Was an auto dealer's combined environmental-disposal and shop-supply charge taxable when it actually represented only shop supplies?

Plain-English summary

Virginia abated the assessment because the dealership's disputed invoice charge was verified as a shop-supply charge only, despite being labeled “environmental disposal/supply charge.” It did not include an environmental disposal fee.

The Department's policy treated shop supplies as items consumed by the dealership while performing repairs. The dealer paid tax when buying those supplies, and a separately identified shop-supply charge to the customer was not taxable.

An environmental charge was different: the Department treated it as a taxable service connected with the sale of tangible personal property. The ruling warned that if a dealer combined any taxable charge with an exempt charge, tax would apply to the entire combined amount. The taxpayer was expected to label nontaxable shop-supply charges separately going forward.

What this means for you

• Auto dealerships were treated as consumers of shop supplies and owed tax on their purchases.
• A separately stated customer shop-supply charge was not taxable under the cited policy.
• Environmental disposal charges were taxable.
• Ambiguous or combined invoice lines can expose the entire charge to tax.

Common questions

Why was this assessment abated?

The auditor verified that the combined label represented only shop supplies and contained no environmental disposal fee.

Who paid tax on the shop supplies?

The dealership paid tax when purchasing them.

What if an invoice combines shop supplies with a taxable environmental charge?

The ruling says tax applies to the total combined amount.

Citations and references

• Virginia Tax Bulletin 94-10.
• P.D. 87-275.

Subject

Automobile dealerships to pay tax on shop supplies at the time of purchased

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-25

Original ruling text

March 27, 2007

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

Dear *:

This is in reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period September 2002 through August 2005. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates an automobile dealership and provides automobile repair services. The Department's audit disclosed that the Taxpayer listed an environmental disposal/shop supply charge on customer repair invoices. Because the nontaxable shop supply charge was not separate from the environmental disposal fee on customer repair invoices, the auditor assessed tax on the combined charge. The Taxpayer seeks an abatement of the assessed tax and interest on the combined charge, contending that the combined charge actually represents shop supply charges only.

DETERMINATION

The Department has previously ruled that shop supplies are used and consumed by automobile dealerships in the performance of repair services for customers. As such, automobile dealerships are required to pay the tax on shop supplies at the time they are purchased. Such charges are not taxable to the customer. See Public Document (P.D.) 87-275 (12/23/87).

The Taxpayer states that, prior to the current audit, a shop supply charge was listed separately on its customer repair invoices. During the current audit period, the Taxpayer renamed the shop supply charge to an "environmental disposal/supply charge" for purposes of customer relations. The Taxpayer contends that the renamed charge, however, still represents shop supply charges only.

Virginia Tax Bulletin 94-10 (12/1/94) explains the Department's policy with respect to environmental charges and characterizes such charges as services in connection with the sale of tangible personal property. When a customer invoice includes a separately stated environmental charge and a shop supply charge, the environmental charge is subject to the tax as a service in connection with the sale of tangible personal property and the shop supply charge is not taxable in accordance with P. D. 87-275

The auditor has verified that the environmental disposal/shop supply charge on customer invoices actually represented exempt shop supply charges and did not include an environmental disposal fee. Accordingly, the charge is not subject to tax. For the future, the Taxpayer will be expected to separately state and identify nontaxable shop supply charges on its customer repair invoices. Please note that if the Taxpayer combines any taxable charge with an exempt charge on its customer repair invoices, the tax will apply to the total combined amount charged.

Based on the foregoing, the balance of the Department's assessment representing the contested issue has been abated. The tax bulletin and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this matter, please contact * of the Office of Policy and Administration, Appeals and Rulings at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-527606101Q