Were separately stated labor charges for installing movable home-theatre systems subject to Virginia sales tax?

Plain-English summary

Virginia removed the separately stated installation labor from the audit. The installer sold home-theatre equipment systems to residential and commercial customers and then installed the components.

The systems were taxable tangible personal property, similar to movable audio-visual equipment mounted on racks, ceilings, or brackets and plugged into existing outlets. But Virginia's regulation separately exempted labor for installing tangible personal property when the charge was stated separately.

The disputed lines represented installation, despite the invoice's use of the word “integrate.” Virginia cautioned the company not to include unrelated services in those exempt installation charges.

What this means for you

• Tax the equipment sale separately from qualifying installation labor.
• State installation charges clearly on invoices.
• Do not bury design, programming, or unrelated services in the installation line.
• Document that the installed system remains tangible personal property.

Citations and references

• Va. Code § 58.1-602.
• 23 VAC 10-210-4040(A), (C)(3), and (D).
• Virginia Public Document 09-117 (July 31, 2009).

Subject

Tax on labor charges

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-127

Original ruling text

July 6, 2011

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

Dear *:

This 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 November 2006 through December 2009. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer installs home theatre systems for both residential and commercial customers. The Taxpayer contests the assessment of tax on labor charges. Based upon the use of the word "integrate" on the Taxpayer's invoices, the Taxpayer maintains that the audit staff misunderstood this to mean that the labor costs are part of the costs of the equipment and thus taxable.

DETERMINATION

Virginia Code § 58.1-602 defines sales prices as:

The total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.

Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A states:

Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable. Transactions involving both the sale of tangible personal property and the provision of services, generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated. As explained in subsection D of this section, the "true object" test is used to determine the taxability of these transactions.

Title 23 VAC 10-210-4040 C 3 provides, "[s]eparately stated labor or service charges for the repair, installation, application or remodeling of tangible personal property are not subject to the tax."

In Public Document (P.D.) 09-117 (7/31/09), the taxpayer requested a ruling regarding the charges to its customers for designing, building and installing audio-visual equipment systems. The systems consisted of videoconferencing equipment, screens, speakers, interactive white boards, and remote control devices. Most of the equipment was typically contained on shelving (a rack) or a ceiling via brackets. All equipment was easily removed or relocated. The equipment was plugged into the building's existing electrical outlets. Based upon the facts presented, it was determined that the audio­visual systems sold by the taxpayer with or without installation constituted retail sales of tangible personal property. In such instances, the taxpayer was instructed to charge and collect the sales tax based on the total charge for the sale of the audio-visual systems. Additionally, the taxpayer was instructed that separately stated installation charges are not subject to the tax . [Emphasis added.]

The facts in this case are similar to those in P.D. 09-117. Based upon a review of the invoices provided by the Taxpayer, the invoice line items at issue relate to the installation of tangible personal property to form the home theatre systems purchased by the Taxpayer's customers. These charges are deemed exempt installation charges as provided in Title 23 VAC 10-210-4040. Accordingly, the installation charges held taxable in the audit will be removed. The Taxpayer should take care to avoid including charges for other services that are not related to the installation of the equipment in the charges for installation.

The audit will be returned to the audit staff for revisions in accordance with this determination. A revised bill, with interest accrued to date, will be mailed to the Taxpayer once the revisions are complete. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. The Taxpayer should remit payment to: Virginia Department of Taxation, 600 E. Main Street, 23 rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia section and regulation cited 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 response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4585863153.P