Does a repair shop have to charge sales tax on parts it installs, and can it fix a lump-sum invoicing mistake that bundled labor with parts?

Plain-English summary

A tractor-trailer body repair shop was audited for a six-year period and found to have two problems: it hadn't collected sales tax from customers on the repair parts it installed, and it billed customers a single lump-sum price that mixed parts and labor together rather than listing them separately.

On the parts issue, the shop argued it shouldn't have to charge its customers tax because it had already paid sales tax when it bought the parts. The Department rejected that: a repair shop is supposed to buy its replacement parts tax-free under a resale exemption certificate, precisely so the tax gets charged only once -- to the end customer, on the final retail sale. Because the shop paid tax on its own purchases instead of buying tax-free, and then also didn't charge its customers, the parts went untaxed at the only point they were actually supposed to be taxed; the auditor was right to include those untaxed sales in the assessment.

On the labor issue, Virginia law exempts labor charges from sales tax, but only if they're separately stated on the invoice -- lump-sum bills that don't break out labor from parts get the whole thing taxed. The shop's customer invoices didn't separate the two. But because this was the shop's very first audit, and the shop's own internal business records did show the labor amounts separately (even though the customer-facing invoices didn't), the Department extended a first-audit courtesy and let those labor charges be pulled back out of the taxable total, consistent with how it has handled this exact situation in two past rulings.

What this means for you

Repair shops and similar businesses that sell and install parts

Buy your replacement parts under a resale exemption certificate rather than paying tax on your own purchase -- and then charge sales tax to your customer on the full parts price when you resell/install them. Paying tax on your own purchase does not substitute for charging your customer; it just means the tax got collected at the wrong link in the chain (and the untaxed resale still gets picked up in an audit).

Businesses that bill customers with a single lump-sum price for labor and parts

Separately state your labor/installation charges on customer invoices if you want them exempt from sales tax. A combined, non-itemized charge makes the entire amount taxable, even if you know internally what portion was labor.

Businesses facing their first sales tax audit

If your customer-facing invoices weren't itemized but your internal books clearly separate labor from parts, this ruling (and the two precedents it cites) shows the Department has been willing to give first-time audit targets the benefit of that internal documentation to remove labor charges from the taxable base -- worth raising in a first audit specifically, since the leniency described here was tied to it being a first audit.

Common questions

Q: If I already paid sales tax when I bought a part, do I still need to charge my customer tax when I resell it to them (installed)?
A: Yes. You're entitled to buy repair parts tax-free under a resale exemption to avoid double taxation, but if you instead pay tax on your own purchase, you must still charge your customer sales tax on the resale -- the tax is owed once, at the retail sale to the end customer.

Q: How do I make sure my labor charges aren't taxed?
A: Separately state the labor or installation charge from the parts/materials charge on the customer's invoice. If the two are combined into one lump-sum price, the whole amount becomes taxable.

Q: What if my customer invoices weren't itemized but my internal records show the labor amount separately?
A: In this ruling, because it was the shop's first audit, the Department allowed the labor charges to be removed from the taxable total based on the shop's internal documentation, even though the customer invoices themselves were lump-sum. This isn't guaranteed in every case, but it reflects the Department's past practice on first audits.

Q: Can I request a settlement if paying the full assessment causes financial hardship?
A: Yes -- the ruling notes the taxpayer can request an offer in compromise based on doubtful collectability by submitting the Department's OIC forms with supporting financial evidence.

Citations and references

• Va. Code § 58.1-603 (imposition of retail sales tax)
• Va. Code § 58.1-602 (definition of "retail sale")
• 23 VAC 10-210-3050 A, B (repair shop tax collection; resale exemption for replacement parts)
• Va. Code § 58.1-609.5(2) (separately stated labor exemption)
• P.D. 96-68 (4/26/1996); P.D. 07-79 (5/18/2007) (first-audit leniency on lump-sum labor)
• P.D. 17-138 (related prior ruling)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-76

Original ruling text

July 6, 2023

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 March 2013 through April 2019. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a tractor-trailer repair shop that specializes in trailer body repair, was audited for the period at issue. During the audit, the auditor found that the Taxpayer failed to collect the sales tax from its customers on the sale of repair parts. The auditor also found the Taxpayer was invoicing its customers on a lump sum basis for sales of tangible personal property (repair parts) and charges for labor.

In its appeal, the Taxpayer contests the application of sales tax on repair labor. The Taxpayer also states that it did not collect sales tax on the sale of parts transferred to its customers because it paid the tax on its purchase of these parts.

DETERMINATION

Untaxed Repair Part Sales

Virginia Code § 58.1-603 imposes the sales tax on the gross sales price of each item or article of tangible personal property when sold at retail in the Commonwealth. Virginia Code § 58.1-602 defines a “retail sale” to be “a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter...” Title 23 of the Virginia Administrative Code (VAC) 10-210-3050 A states:

Any person engaged in the business of repairing tangible personal property is required to register and to collect and pay the tax. If the dealer performing the repair work does not separately state, itemize or segregate at a fixed or retail price, the parts, materials and supplies sold, the tax will apply to the total charge including repair labor.

Title 23 VAC 10-210-3050 B provides that: “Replacement parts, materials and supplies that are transferred to the customer may be purchased under certificates of exemption.”

The Taxpayer contests the exceptions listed in the audit for untaxed repair part sales because it claims that the tax was paid on the purchase of the parts. The Taxpayer is required to charge sales tax on the sales price of the repair parts transferred to its customers. The Taxpayer is entitled by law to purchase repair parts under the resale exemption to avoid double taxation of the parts. Based on the cited authorities, the auditor properly included the untaxed repair part sales in the audit.

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 remove the charges for labor from the audit. 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 Document (P.D.) 96-68 (4/26/1996) and P.D. 07-79 (5/18/2007).

Financial Hardship

The Taxpayer indicates that paying the full amount of the assessment will cause a financial burden. As such, the Taxpayer may wish to request an offer in compromise based on doubtful collectability. The Taxpayer must present evidence of doubtful collectability to support a claim of financial hardship. If the Taxpayer wishes to pursue a settlement based on doubtful collectability, please complete and return the enclosed OlC - Fee and OlC B -3 forms to: Tax Commissioner, Virginia Department of Taxation, Post Office Box 2475, Richmond, Virginia 23218-2475. These forms will allow the Department to review and analyze the Taxpayer’s financial situation. Upon completion of the Department’s review, a response will be issued based upon the information provided. If the Department does not receive the completed forms within 30 days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based upon doubtful collectability.

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.

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 from the bill date to avoid the accrual of additional interest.

The Code of Virginia sections, regulation, and public documents cited are available online 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 determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR3297.G

Related Documents

96-68

07-79

17-138