Could a countertop fabricator avoid Virginia sales tax on fabrication and related service charges by claiming Department representatives gave incorrect advice, and how did a July 2017 law change affect later transactions?

Plain-English summary

Virginia upheld sales tax assessed on a countertop business's untaxed fabrication labor and miscellaneous service charges for May 2013 through April 2016. The taxpayer said Department representatives had told it that its tax treatment was correct, but neither the Department's records nor the taxpayer's evidence showed advice about exempting those particular charges.

Va. Code § 58.1-1835 provides relief for qualifying erroneous written advice given in response to a specific written request and reasonably relied upon on unchanged, accurately disclosed facts. Those conditions were not met.

Why the charges were taxable for the audit period

The version of Va. Code § 58.1-602 applied in the ruling treated fabrication as part of a taxable sale. Cutting stone slabs to size, edging them, and cutting holes for sinks or appliances were taxable fabrication services.

The statute's definition of sales price also included services that were part of a taxable sale. The Department therefore treated the connected labor and miscellaneous service charges as part of the taxable countertop sales.

Why the advice defense failed

The Department's records showed communications about delinquent returns and whether the business was generally a contractor or retailer. They did not show that a Department employee said fabrication labor or the other connected service charges were exempt. The taxpayer also produced no written response to a specific written request addressing those charges.

Without that documentation, the Tax Commissioner could not abate the assessment under Va. Code § 58.1-1835.

The July 1, 2017 law change

P.D. 17-100 separately explained that Senate Bill 1308 and House Bill 1890 changed Va. Code § 58.1-610 D effective July 1, 2017. Listed sell-and-install businesses, including countertop installers, were to be treated as real property contractors and as users and consumers of the installed items, paying sales or use tax when purchasing them.

That later change did not erase the assessment for the earlier audit period.

What this means for contractors and retailers

• Oral recollections of general Department conversations do not satisfy the written-advice relief statute.
• A request and response should specifically address the transaction and charge at issue.
• Tax treatment must be matched to the law in effect during the transaction period.
• Businesses crossing a statutory effective date should separately analyze purchases and customer charges before and after the change.

Common questions

Were countertop fabrication charges taxable during this audit?

Yes. For May 2013 through April 2016, the Department treated fabrication labor and connected service charges as taxable parts of the retail sale.

Why did the claimed Department advice not excuse the tax?

There was no evidence of specific written advice meeting Va. Code § 58.1-1835's requirements, and the Department's records did not show verbal advice that the charges were exempt.

Did the 2017 legislation cancel the earlier assessment?

No. The change took effect July 1, 2017 and required the taxpayer to change its procedures going forward; the audit assessment for the earlier period remained correct.

Citations and references

• Va. Code § 58.1-1835 — relief for qualifying erroneous written advice
• Va. Code § 58.1-602 — definitions of sale and sales price
• Va. Code § 58.1-610 D — real property contractor treatment
• 2017 Acts of Assembly, Chapters 449 and 436 — Senate Bill 1308 and House Bill 1890
• Related Virginia rulings cited: P.D. 86-242 and P.D. 16-80

Subject

No evidence in the Department's records of written or verbal advice being provided by the Department to the Taxpayer,

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-100

Original ruling text

June 20, 2017

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

Dear *:

This will reply to your letter in which you seek the correction of retail sales and use tax assessments issued to * (the “Taxpayer”) for the period May 2013 through April 2016. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer fabricates, sells and installs countertops. The Department audited the Taxpayer and assessed retail sales tax on untaxed charges that were billed to customers for fabrication and miscellaneous services provided in connection with sales of countertops. The Taxpayer maintains that it was instructed by representatives of the Department that the sales tax was being calculated and charged correctly. The Taxpayer states that it relied on the incorrect information provided by the Department, which resulted in the audit assessment of the retail sales tax.

DETERMINATION

Erroneous Advice Received

Virginia Code § 58.1-1835 authorizes the Tax Commissioner to abate an assessment or a portion of an assessment that is attributable to erroneous advice furnished to taxpayers in writing by an employee of the Department acting in his official capacity. Virginia Code § 58.1-1835 provides that an assessment will be abated provided the following requirements are met:

The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;

The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and

The facts of the case described in the written advice and the request therefor are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered.

A review of the Department's records confirms that the Taxpayer did communicate with a field collections representative regarding the filing of delinquent sales tax returns. The Department's records also indicate that the Taxpayer discussed with representatives of the Department whether the business should be treated as a contractor or a retailer for sales and use tax purposes.

The contested issue in the audit is the application of the sales tax to fabrication labor and other service charges billed in connection with the sale of countertops or other property. The Department's records do not indicate that a representative of the Department advised the Taxpayer that fabrication labor or other service charges are exempt from the retail sales tax. Further, the Taxpayer has not provided evidence that it received and relied upon written advice from the Department that resulted in the assessment that is under appeal. My concern with evaluating the Taxpayer's claim that it received incorrect information is that it is often difficult to determine what specific questions were asked and what information regarding the Taxpayer's business activities was presented to the Department.

In this instance, there is no written documentation that demonstrates the Taxpayer specifically requested the Department's advice regarding the taxation of fabrication labor and other service and labor charges. There is no evidence in the Department's records of written or verbal advice being provided by the Department to the Taxpayer. Under the provisions of Va. Code § 58.1-1835, the audit assessments cannot be abated based on the Taxpayer's claim that it received incorrect information from representatives of the Department.

The Taxpayer should also note that the Department publishes sales and use tax regulations, bulletins, rulings and determinations that address various sales and use tax topics. This information is readily available to the public through the Department's website.

Fabrication Labor

I understand that the auditor provided Public Document (P.D.) 86-242 (11/28/86) to the Taxpayer. This document explains that fabrication labor is a taxable labor charge. The Department's policy set out in this document is based on the definition of “sale” in Va. Code § 58.1-602, which states, in part, that a sale is “any rendition of a taxable service for a consideration, and includes the fabrication of tangible personal property....” More recently, the Department issued P.D. 16-80 (5/16/16), which addresses a business engaged in the sale and installation of countertops. This document states that taxable fabrication services include cutting a stone slab to size, edging and cutting holes for sinks and other appliances.

Other Service Charges

P.D. 16-80 also discusses the taxation of other types of service and labor charges and states that, absent a statutory exemption from the sales and use tax, service and labor charges become part of the taxable “sales price” of the property sold. “Sales price” is defined in Va. Code § 58.1-602 as “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale ....” [Emphasis added.] Based on the definition of sales price, service and labor charges are taxable when billed in connection with taxable sales of tangible personal property. Based on the cited authorities, the auditor properly held the fabrication and other service charges taxable in the audit.

Legislative Change

The 2017 Virginia General Assembly passed legislation that changes the tax treatment of businesses that sell and install certain tangible personal property, such as countertops. The legislation, Senate Bill 1308 (2017 Acts of Assembly, Chapter 449) and House Bill 1890 (2017 Acts of Assembly, Chapter 436) was signed by the Governor of Virginia and becomes effective July 1, 2017.

The legislation amends Va. Code § 58.1-610 D by eliminating the retail classification of certain businesses that sell and install fences, venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings, cabinets, countertops, kitchen equipment, window air conditioning units or other like or comparable items. Businesses that sell and install the items listed above should begin treating themselves as real property contractors and will be deemed the users and consumers of items purchased for installation in real property construction work. As such, the retail sales or use tax should be paid on these items at the time of purchase.

The Taxpayer should note this law change and change its sales and use tax reporting and payment procedures accordingly.

CONCLUSION

Based on the above, the audit assessments are correct. The Taxpayer will be issued updated bills that include accrued interest to date. The bills should be paid within 30 days to avoid the accrual of additional interest.

The Code of Virginia sections and public documents 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 concerning this determination, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1063.S