My business claims its supply purchases were tax-exempt for resale and its vendor invoices were labor-only -- but I don't have great paperwork proving it. Does the assessment still get upheld?

Plain-English summary

A seasonal frozen yogurt shop was audited for the period January 2014 through February 2018, and the Department found it had been buying items for its own business use without paying sales tax to its suppliers or accruing and paying use tax itself. The shop pushed back on two categories of purchases:

Items it said were bought "for resale." Virginia's resale exemption covers purchases genuinely intended for resale to customers, not items a business consumes itself. During the audit, the Department's auditor reviewed the shop's credit card statements and ledgers, removed items the ledger itself labeled as resale, but kept items coded as "office supplies" and "maintenance and repairs" in the taxable assessment -- since it wasn't clear those were actually for resale. The auditor asked for receipts or invoices to verify these items qualified; the shop never provided any, either during the audit or on appeal.

Third-party service charges it said were "labor only." Separately-stated labor or installation/repair charges (with no tangible property involved) are exempt from sales and use tax. The shop argued it bought the materials itself and a third-party vendor only supplied labor, which should be exempt. But when the shop first gave the auditor copies of the vendor's invoices, those invoices showed separate charges for a "trip fee" and "parts" IN ADDITION to labor -- not labor alone. The shop later submitted the SAME invoices a second time, but in an ALTERED form showing "labor only." The Department did not accept the altered invoices as proof, and no further documentation was ever provided.

Under Virginia law, a dealer must keep adequate records of its taxable purchases and sales for three years, and an assessment issued by the Department is presumed correct -- meaning the burden is on the taxpayer to prove it wrong with real documentation. Here, the shop's records simply didn't establish that the disputed items were for resale or that the vendor charges were purely for labor (and the altered invoices actively worked against its case). Because the burden wasn't met, the assessment was upheld in full.

What this means for you

Businesses claiming the resale exemption on inventory or supply purchases

Keep receipts and invoices that clearly document what you bought and why it qualifies for resale. If your bookkeeping codes an item as "office supplies" or "repairs" rather than "inventory for resale," expect an auditor to question it -- and be ready to produce real documentation, not just an assertion, to move it out of the taxable column.

Businesses claiming the labor-only exemption for third-party services

The exemption only covers charges that are genuinely, SEPARATELY stated as labor -- if a vendor's invoice shows a trip fee, parts, or other tangible-property charges alongside labor, that combined invoice won't qualify. Get your vendor to issue a properly itemized, labor-only invoice at the time of the transaction if that's really the nature of the charge -- don't try to recharacterize an existing invoice after the fact.

Anyone tempted to resubmit an altered invoice during an audit or appeal

Providing a modified version of a document you already submitted in its original form is a serious credibility problem, not a shortcut -- here it was expressly rejected as proof and likely undermined the taxpayer's broader documentation arguments. If your original paperwork doesn't support your position, the solution is better original records, not alteration.

Common questions

Q: What documentation do I need to prove a purchase was exempt as "for resale"?
A: Receipts, invoices, or similar records showing the item was purchased with the intent to resell it to a customer -- items coded generically as "office supplies" or "repairs and maintenance" in your books, without supporting invoices, are likely to be treated as taxable purchases for your own use.

Q: My vendor did both labor and provided some materials on one invoice -- is any of that exempt?
A: Only amounts SEPARATELY charged for labor or installation/repair services (with no tangible personal property involved) are exempt. An invoice that combines labor with a trip fee, parts, or other tangible-property charges doesn't establish a labor-only exemption for the whole amount.

Q: What happens if I don't have adequate records to support my tax position in a Virginia sales/use tax audit?
A: The assessment is presumed correct, and the burden is on you to prove it wrong. Without adequate records -- required to be kept for three years under Virginia law -- the Department may compute your liability using the best information available, and an appeal citing missing or unsupported documentation is unlikely to succeed.

Subject

Audit: Dealer Records - Documentation, Purchases: Resale Exemption/Non Exempt Supplies, Services: Taxable - Altered Invoices

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-119

Original ruling text

September 7, 2021

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 January 2014 through February 2018. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operated as a seasonal frozen yogurt establishment. The Department’s audit disclosed that the Taxpayer was making purchases for its own use and consumption without payment of the sales tax to suppliers or accrual and payment of the use tax to the Department. The Taxpayer states that the purchases of tangible personal property were exempt under the resale exemption, and payments to vendors were exempt as services not in connection with the sale of tangible personal property. However, the Taxpayer did not have adequate records to support the claimed exemptions. As a result, the Taxpayer was assessed use tax when the auditor could not confirm the items were for resale or were services that did not include the provision of tangible personal property. The Taxpayer appeals, contending such purchases and payments were nontaxable and should be removed from the assessment.

DETERMINATION

The Virginia retail sales and use tax applies to the sale or the use of tangible personal property. Virginia Code § 58.1-603 imposes the sales tax “upon every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth.” Virginia Code § 58.1-604 imposes the use tax “upon the use or consumption of tangible personal property in this Commonwealth, or the storage or such property outside the Commonwealth for use or consumption in this Commonwealth.”

Items Purchased for Resale

Virginia Code § 58.1-602 defines “retail sale” to mean a sale to any person for any purpose other than for resale in the form of tangible personal property or taxable services.

The Taxpayer contends that items purchased under the resale exemption were improperly included in the assessment. During the audit, the Department’s auditor reviewed credit card statements, and ledgers provided by the Taxpayer. The auditor removed items that were listed as resale when reviewing the ledger, but included items coded as office supplies, maintenance and repairs as it was unclear that these items were intended for resale. The auditor requested that the Taxpayer provide copies of receipts or invoices for such expenses to verify that these items could be purchased for resale exempt from the sales tax. No documentation verifying the expenses was provided during the audit and the Taxpayer has not provided any additional documentation with the appeal.

Services Provided by a Third Party

Virginia Code § 58.1-609.5 2 provides that the retail sales and use tax does not apply to “an amount separately charged for labor or services rendered in installing, applying, remodeling, or repairing property sold or rented”. In instances where the sales tax is not collected or paid at the time the transaction takes place, the purchaser becomes liable for the use tax.

The Taxpayer contends that services provided by a third party in which services and no materials (tangible personal property) were included, are therefore exempt from the retail sales and use tax. During the audit, the Taxpayer explained that it purchased all the necessary materials and the third party provided installation.

The auditor also requested documentation that verified the Taxpayer’s purchase of the materials so that the labor only invoices could be verified. The Taxpayer initially provided copies of invoices from the third party, which detailed amounts for a “trip fee” and “parts” in addition to charges for labor. Invoices were later provided a second time to the auditor, in an altered state, showing “labor only” and were not accepted as proof that the transactions were for labor only. No additional documentation was provided by the Taxpayer to support this contention with the appeal.

Dealer Records

Virginia Code § 58.1-633 A requires every dealer “to keep and preserve suitable records of the sales, leases, or purchases… and such other pertinent information as may be required by the Tax Commissioner. This record keeping requirement is further explained in Title 23 of the Virginia Administrative Code 10-210-470:

Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include… a daily record of all cash and credit sales, including sales under any type of financing or installment plan in use… a record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase… a record of all tangible property used or consumed in the conduct of the business… Records must be open for inspection and examination… by the Department of Taxation….

Accordingly, taxpayers are required to maintain accurate books and records of transactions for review by the Department. As indicated above, the documentation, or lack thereof, provided by the Taxpayer does not support its contentions concerning its purchases.

CONCLUSION

Virginia Code § 58.1-205 deems assessments issued by the Department to be prima facie correct. This means that the burden of proving the assessment is incorrect rests upon the Taxpayer. The Taxpayer's records did not contain adequate information to verify whether certain items purchased exempt of the tax were for sale or resale as numerous invoices were missing from the Taxpayer's records, and several items were coded office supplies and repair and maintenance. The provision of adequate records and other documentation is necessary to prove that the tax assessed in the audit is incorrect. In this instance, the Taxpayer has not met the burden of proof.

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 60 days of the date of this letter.

The Code of Virginia sections and regulation cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions 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/1748.A