Did vendor mistakes relieve a Virginia purchaser from use tax on repair parts and goods delivered from out of state?

Subject

Taxpayer's responsibility to remit to the Department the applicable use tax

Plain-English summary

Virginia upheld consumer use tax because the purchaser remains legally responsible when a seller fails to collect the proper Virginia sales tax. The repair shop's transfer of parts was a retail sale. Even if the shop had paid tax when buying the parts, it should have bought them for resale and collected tax on its selling price to the contractor.

The out-of-state invoices also did not establish payment of Virginia tax. The charges were unidentified or did not match the 4.5% Virginia rate then in effect, the vendors were not registered Virginia collectors, and the goods were delivered to the contractor in Virginia.

Vendor error therefore did not remove the contractor's duty to remit use tax directly.

What this means for you

• Review purchase invoices for the correct Virginia tax rather than assuming any tax line is sufficient.
• If a seller does not collect Virginia tax, the purchaser may owe consumer use tax directly.
• Repair parts transferred to a customer are retail sales, including any taxable markup.
• Tax charged for another or unidentified state may require a vendor refund while Virginia use tax remains due.

Common questions

Q: Did the repair shop's possible tax payment prevent use tax?
A: No. The shop should have bought the parts for resale and collected tax from the contractor on the retail selling price.

Q: Why were the out-of-state purchases taxable?
A: The goods were delivered in Virginia and the invoices did not show collection of the proper Virginia tax.

Q: Who bears the ultimate tax responsibility?
A: The purchaser, even though registered sellers also have a collection duty.

Citations and references

• Va. Code §§ 58.1-625, 58.1-603, and 58.1-602.
• 23 VAC 10-210-6030, 10-210-3050 A, and 10-210-460.
• United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978).
• Lee Brothers v. State Tax Commissioner (Henry County Cir. Ct. Sept. 13, 1973).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-131

Original ruling text

July 30, 2008

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

Dear *:

This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to * (the "Taxpayer"), for the period May 2001 through April 2007.

FACTS

The Taxpayer, an electrical contractor, was audited by the Department and assessed consumer use tax on various purchases. The Taxpayer contests the assessment of tax on charges for repair parts on which a Virginia automotive repair business failed to charge and collect sales tax. The Taxpayer contends that the repair shop paid the tax on the repair parts at the time of purchase and that it should not be held liable for payment of the tax a second time. The Taxpayer also requests relief from the tax on purchases from out-of-state vendors that failed to charge Virginia tax or incorrectly charged another state's tax. In summary, the Taxpayer maintains that it has been unfairly assessed for the mistakes of others and should not be held responsible for the tax on the assessed transactions.

DETERMINATION

Taxpayer's Responsibilities

In United States v. Forst , 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4 th Cir. 1978), the Court ruled that the legal incidence of the Virginia retail sales and use tax is on the ultimate purchaser. Although a registered seller is legally obligated to collect the tax from the purchaser on retail transactions, Va. Code § 58.1-625 makes the sales or use tax the legal debt of the purchaser. In Lee Brothers v. State Tax Commissioner , Circuit Court of Henry County (9/13/73), the Court ruled that "a person who uses property in Virginia and cannot establish that a sales tax has been added to the purchase price at the time of its purchase is properly assessable with the use tax... even though the vendor fails to collect the sales tax from the consumer . . . ."

Title 23 of the Virginia Administrative Code (VAC) 10-210-6030 addresses the Department's policy with respect to Virginia use tax and states the use tax is due from the purchaser when a sales or use tax is not paid on the property at the time of purchase. While the Taxpayer's suppliers may be required to charge and collect the sales tax, the Taxpayer is ultimately responsible for ensuring the payment of the sales and use tax on all taxable purchases. The Taxpayer does not escape this responsibility because the seller fails to charge and collect the sales or use tax. Keeping this in mind, I will address the issues raised in the Taxpayer's appeal.

Automotive Repair Parts

Virginia Code § 58.1-603 imposes the sales tax on the gross sales price of each item or article of tangible personal property when sold at retail in the Commonwealth. Virginia Code § 58.1-602 defines a "retail sale" to be "a sale to any person for any purpose other than for resale in the form of tangible personal property ...." Title 23 VAC 10-210-3050 A states:

Any person engaged in the business of repairing tangible personal property is required to register and to collect and pay the tax. If the dealer performing the repair work does not separately state, itemize or segregate at a fixed or retail price, the parts, materials and supplies sold, the tax will apply to the total charge including repair labor.

Based on the sources cited, the provision by a repair business of repair parts to customers is considered a retail sale and the repair business is required to collect the sales tax on the sales price of the parts. When the sales tax is not charged, the purchaser is legally required to pay use tax on the purchase. While the Taxpayer claims the repair business has already paid tax on the parts, no evidence has been provided to substantiate this claim. Moreover, it is not known if the repair business marked up the price of the parts on the Taxpayer's invoice. If this is true, the tax would be due on the markup amount, which is a part of the taxable sales price of the parts.

Regardless of whether the repair business paid the tax on the parts, the repair business is clearly required to charge sales tax on the sales price of the repair parts transferred to the Taxpayer. The repair business is entitled by law to purchase repair parts under the resale exemption to avoid double taxation of the parts. Because the repair business did not charge the tax, the Taxpayer is required by law to pay use tax on the repair parts. There is no basis to remove this transaction from the audit.

Purchases from Out-of-State Businesses

The Taxpayer's audit includes a purchase made from an out-of-state company that listed an itemized charge for sales tax on the sales invoice. This vendor's invoice does not indicate the state for which the sales tax is charged. The remaining contested transactions consist of purchases from an out-of-state vendor in which the vendor's invoices show a separate, unidentified charge. The charges on both vendors' invoices are not computed at the 4.5 percent Virginia rate of tax in effect at the time the sales were made. The items purchased from both vendors were shipped to the Taxpayer's Virginia location.

The Department's records do not show that either out-of-state vendor is registered to collect Virginia sales and use tax. Because both businesses are located out-of-state, they may not be required to register for the collection of the Virginia sales and use tax. Generally, out-of-state businesses must have sufficient "nexus" in Virginia before the Department can require that business to register and collect the Virginia sales and use tax. See Title 23 VAC 10-210-460. It is clear that these transactions were taxable Virginia sales because the Taxpayer took delivery of the items in Virginia. It is also clear that these businesses did not charge the Virginia sales and use tax, on the transactions.

As stated above, the purchaser is legally and ultimately responsible for paying the proper amount of sales or use tax to Virginia. Therefore, it was the Taxpayer's responsibility to remit to the Department the applicable use tax on these purchases. In this instance, the out-of-state purchases were properly held taxable in the audit.

CONCLUSION

The Taxpayer's audit assessment is correct as issued. An updated notice of assessment with accrued interest will be mailed to the Taxpayer. The Taxpayer should pay the bill within 30 days to avoid the accrual of additional interest.

The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions concerning this response or need further assistance, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1964928229.S