My auto repair shops bill customers a lump sum for parts and labor, and I also thought accepting a government ID or license plate proved a sale to a government customer was tax-exempt -- why did my audit assessment include both?

Plain-English summary

A company that operates vehicle repair shops in Virginia and other states was audited for sales and use tax covering November 2017 through October 2020 and was assessed tax and interest on untaxed sales, general expenses, and fixed asset purchases. The audit found the shop was billing customers a lump sum covering both parts (tangible personal property) and labor -- and Virginia charged tax on the whole lump sum because labor wasn't broken out separately. The shop also believed certain sales to government customers were exempt, relying on government ID cards or license plates shown at the time of sale.

On the labor issue, Virginia Code § 58.1-609.5(2) exempts an amount SEPARATELY CHARGED for labor or installation services from tax -- but if a seller doesn't segregate the labor charge from the taxable parts charge, and instead combines them into one price, the whole combined charge becomes taxable. The shop asked the auditor to remove the labor portion based on its own internal records, which did separate parts and labor even though the customer invoices didn't. Because this was the shop's first audit, the Department agreed to revise the assessment and remove the labor charges shown in the shop's internal documentation -- a taxpayer-favorable, first-audit accommodation consistent with the Department's established practice.

On the government-entity sales, the shop fared worse. Virginia law presumes all sales taxable unless the seller has (and keeps) a proper exemption certificate; a government ID card or license plate simply isn't one of the accepted forms of proof. The regulations specifically require the exemption to rest on a required official government purchase order paid from public funds -- sales to individual government employees, even for official business, are actually taxable, and mere identification isn't enough to show the sale was to the government entity itself and properly authorized. Because the shop never produced valid exemption certificates, purchase orders, or other required proof for these sales -- even at the appeal stage -- the Department found it hadn't met its burden of showing the sales were exempt, and those amounts stayed in the assessment. As a further first-audit accommodation, though, the shop got 45 days to submit the required documentation (exemption certificates, government purchase orders, or government credit card records) for those specific transactions, with the caveat that a "second chance" like this gets more scrutiny than documentation relied on at the time of the original sale.

What this means for you

Businesses that bill customers a lump sum covering both parts/products and labor

If you want your separately-exempt labor or installation charges to actually be tax-exempt, state them SEPARATELY on the customer invoice. A combined lump-sum charge makes the entire amount taxable, even if your own internal records track the split -- though on a first audit, the Department may accept internal documentation to retroactively separate the two.

Businesses selling to government customers or employees

Accepting a government ID card or government license plate at the time of sale does NOT substantiate a tax exemption. You need an actual exemption certificate, an official government purchase order showing the purchase is paid from public funds, or a government credit card/direct-billing arrangement. Sales to individual government employees -- even for official government business -- are taxable unless properly billed to and paid by the government entity itself.

Businesses undergoing their first sales tax audit

The Department may give some accommodation on a first audit -- here, both accepting internal records to strip out labor charges and giving 45 extra days to produce exemption documentation -- but be aware that documentation produced as a "second chance" after the fact gets MORE scrutiny than documentation the business actually relied on when making the original sale, and future audit periods won't get the same leniency.

Common questions

Q: I billed a customer a lump sum for parts and labor together -- is any of that exempt?
A: Not unless the labor/installation charge is separately stated on the invoice. A combined lump-sum charge is fully taxable, though the Department may accept internal records showing the true split, particularly on a taxpayer's first audit.

Q: Does showing a government ID card or license plate prove a sale to a government customer is tax-exempt?
A: No. Virginia requires an actual exemption certificate, an official government purchase order paid from public funds, or a government credit card/direct-billing arrangement -- identification alone doesn't satisfy the requirement.

Q: What happens on a first audit if I didn't collect proper exemption certificates at the time of sale?
A: You may get a limited, additional window (45 days here) to produce the required exemption certificates or purchase order/credit card documentation after the fact -- but the Department applies closer scrutiny to certificates obtained this way than to ones relied on at the time of the original sale, and this accommodation applies to the current audit period only, not future ones.

Citations and references

• Va. Code § 58.1-609.5(2) (exemption for a separately charged labor/installation amount; combined charges are fully taxable)
• Va. Code § 58.1-623(A) (burden of proving a sale is exempt rests on the dealer absent a proper exemption certificate)
• 23 VAC 10-210-280(A) (a certificate that is incomplete, invalid, infirm, or inconsistent on its face is never acceptable)
• 23 VAC 10-210-690(A) (sales to government entities are exempt only pursuant to a required official purchase order paid from public funds; sales to government employees for their own use are taxable)
• P.D. 96-68 (4/26/1996) and P.D. 07-79 (5/18/2007) (prior rulings on separately stated labor charge exemptions)
• P.D. 01-36 (4/11/2001) (documentation obtained as a "second chance" to substantiate exempt sales gets closer scrutiny than documentation relied on at the time of the original sale)

Subject

Exemption: Labor Charges; Sales to Government Entities - Tax assessed for lump sum billing charges and sales not substantiated by exemption certifucates

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-100

Original ruling text

June 1, 2022

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 2017 through October 2020. I apologize for the delay in responding to your letter.

FACTS

Under audit, the Taxpayer, an operator of vehicle repair shops in Virginia and other states, was assessed tax and interest due for untaxed sales, untaxed general expense, and fixed asset purchases. The auditor found the Taxpayer was invoicing its customers on a lump sum basis for sales of tangible personal property (car parts) and charges for labor.

The Taxpayer collected and remitted sales tax on the sale of parts, but contends the inclusion of labor charges in the audit should be removed because they are exempt from the tax. The Taxpayer seeks removal of the tax assessed on labor charges based on its internal records, which separate the taxable charges for parts and the exempt labor charges. The Taxpayer also believes that certain sales were exempt from tax based on its reliance on government identification cards or government license plates produced at the time of sale.

DETERMINATION

Charge for Labor

Virginia Code § 58.1-609.5 (2) provides an exemption from the retail sales and use tax for “ [a]n amount separately charged for labor or services rendered in installing , applying, remodeling, or repairing property sold or rented.” [Emphasis added.] This statute allows an exemption if the charge for labor or services rendered in installing property sold is separately stated on the customer's invoice. If such charges are not separately stated, the charges become a part of the sales price subject to the tax. When a seller does not segregate a nontaxable installation charge from a taxable charge, but instead combines the two into a single charge, the combined charge is taxable.

The Taxpayer requests the auditor revise the audit to remove the charges for labor from the sales exceptions, based on the Taxpayer’s internal documentation. Because this was a first audit, the assessment will be returned to the audit staff to remove the charges for labor shown on the Taxpayer’s internal records. This treatment is consistent with the Department's prior decisions as reflected in Public Documents 96-68 (4/26/1996) and 07-79 (5/18/2007).

Exemption Certificates, Sales to Government Entities

Virginia Code § 58.1-623 (A) sets out that “[a]ll sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter."

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 (A) states, in part, that:

All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith, from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law… However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

Title 23 VAC 10-210-690 (A) provides the following regulatory requirements for sales made to government entities:

Sales to the United States, or to the Commonwealth of Virginia or its political subdivisions, are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds. Sales made without the required purchase orders and not paid for out of public funds are taxable. Sales to governmental employees for their own consumption or use in carrying out official government business are taxable.

The Taxpayer believes that its acceptance of government identification cards and government license plates should satisfy the requirements found in Title 23 VAC 10-210-280 for tax exemption purposes. Identification cards and license plates do not meet the above requirement.

During the audit, the Taxpayer provided exemption certificates for certain sales that were categorized as exempt on its internal records. These transactions were removed from the exceptions list. The auditor notes that the sales exceptions at issue remained in the audit because the Taxpayer either failed to produce an exemption certificate or an invalid or incomplete exemption certificate was provided. In its appeal, the Taxpayer still does not provide exemption certificates or proof of government payment to prove that the sales were exempt from the tax. Based on the statutory authorities stated above, the Taxpayer was required to charge the tax in the absence of a valid exemption certificate, government purchase order showing direct billing to a government agency, or a government credit card to prove the sales at issue were exempt from taxation.

Virginia Code § 58.1 205 deems any tax assessment issued by the Department to be prima facie correct. Accordingly, the burden is upon the Taxpayer to prove an erroneous assessment. In this case, the Taxpayer has failed to meet its burden of proving that the sales at issue were exempt from the tax.

CONCLUSION

Based on this determination, the audit will be returned to the appropriate field audit staff. The auditor will remove the charges for labor from the sales exceptions as shown by the Taxpayer’s internal documentation.

In addition, because this was a first audit, I will provide the Taxpayer with one final opportunity to correct this issue. Accordingly, the Taxpayer is hereby provided 45 days from the date of this letter to provide the audit staff with the exemption certificates or government purchase orders or government credit card documentation used by its customers for the transactions at issue. Based on the documentation provided, the audit staff will make any necessary adjustments to the assessment. In accordance with P.D. 01-36 (4/11/2001), when a dealer is afforded a “second chance” to secure exemption certificates to support untaxed sales, the Department’s long-standing policy is to more closely evaluate the validity of the certificate because the dealer did not originally rely on the certificate to make the exempt sale.

Upon completion of the revision, the auditor will send a revised audit report and updated bills to the Taxpayer. The bills should be paid within 60 days to avoid the accrual of additional interest.

In addition, the adjustment allowed for labor charges in this determination applies to the audit period at issue only. The Taxpayer is responsible for correctly invoicing its parts and labor charges to its customers for future periods.

The Code of Virginia sections, regulations, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. 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/3957.G

Related Documents

96-68

07-79

00-17

01-36