Were lump-sum charges for electrostatic powder coating of customer-owned products taxable fabrication in Virginia?

Subject

Powder coating customer-owned products was taxable fabrication

Plain-English summary

Virginia upheld sales tax on the powder-coating charges. The taxpayer electrostatically coated products supplied by customers and embedded the coating through heat treatment. Customers received one lump-sum bill covering labor and materials.

Virginia's regulation treated an operation that changes the form or state of tangible personal property as fabrication. Fabrication charges were taxable even when the consumer supplied the underlying material, and the Department had previously classified special coatings applied to parts as fabrication. The uncollected-sales-tax assessment was therefore correct.

The taxpayer also raised financial hardship and asked for an offer in compromise. Virginia found that the appeal did not show the liability was wrong and included no compromise application, proposed amount, or financial support. The taxpayer could still submit the required form and current financial statement based on doubtful collectibility.

What this means for you

• Applying a coating can be taxable fabrication when the process changes customer-owned tangible property.
• Billing labor and materials together does not turn fabrication into a nontaxable service.
• Financial hardship is separate from the legal correctness of an assessment.
• An offer in compromise requires a formal submission and supporting financial information.

Common questions

Why was powder coating treated as fabrication?

The heat-treatment process embedded the coating and changed the form or state of the customer's product.

Was only the material portion taxable?

No. The ruling upheld tax on the lump-sum fabrication charge that included labor and materials.

Did Virginia accept the hardship request?

Not in this ruling. The taxpayer had not submitted an application, offer amount, or financial support, but could still file a proper offer based on doubtful collectibility.

Citations and references

• 23 VAC 10-210-560.
• Va. Code § 58.1-105.
• Virginia Public Document 88-53.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-146

Original ruling text

July 26, 2010

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

Dear *:

This reply is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued for the period April 2004 through February 2009. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer electrostatically powder coats products provided by its customers. The coating is embedded into the product through heat treatment. The process is billed to the customer as a lump sum that includes both labor and materials. The Department's auditor found the process to be taxable fabrication and assessed the Taxpayer for uncollected sales tax on these charges. The Taxpayer protests the audit assessment.

DETERMINATION

Fabrication

Title 23 of the Virginia Administrative Code 10-210-560 defines fabrication as an operation that changes the forms or state of tangible personal property. The regulation states that the tax applies to charges for the fabrication of tangible personal property for consumers who provide the materials or for products sold at retail. Also, in Public Document 88-53 (4/4/88) the Tax Commissioner determined that the application of special coatings to parts qualifies as fabrication. Based on the foregoing, the assessment of the tax to fabrication services provided by the Taxpayer is correct.

Financial Hardship

In your appeal letter, you represent that the Taxpayer may face financial hardship if required to pay the assessed amount. Therefore, as an alternative to an appeal, the Taxpayer requests that the Department accept an offer in compromise.

Virginia Code § 58.1-105 authorizes the Tax Commissioner to compromise and settle doubtful or disputed claims for taxes or tax liability of doubtful collectibility. In order for the Tax Commissioner to accept an offer made by the Taxpayer, it must first be demonstrated that the liability is incorrect or the Taxpayer is unable to make payment on the outstanding liability. In this case, the Taxpayer has not demonstrated that the assessment is incorrect. Furthermore, the Taxpayer has submitted no application, offer amount or support for its request for relief based on financial hardship.

Notwithstanding the above, the Taxpayer may submit an offer in compromise to the Department based on doubtful collectibility pursuant to Va. Code § 58.1-105. Such an offer must be submitted using the Department's Form OIC-BUS, which is available on-line at www.tax.virginia.gov in the Business Forms and Instructions section of the Department's website. The offer must be accompanied by a current financial information statement. If you have any questions about making an offer, you may contact a member of the Offer in Compromise Team at (804) 367-8045.

If an offer and the required financial information are not submitted within 30 days from the date of this letter, an updated bill, with interest accrued to date, will be mailed to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid the accrual of additional interest charges.

The Code of Virginia sections, regulation and public document 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 about this response, you may contact * in the Office of Tax Policy, Appeals and Rulings at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3628565571.M