Could a landscaper use internal records to exempt installation labor that was not separately stated after Virginia gave inaccurate advice?

Subject

Inaccurate advice received from the Department on invoicing customers

Plain-English summary

A landscaping contractor billed customers one lump sum for materials and installation labor. Virginia ordinarily exempts installation labor only when it is separately charged, so the audit taxed the full invoice amount.

The contractor said a Department district-office representative had approved lump-sum invoices as long as internal records separated materials and labor. The auditor confirmed that those internal records existed. Because this was the company's first audit and it had received inaccurate Department advice, the Commissioner allowed the internal breakdown and abated the remaining assessment.

The relief was prospective only in the opposite direction: beginning April 2005, the contractor had to invoice materials and installation labor correctly. The ruling did not excuse lump-sum invoicing for future periods.

What this means for you

• Separately state qualifying installation labor on customer invoices to preserve the exemption.
• Internal records usually do not replace the invoice requirement, but verified records and documented inaccurate advice supported one-time first-audit relief here.
• A favorable audit adjustment can be limited to the historical period and require corrected treatment going forward.

Citations and references

• Va. Code § 58.1-609.5(2), exemption for separately charged installation labor.
• P.D. 98-124 and P.D. 00-17, prior first-audit adjustments cited by the Department.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-79

Original ruling text

May 18, 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 Department's retail sales and use tax assessment issued to * (the "Taxpayer") for the period April 2002 through March 2005. I note that the uncontested portion of the assessment has been paid. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a landscaping contractor. The Department's audit disclosed that the Taxpayer invoiced its customers on a lump sum basis. Because the Taxpayer did not separately state the labor charges from the tangible personal property, the Taxpayer was held liable for the sales tax on the entire charge, including labor.

The Taxpayer states that when it set up its operations, it contacted the Department's district office for advice on the proper method of invoicing its customers. The Taxpayer states that the district office representative agreed that the Taxpayer could invoice its customers without separately stating the materials and labor as long as the Taxpayer kept records showing the separate charges for materials. The Taxpayer seeks a waiver of the taxes assessed on the labor charges on the basis that it was advised by Department personnel that such a practice was allowable.

DETERMINATION

Installation Labor

Virginia Code § 58.1- 609.5 2 provides an exemption for installation labor when separately charged. In this instance, the Taxpayer charged its customers for materials and labor on a lump-sum basis. The Taxpayer states, and the auditor has verified, that the Taxpayer possesses internal documentation reflecting a breakdown between the materials and labor charged to the customer on a lump-sum basis.

For purposes of this first audit and because the Taxpayer received inaccurate advice from the Department, I will allow for an adjustment to the assessment based on the Taxpayer's internal documentation. This adjustment will result in the abatement of the balance of the assessment. This treatment is consistent with the Department's prior decisions as reflected in Public Documents 98-124 (7/28/98) and 00-17 (3/15/00).

Please note that the adjustment allowed in this response applies to the audit period at issue and not to any future periods. The Taxpayer is responsible for correctly invoicing its materials and installation labor to its customers beginning April 2005.

The Code of Virginia section 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/1-398101801Q