Are separately stated vehicle diagnostic charges exempt when the repair shop also sells and installs replacement parts?

Subject

Diagnostic charges were exempt only without a related parts sale

Plain-English summary

Virginia taxed diagnostic charges when they were part of a transaction that also sold replacement parts, but exempted diagnosis sold by itself. Separately stating the diagnostic fee did not control the mixed transaction.

When a diagnosis found a defective part and the customer authorized repair, Virginia viewed the customer's true object as obtaining the installed replacement part so the vehicle would operate. The cited repair-labor exemption covered actual repair labor, not preparatory diagnostic work, and the standalone repair-service exemption did not apply to a consequential property sale.

If the customer wanted only the problem diagnosed and did not buy a part, the diagnostic charge was an exempt service. The audit assessment for mixed transactions was upheld.

What this means for you

• Track standalone diagnostic work separately from jobs that lead to parts sales.
• A separately stated fee can still be taxable when connected to a consequential property sale.
• Repair labor and pre-repair diagnosis were treated under different exemption provisions.
• Invoice the customer's actual choice and the parts transferred, not merely a generic service label.

Citations and references

• Va. Code § 58.1-609.5 1 and 2.
• 23 VAC 10-210-1000 and 10-210-3050.
• Public Documents 01-78, 96-88, and 08-67, discussed in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-223

Original ruling text

December 13, 2013

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

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period March 2009 through August 2012. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is an automobile dealership that also operates an automobile repair shop. An audit resulted in the assessment of untaxed sales and purchases of tangible personal property. Included in the assessment are diagnostic charges made in connection with the sale of tangible personal property, i.e. , a mixed transaction.

The Taxpayer contests the tax assessed on separately stated diagnostic charges, i.e. , charges for determining the nature of a fault with the operation of a vehicle. Diagnostic testing must be done prior to the actual repair or adjustment of a vehicle component. The Taxpayer contends that such testing falls under the scope of a repair service and should therefore be exempt of the retail sales and use tax pursuant to Va. Code §§ 58.1-609.5 (1) and (2). The Taxpayer also contends that the true object of these mixed transactions is to secure a service performed by a master technician and that the sale of any replacement parts are incidental to the service provided.

DETERMINATION

Subsection 2 of Va. Code § 58.1-609.5 provides an exemption from the tax for "[a]n amount separately charged for labor or services rendered in installing, applying, remodeling or repairing property sold." As clarified in Public Documents (P.D.) 01-78 (6/14/01) and 96-88 (5/14/96), the Department has traditionally held that this repair labor exemption is applicable only to labor performed in the actual repair activity and would not be applicable to services performed prior to, in preparation of, or after the actual repair.

On the other hand, subsection 1 of Va. Code § 58.1-609.5 provides the following exemption:

Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made; services rendered by repairmen for which a separate charge is made ; and services not involving an exchange of tangible personal property which provide access to or use of the international network of computer systems commonly known as the Internet and any other related electronic communication service. [Emphasis added.]

Pursuant to long-standing policy, the "services rendered by repairmen" exemption is applicable to those transactions in which such services are not performed in connection with the sale of tangible personal property. As shown above, this exemption is in the same subsection as the long-standing professional service exemption and the more recently enacted Internet access exemption. These exemptions are intended to apply when the true object of the transaction is for an exempt service, i.e. , the tangible personal property transferred is inconsequential or no tangible personal property is transferred with the transaction.

The Department has performed several sales and use tax expenditure studies of the fiscal, economic and policy impact of each exemption category at the request of the Virginia General Assembly. In December 1991, the Department presented its report to the General Assembly on the various service exemptions. Relevant pages of such report are enclosed. On page 33 of its report, the Department cited the repair labor exemption set out in Va. Code § 58.1-609.5 2 [formerly Va. Code § 58.1-608(A)(5)(b)] and stated the following:

This exemption, unlike the service exemption in Va. Code 5 58.1- 608(A)(5)(a) , applies to the labor that is performed in connection with a sale of tangible personal property. [Emphasis added.]

Virginia Code § 58.1-608(A)(5)(a) is currently Va. Code § 58.1-609.5 1 that is cited above. The General Assembly has not overturned the Department's policy as expressed in the expenditure study and explained above.

I would also note the policy treatment set out in P.D. 08-67 (5/22/08), in which the Tax Commissioner determined that the exemption in Va. Code § 58.1-609.5 1 was not applicable to mileage and road service charges because the transaction was for the consequential sale of tangible personal property.

The Taxpayer contends that the true object of a mixed transaction for diagnostic testing and replacement parts is a service. I must respectfully disagree. When a faulty vehicle part is diagnosed for replacement and the customer desires that the vehicle be repaired, it is my opinion that the true object of the transaction becomes the sale of replacement parts because the customer desires the vehicle be repaired, i.e. , the customer wants the replacement parts installed so that the vehicle may operate properly, and does not merely want the diagnostic services. This tax application is evident in the Department's regulation on motor vehicle dealers, i.e. , Title 23 of the Virginia Administrative Code (VAC) 10-210-1000, which sets out that "[p]arts used in repairing customers' motor vehicles are taxable. Charges for repair labor are not taxable when billed separately." Also see Title 23 VAC 10-210-3050 on repair businesses. Thus, the true object of a mixed transaction for repair parts and repair labor and/or other services provided (such as diagnostic testing) is the consequential sale of the tangible personal property.

For all of these reasons, I must conclude that the exemption for "services rendered by repairmen" does not apply to the contested diagnostic testing charges when a diagnostic testing charge is made in connection with the consequential sale of a repair or replacement part, such as the replacement of a defective battery, ignition coil, distributor, O2 sensor, starter, alternator, window motor, fuel tank, water pump, carburetor, fuel injector, etc. On the other hand, diagnostic charges are tax exempt when they are not provided in connection with the sale of tangible personal property. For instance, when a customer merely desires to have a problem diagnosed but not repaired, the diagnostic charge is for an exempt service.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges.

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 web site. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner