Is separately stated labor for crimping custom hydraulic hoses, air-conditioning hoses, and battery cables taxable fabrication in Virginia?

Subject

Custom hose and cable labor treated as taxable fabrication

Plain-English summary

Virginia upheld tax on the labor used to crimp and make custom hydraulic hoses, air-conditioning hoses, and battery cables. The distributor argued that the labor was exempt repair labor because customers used the finished parts to repair vehicles and equipment and because the labor was separately stated.

The Commissioner focused on what the distributor itself did. It was not restoring a broken hose or cable. It combined and crimped components to create a new replacement item to the customer's specifications. Virginia's regulation defines an operation changing tangible personal property's form or state as fabrication, while repair restores used or worn property.

Because the work was fabrication on special order, tax applied to the total charge, including labor even when separately stated. The assessments had already been paid, so the Commissioner denied a refund.

What this means for you

• The customer's ultimate repair activity does not make the seller's separate creation of a new part exempt repair labor.
• Virginia distinguishes restoring an existing used item from fabricating a new replacement item.
• Custom cutting, shaping, bending, welding, machining, crimping, and similar changes can be taxable fabrication.
• Separately stating labor does not remove it from the taxable base when the labor is part of special-order fabrication.
• Advertising a product as custom-made can support the conclusion that the seller is fabricating new property.

Common questions

Why was this fabrication rather than repair?

The distributor created new hoses and cables to customer specifications; it did not restore the broken or non-operational items.

Did it matter that customers used the new parts in repairs?

No. The ruling examined the distributor's operation, which created replacement property.

Was separately stated labor exempt?

No. The regulation quoted in the ruling applies tax to the total special-order fabrication charge, including separately stated labor.

Did the taxpayer receive a refund?

No. The Commissioner found no basis to revise the paid assessments.

Citations and references

• Va. Code § 58.1-1821.
• 23 VAC 10-210-560(A) and (B).
• P.D. 88-136 (June 20, 1988).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-193

Original ruling text

November 27, 2007

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessments issued to * (the "Taxpayer") for the period January 2004 through June 2006. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a distributor of automotive equipment and heavy truck replacement parts. The parts are sold to customers who perform repair and maintenance on vehicles and equipment. The Taxpayer also makes or "crimps" hydraulic hoses, air conditioning hoses and battery cables that are sold for repair of vehicles or equipment.

As a result of the Department's audit, an assessment was issued for untaxed labor associated with the crimping of the hoses and cables. The auditor determined the labor constituted taxable fabrication pursuant to Title 23 of the Virginia Administrative Code VAC) 10-210-560 A. The Taxpayer contends that the labor is exempt repair labor that was separately stated on customer invoices.

DETERMINATION

Title 23 of the Virginia Administrative Code (VAC) 10-210-560 A provides that:

An operation which changes the form or state of tangible personal property is fabrication. Fabrication is distinguished from repair which is an operation that restores a used or worn piece of tangible personal property.

The Department has traditionally held that tangible personal property that is cut, sawed, shaped, bent, threaded, welded, bored, drilled, punched, machined, sheared, or otherwise subjected to an operation which changes the property's form or state is considered to have been "fabricated." Such operations are deemed to represent a taxable service in accordance with the above regulation.

In this instance, the Taxpayer is acting as a fabricator when making or crimping the hoses and cables. Although the hoses and cables may be used by the Taxpayer's customer in repairing an automobile or equipment, the Taxpayer is not repairing a broken or non-operational hose or cable. The Taxpayer is creating a new hose or cable to meet the customer specifications to replace a broken or non-operational hose or cable. This is supported by the Taxpayer's website advertising that it specializes in custom made hoses and cables.

Title 23 VAC 10-210-560 B provides that the sales tax applies to "the total charge for the fabrication of tangible personal property on a special order for a consideration, including labor, even if charges for labor are separately stated." The Department's longstanding policy on the application of tax to charges for the fabrication of tangible personal property, including labor, is addressed in Public Document (P.D.) 88-136 (6/20/88). In this document, the Tax Commissioner addresses the difference between separately charged labor rendered in installing, applying, or remodeling or repairing property sold and taxable labor charges for the fabrication of tangible personal property.

Based on the foregoing, there is no basis for revising the audit. According to the Department's records the assessments have been paid in full; therefore, no refund will be issued.

The regulation sections and public document cited, along with other reference documents, are available on-line at www.tax.virignia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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