How did Virginia tax lump-sum medical-equipment repair bills and combined shipping-and-handling charges?

Subject

Lump sum charge to customers for the repair labor/parts associated with the medical instruments and equipment.

Plain-English summary

Virginia treated the company's lump-sum medical-instrument repair charges as taxable, but granted conditional relief for separately identified labor in this first audit. Because the original invoices combined repair parts and services, the auditor correctly taxed the entire charge.

The Commissioner nevertheless agreed to remove tax associated with repair labor after the auditor verified corrected invoices that separately stated labor and parts. The relief reflected that this was the company's first audit and that its billing system had been changed for future Virginia invoices.

The ruling also said a combined shipping-and-handling fee is fully taxable. If shipping and handling are separately stated, the shipping portion may be exempt while handling remains taxable. Finally, the company's protective refund claim was timely, but any refund required proof that it first returned the erroneously collected tax to its customers.

What this means for you

• Combining taxable parts and exempt repair labor in one charge can make the full invoice taxable.
• Separately state parts, repair labor, shipping, and handling according to their actual character.
• The labor adjustment here was conditional on auditor verification and first-audit circumstances, not a general right to retroactively rewrite invoices.
• A dealer seeking back tax it collected from customers must document that the customers were refunded.

Common questions

Q: Were the original lump-sum repair invoices taxable?
A: Yes. Services included in or connected with a sale of tangible personal property were part of taxable sales price when billed as one amount.

Q: Why did Virginia remove the repair-labor portion?
A: The Department allowed first-audit relief after the company issued corrected invoices, separated labor from parts, and changed its future billing system, subject to auditor verification.

Q: Is a combined shipping-and-handling fee exempt?
A: No. The entire combined charge was taxable. Separately stated shipping could be exempt, while handling remained taxable.

Q: What supported the protective refund claim?
A: It was filed before a valid limitations waiver expired, but an actual refund required evidence that the company repaid customers' erroneously collected tax.

Citations and references

• Va. Code §§ 58.1-602, 58.1-609.5 3, 58.1-1823, and 58.1-1824.
• 23 VAC 10-210-4040, 10-210-6000, and 10-210-3040.
• P.D. 01-158, P.D. 89-221, P.D. 99-289, and P.D. 03-52.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-94

Original ruling text

June 18, 2008

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 assessment issued to * (the "Taxpayer") for the period September 2003 through June 2006. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer provides servicing and repair of medical instruments and equipment for hospitals and healthcare facilities. As a result of the Department's audit, the Taxpayer was assessed tax on a lump sum charge billed to customers for the repair labor and parts associated with the medical instruments and equipment. The Taxpayer's invoices include a standard calculation of 20% of the total invoice amount for parts and other supplies. The Taxpayer has issued corrected invoices showing separately stated repair labor and parts charges. For this reason, the Taxpayer requests that the tax assessed on the repair labor charges be abated.

DETERMINATION

Lump Sum Repair Charges

Virginia Code § 58.1-602 defines "sales price" as the total amount for which tangible personal property or services are sold, including any services that are part of the sale. Furthermore, Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 notes that charges for services included in or in connection with the sale of tangible personal property are taxable. In this case, the Taxpayer billed a lump sum charge for the repair parts and services provided to its customers. Based on the statute and regulation cited above, the auditor correctly held the total charge taxable.

Notwithstanding the above, I recognize that there may have been exempt services included in the Taxpayer's total charge to its customers. Because this is a first generation audit of the Taxpayer, I will agree to remove the tax associated with the repair labor charges from the assessment. This action is based on the auditor's verification that the Taxpayer has issued corrected invoices to its customers that separate the charges for repair labor and parts. Furthermore, the Taxpayer has made modifications to its invoicing system so that all future invoices for Virginia sales will reflect a separate line item for the parts and services components of each invoice. This treatment is consistent with Public Documents (P.D.) 01-158 (10/19/01) and 89-221 (8/24/89).

Upon verification of the invoices by the Department's auditor, the assessment will be adjusted. The Taxpayer will receive an updated bill, including accrued interest, which should be paid within 30 days of the bill date to avoid the accrual of additional interest charges.

Combined Shipping and Handling Charges

A review of the sample invoices provided by the Taxpayer indicates that sales tax was not calculated on shipping and handling charges. In accordance with Va. Code § 58.1-609.5 3, shipping charges are exempt when separately stated. When shipping and handling is billed as a lump sum, the entire charge is subject to the tax. See P.D. 99-289 (11/8/99) and Title 23 VAC 10-210-6000. The Taxpayer should modify its invoicing system to charge the tax on the full amount of combined shipping and handling charges. The Taxpayer may also modify its invoices by separately stating shipping and handling charges and may then calculate the tax on the handling charge only.

Protective Claim for Refund

The Taxpayer notes that the issuance of corrected invoices could result in the overpayment of sales tax by some of its customers. To the extent any refunds to customers are required as the result of re-invoicing its customers, the Taxpayer makes a protective claim for refund of the tax on those transactions pursuant to Va. Code § 58.1-1824. Virginia Code § 58.1-1824 provides that "any person who has paid an assessment of taxes administered by the Department of Taxation may preserve his judicial remedies by filing for refund with the Tax Commissioner . . . within three years of the date such tax was assessed." In addition, Virginia Code § 58.1-1823 authorizes the refund of any tax within three years from the date the tax was paid.

Public Document 03-52 (7/3/03) addresses a situation in which a taxpayer filed a protective claim for refund of use taxes erroneously accrued and paid to the Department. An audit of that taxpayer's records by the Department did not identify the erroneously remitted taxes. The taxpayer filed a refund claim after finding the tax overpayment and after paying the audit assessment. For refund claims made in this type of situation, P.D. 03-52 states that one of two criteria must be satisfied for the Department to consider a refund claim timely filed. The Taxpayer meets one of the criteria discussed in this document. This criterion requires that the refund request be filed within the time covered by a waiver of the statute between a taxpayer and the Department. The Taxpayer's refund request was made on June 28, 2007, and a valid waiver of time limitations for the audit period expired on June 30, 2007. Accordingly, the Taxpayer has filed a timely claim for a refund of the taxes overpaid as a result of re­invoicing its customers.

The provisions of Title 23 VAC 10-210-3040 will apply to any refund issued the Taxpayer by the Department. The refund claim must be supported by evidence showing that the erroneously collected tax has been refunded by the Taxpayer to its customers. The Taxpayer should be prepared to provide the Department's auditor with documentation for any refund claims related to this issue.

The Code of Virginia sections, regulations and public documents 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 about this determination, you may contact the Department's Office of Tax Policy, Appeals and Rulings, at *.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1542810345.i