." The term "sales price" is defined in Code of Virginia §58.1-602 as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale...."
Virginia Regulation (VR) 630-1 0-95(A)(2) provides that separately stated installation charges are excluded from "sales price" and, therefore, are not subject to the tax. Installation is "labor rendered after the product is complete in order to install it for the customer." See P.D. 86-186 (9/18/86) (copy enclosed). Charges for assembling the property sold are not part of installation and, therefore, are not excluded from the sales price, but rather are for services in connection with the sale and are subject to tax.
A review of the audit workpapers reveals that the auditor questioned the amount of the separately stated installation charges and was told that the charges were for both the assembly and installation of the racks. Installation consisted of bolting the racks to the floor and walls; a greater portion of each "installation charge" was actually for the assembly and erection of the racks prior to installation. While you correctly point out that separately stated installation charges are not subject to the tax, a single charge for assembly or other taxable services and installation is taxable.
You state that the Taxpayer hired a separate work force to install the racks. This position was not presented to the auditor, and no documentation has been offered to support it. Even assuming a separate work force was used, the "installation charges" listed by the vendor on the sales invoice would have to represent assembly or some other service in connection with the sale because the vendor would not have installed the racks.
Nevertheless, recognizing that a portion of each charge at issue was actually for installation, I am willing to prorate each charge and remove 20% as nontaxable installation labor.
Penalty
The Taxpayer's use tax compliance ratio for the entire audit period was 78%. During the audit period, Virginia Regulation (VR) 630-10-80 was revised and the required use tax compliance ratio for third generation audits was increased from 75% to 85%, effective July 1, 1993. All but four months of the audit period were prior to the effective date and subject to the 75% ratio, which the Taxpayer met and exceeded. Therefore, based on the information provided and a review of the audit workpapers, the penalty portion of each assessment will be abated.
Accordingly, the portion of the assessment pertaining to charges for installation and assembly will be revised to remove 20% of the charges, and the penalties assessed will be abated. Please submit a check for *********interest updated to the date the appeal was received) to the department's Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23282-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8082F
Rulings of the Tax Commissioner