My auto repair shop was audited for 2020-2022 — aren't separately stated diagnostic labor charges exempt from Virginia sales tax?

Plain-English summary

An automotive repair shop and used car dealer was audited for January 2020 through December 2022 and assessed tax and interest on untaxed diagnostic labor and untaxed purchases. It appealed under Va. Code § 58.1-1821, raising three issues.

1. Diagnostic labor — taxable, because the exemption came later. Virginia now exempts amounts separately charged for labor rendered in connection with diagnostic work for automotive repair and emergency roadside service, whether or not a repair part or shop supply charge is part of the transaction — but only since July 1, 2023, when House Bill 1677 (Chapter 35, Acts of Assembly) amended Va. Code § 58.1-609.5 (see P.D. 23-65). Before that change, diagnostic charges were exempt only when they were not made in connection with a sale of tangible personal property, or when any property exchanged was inconsequential (P.D. 13-223). Every transaction in this audit happened before the new law, so diagnostic labor billed in connection with parts sales was taxable under the policy in effect during the audit period — and exemptions are strictly construed, with doubt resolved against the claimant (Commonwealth v. Community Motor Bus, Commonwealth v. Research Analysis Corp., Golden Skillet Corp. v. Commonwealth). Those exceptions stay in the audit.

2. The air compressor — proof required. The shop said its supplier had adjusted the purchase and collected the tax. Virginia imposes sales tax on the seller's proceeds (§ 58.1-603) and use tax on property used or consumed in Virginia when no sales tax was paid (§ 58.1-604), and under long-settled law the Department may collect from either the seller or the purchaser — the seller collects it, but the statute "makes the tax the legal debt of the purchaser" (United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978); § 58.1-625). The documentation submitted did not show the tax on the compressor was actually paid to the vendor or the Department, so the item comes out only if the shop provides proof — it has 30 days to contact the auditor and do so.

3. The duplicate — removed. The audit's exceptions list included invoice #43811 twice; one of the duplicates will be removed.

Bottom line: the assessment goes back to field audit staff for revision. The diagnostic-labor exceptions remain, one duplicate comes out, and the compressor depends on documentation. Because the assessment had already been paid in full, the reduction will be issued as a refund with refund interest.

What this means for you

Auto repair shops and dealers

Since July 1, 2023, separately stated diagnostic labor for automotive repair and emergency roadside service is exempt from Virginia sales tax even when you also sell a part or charge for shop supplies. But the exemption is not retroactive: for earlier periods, diagnostic labor billed in connection with a parts sale was taxable, and audits of pre-2023 periods will apply the old rule. Date matters — sort your exposure by when the transaction occurred, not by today's law.

Purchasers relying on "the vendor handled the tax"

Saying the supplier collected the tax isn't enough — the tax is legally your debt as purchaser, and the Department can look to either side of the sale. Keep invoices or vendor statements that actually show the tax charged and paid; here the shop got a 30-day window to produce that proof or the assessment on the purchase stands.

Anyone facing a Virginia audit

Check the exceptions list line by line: this taxpayer found a transaction counted twice, and the Department removed it on appeal. And if you've already paid the assessment, a successful revision comes back as a refund with interest.

Common questions

Q: Isn't automotive diagnostic labor exempt in Virginia?
A: It is now — since July 1, 2023, House Bill 1677 amended Va. Code § 58.1-609.5 to exempt separately charged diagnostic labor for automotive repair and emergency roadside service regardless of whether a part or shop supply is sold with it. Before that date, the charge was exempt only if it was not connected to a sale of tangible personal property, so pre-2023 audit periods still apply the old rule.

Q: My vendor said it collected the sales tax — why am I being assessed?
A: The Department may seek the tax from either the seller or the purchaser; the statute makes it the purchaser's legal debt (§ 58.1-625; United States v. Forst). Unless your records show the tax was actually paid on the specific purchase, an assessment against you as the purchaser stands.

Q: What happened to the double-counted invoice?
A: The Department confirmed invoice #43811 appeared twice in the audit exceptions and ordered one occurrence removed when the audit is revised.

Q: The taxpayer already paid the assessment — what happens after the revision?
A: Because the revised liability will be lower and the assessment was satisfied, the Department will issue a refund of the difference with appropriate refund interest.

Citations and references

Statutes:

• Va. Code § 58.1-1821 — administrative appeal (application for correction) to the Tax Commissioner
• Va. Code § 58.1-203 — the Department's authority to interpret and enforce the tax laws
• Va. Code § 58.1-609.5 8 — exemption for separately charged automotive diagnostic labor (effective July 1, 2023, per House Bill 1677, Chapter 35, Acts of Assembly)
• Va. Code § 58.1-603 — imposition of the retail sales tax
• Va. Code § 58.1-604 — imposition of the use tax where no sales tax was paid
• Va. Code § 58.1-625 — the seller collects the tax, but it is the legal debt of the purchaser

Authorities the Department relied on (described here, not linked): Commonwealth v. Community Motor Bus Co., 214 Va. 155 (1973), Commonwealth v. Research Analysis Corp., 214 Va. 161 (1973), and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973) (strict construction of exemptions); United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978) (the tax is the purchaser's legal debt); P.D. 23-65 (9/15/2023) (the 2023 diagnostic-labor exemption) and P.D. 13-223 (12/13/2013) (the pre-2023 rule for diagnostic charges).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-53

Original ruling text

April 25, 2025

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 audit assessment issued for the period January 2020 through December 2022.

FACTS

An audit was conducted on the books and records of the Taxpayer, an automotive repair shop and used car dealer, for the period at issue. As a result of the audit, the Taxpayer was assessed tax and interest on untaxed diagnostic labor and purchases. The Taxpayer filed an application of correction contending that separately stated labor charges were rendered in connection with tax-exempt diagnostic work. In addition, the Taxpayer disputes exceptions to one purchase on which tax was paid and a transaction included twice in the exceptions list.

ANALYSIS

Strict Construction of Exemptions

The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, the Virginia Supreme Court requires strict construction of sales tax exemptions. Where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Community MotorBus , 214 Va. 155 (1973); Commonwealth v. Research Analysis Corporation , 214 Va. 161 (1973); and Golden Skillet Corp . v. Commonwealth , 214 Va. 276 (1973).

Diagnostic Service Exemption

The Taxpayer contends that the separately stated labor charges made in connection with diagnostic work are exempt from tax under Virginia Code § 58.1-609.5 8 and should be removed from the exceptions list. Effective July 1, 2023, the General Assembly enacted House Bill 1677 (Chapter 35, Acts of Assembly ), which amended Virginia Code § 58.1-609.5 to provide an exemption from the retail sales and use tax for amounts separately charged for labor rendered in connection with diagnostic work for automotive repair and emergency roadside service for motor vehicles regardless of whether there is a sale of a repair or replacement part or a shop supply charge. See Public Document (P.D.) 23-65 (9/15/2023).

Prior to the law change, amounts charged for diagnostic services were only exempt from the retail sales and use tax when such charges were not made in connection with the sale of tangible personal property, or when the property exchanged was inconsequential to the transaction. See P.D. 13-223 (12/13/2013). In this instance, the transactions at issue occurred prior to the enactment of the new law and were taxable under the Department’s policy in effect during the audit period.

Untaxed Purchase

The Taxpayer contends that an untaxed purchase for an air compressor should be removed from the exceptions list because the supplier adjusted the purchase and collected tax. 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 retail sales tax on the proceeds from the sale, rental, or lease of tangible personal property in Virginia, accommodations furnished to transients, and on any services expressly stated as taxable by Chapter 6 of Title 58.1 of the Code of Virginia . Similarly, Virginia Code § 58.1-604 imposes a use tax on items of tangible personal property used, consumed, distributed, or stored in Virginia for which no retail sales tax has been paid.

Under long-settled principles of sales and use tax law, the Department may seek payment of the tax from either the seller or the purchaser of tangible personal property. See United States v. Forst , 442 F. Supp. 920 (W.D. Va. 1977) aff'd, 569 F.2d 811 (4th Cir. 1978), which held that, while “the seller is legally obligated to collect the tax from the purchaser, the statute [ Virginia Code § 58.1-625] makes the tax the legal debt of the purchaser.”

With its application for correction the Taxpayer provided documentation indicating payment of sales tax to the vendor. The documents provided, however, do not evidence the payment of the tax on the air compressor to the vendor or the Department.

Duplicate Transaction

The Taxpayer contends that the exceptions list includes two identical transactions that were used to compute the audit liability. Upon review of the audit report, invoice #43811 is listed twice in the exceptions.

DETERMINATION

In accordance with this determination, the assessment will be returned to appropriate field audit staff for review and revision. Transactions that included the sale of tangible personal property in connection with diagnostic work were properly listed as exceptions and will remain in the audit. One of the duplicate exceptions for the same transaction will be removed from the audit. The Taxpayer must provide documentation to show that the tax on the air compressor purchase was paid, either to the vendor or the Department.

The Taxpayer should contact the auditor, *, at or **@tax.virginia.gov within 30 days of the date of this letter to set up a mutually agreeable time in order to provide proof that the tax was paid on the air compressor purchase. Once the documentation is submitted, the auditor will make revisions as indicated above. After the revisions are made, the Department will issue a revised audit report. Because the revised audit liability will be decreased and the assessment has been satisfied, a refund with appropriate refund interest will be issued.

The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/5039.F

Related Documents

94-162

13-223

23-65