My auto repair shop charges customers separately for diagnostic testing before we fix their car -- is that diagnostic charge taxable if we also sell replacement parts in the same job?

Plain-English summary

An automobile dealership that also operated a repair shop was audited for July 2019 through June 2022 and assessed tax on untaxed sales, including diagnostic charges billed in connection with automotive repairs. The dealership argued diagnostic testing should count as exempt repair labor -- since testing has to happen before a component can actually be fixed -- and that the true object of an auto service transaction is the repair itself, not the sale of replacement parts.

Two different service exemptions, and they don't overlap. Virginia has two separate exemptions that can apply to auto repair work:

• Va. Code § 58.1-609.5 2 exempts separately stated repair labor connected to a sale of tangible personal property (i.e., labor billed alongside parts).
• Va. Code § 58.1-609.5 1 exempts repairmen's services more broadly, but the Department has long read it to apply only to PURE service transactions -- ones that don't involve selling parts at all. The Department based this reading on three things: the services exemption groups repairmen together with insurance, internet access, personal, and professional services (categories that transfer little or no tangible property); the services exemption doesn't mention any connection to selling tangible property; and § 58.1-609.5 2 already provides a separate, specific exemption for repair labor tied to a parts sale -- so the general services exemption shouldn't be read to cover that same ground too.

Where diagnostic testing lands. Diagnostic testing generally happens BEFORE the actual repair, so the Department's policy holds that the repair labor exemption (which covers only labor in the actual repair activity) doesn't cover it, whether or not parts end up being sold. Whether a diagnostic charge is taxable then turns on whether the job is a pure service or a mixed transaction: if diagnostic testing is billed in connection with the sale of a replacement part, the true object of that mixed transaction is the installation of the part -- making the diagnostic fee a taxable part of the sale, even when separately stated on the invoice. If, on the other hand, a repair doesn't involve any parts sale at all (no installation, no parts furnished by the shop), the Department agreed the shop is right that it wouldn't owe tax on the diagnostic charge -- since nothing in the statute says the pure-service exemption depends on whether a parts sale happens to accompany it in OTHER cases.

A recent law change helps going forward, but not for this audit. Effective July 1, 2023, Virginia added a dedicated exemption (Va. Code § 58.1-609.5 8) specifically for automotive diagnostic and emergency roadside labor, separately stated on the invoice -- regardless of whether the job also involves a parts sale, repair, or shop supply charge. That new exemption didn't exist during this Taxpayer's audit period (July 2019-June 2022), so the assessment on the pre-2023 mixed-transaction diagnostic charges was correct. The Taxpayer had already paid the assessment in full, so the ruling required no further action.

What this means for you

Auto repair shops and dealerships with service departments

For work done on or after July 1, 2023, diagnostic and emergency roadside labor charges are exempt when separately stated on the invoice -- regardless of whether the job also involves selling parts. For work done BEFORE that date, diagnostic charges tied to a parts sale were taxable, even if separately stated, because the true object of the transaction was treated as the parts installation.

Any Virginia business billing a "service" charge alongside a sale of tangible property

The general repairmen/personal/professional services exemption (§ 58.1-609.5 1) only covers PURE service transactions with no accompanying sale of property. If your service charge is connected to selling or installing goods, look instead at whether a specific, narrower exemption (like the repair labor exemption, or now the diagnostic labor exemption) actually covers it -- don't assume the general services exemption reaches it.

Businesses under audit for old (pre-July 2023) diagnostic or mixed-service charges

This ruling confirms the Department's long-standing "true object" position for mixed transactions predating the 2023 law change: don't expect an exemption for a service charge that's part of an overall parts sale, even if separately billed.

Common questions

Q: Are auto diagnostic charges taxable if my shop also sells and installs a replacement part in the same job?
A: For work performed before July 1, 2023, yes -- the Department treated diagnostic testing billed alongside a parts sale as part of a taxable mixed transaction. For work on or after July 1, 2023, a new exemption (Va. Code § 58.1-609.5 8) makes diagnostic labor exempt when separately stated, regardless of any accompanying parts sale.

Q: What if my repair job doesn't involve selling any parts at all -- just a pure diagnostic or service charge?
A: The Department agreed that a pure service transaction, with no parts sold or installed, would not owe tax on the diagnostic charge -- even for the pre-2023 audit period at issue in this ruling.

Q: Why doesn't the general repairmen's services exemption (§ 58.1-609.5 1) cover repair labor connected to a parts sale?
A: The Department reads that exemption as limited to pure service transactions -- it's grouped with services like insurance and professional services that transfer little or no property, and a separate, more specific exemption (§ 58.1-609.5 2) already covers repair labor tied to a parts sale.

Citations and references

Statutes:

• Va. Code § 58.1-609.5 1 -- exemption for repairmen's services separately charged; applies only to pure service transactions with no accompanying property sale
• Va. Code § 58.1-609.5 2 -- exemption for separately stated repair labor connected to a sale/rental of tangible personal property
• Va. Code § 58.1-609.5 8 -- effective July 1, 2023; new exemption for automotive diagnostic and emergency roadside labor, regardless of any accompanying parts sale
• Va. Code § 58.1-602 -- definition of "sales price"

Case law: Golden Skillet Corporation v. Commonwealth, 214 Va. 276 (1973) -- Virginia courts require strict construction of sales and use tax exemptions, resolving doubt against the party claiming the exemption.

Prior rulings the Department relied on (described here, not linked): P.D. 96-88 (5/14/1996) and P.D. 01-78 (6/14/2001) -- repair labor exemption applies only to the actual repair activity, not work before or after it; P.D. 13-223 (12/13/2013) -- diagnostic testing connected to a parts sale is taxable; P.D. 16-159 (8/5/2016) -- the three-factor rationale for reading the general services exemption as pure-service-only; P.D. 17-188 (11/16/2017) and P.D. 22-101 (6/1/2022) -- reaffirming the true-object rule for diagnostic/mixed transactions. This is a true-object-test ruling in the same family as this corpus's P.D. 24-102 (portable toilet rentals, where the true object test similarly determined taxability of a service-plus-property transaction) and P.D. 25-14 (a case where the true object test didn't apply at all for lack of any service).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-78

Original ruling text

August 21, 2024

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 audit period July 2019 through June 2022.

FACTS

The Taxpayer, an automobile dealership that also operated a repair shop, was audited for the period at issue. Under audit, exceptions were found for untaxed sales and purchases of tangible personal property. Included in the untaxed sales were diagnostic charges made in connection with automotive repairs.

The Taxpayer filed an application for correction contesting the tax assessed on separately stated diagnostic charges because the testing must be done prior to the actual repair or adjustment of a vehicle component. The Taxpayer argues that diagnostic testing should be considered part of repair labor, which is exempt from the retail sales and use tax. The Taxpayer also believes that the true object of automobile service transactions is for the repair of a vehicle rather than the sale of replacement parts.

DETERMINATION

Diagnostic Testing in Mixed Transactions

The Taxpayer argues that the sale of parts cannot be the true object of an automobile service transaction because a charge for such testing is not always accompanied by the sale of replacement parts. For example, a repair may not require the installation of parts, a facility may not carry or furnish parts, or, in some circumstances, the parts may be provided by a customer.

The repair labor and service exemption of Virginia Code § 58.1-609.5 2 allows an exemption for repairmen that are provided in connection with property sold. On the other hand, the repairmen services exemption of Virginia Code § 58.1-609.5 1 does not explicitly state that such services specifically apply when furnished in connection with the sale of tangible personal property. Thus, the Taxpayer is correct when it states that it would not be required to collect sales tax on diagnostic testing when such testing is not included in a repair that included the provision and installation of parts.

Pursuant to Virginia Code § 58.1-609.5 1, services rendered by repairmen for which a separate charge is made are exempt from the retail sales tax. In Public Document (P.D.) 13-223 (12/13/2013), the Department determined that the exemption for services rendered by repairmen do not apply to diagnostic testing charges made in connection with the resulting sale of a repair or replacement part. In P.D. 16-159 (8/5/2016), the Department recognized several factors that have contributed to the long-standing policy to treat the repairmen service exemption as applicable to pure service transactions. These factors are:

1. The services exemption set out in Virginia Code § 58.1-609.5 1 include insurance, Internet access, personal, professional, and repairmen services. The General Assembly grouped these service exemptions together because they, generally, apply to transactions that transfer inconsequential or no tangible personal property. The General Assembly appears to have considered that the repairmen services to be sufficiently similar in character and expression to the insurance, personal, and professional services and should be associated and placed with the exemption.

2. The services exemption makes no mention of any connection to the sale or rental of tangible personal property. Thus, it would be inappropriate to include a service that is associated with the consequential sale of tangible personal property in Virginia Code § 58.1-609.5 1.

3. Virginia Code § 58.1-609.5 2 establishes a separately stated repair labor exemption, which clearly contemplates a specific exemption from the sale or rental of tangible personal property.

Based on these factors, the Department concluded that the General Assembly intended the repairmen service exemption to apply only to pure service transactions.

The Virginia courts have consistently required strict construction of sales and use tax exemptions, i.e., where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Golden Skillet Corporation v. Commonwealth , 214 Va. 276, (1973). While separate charges for repair labor enjoy the statutory exemption cited, other labor charges billed in the same transaction are taxable unless specifically exempt by law. Thus, charges for other types of labor or services are properly included in the taxable sales price of the tangible personal property that is billed in the transaction, regardless that the labor or service charges are billed separately.

The Department’s policy has held that the repair labor exemption under Virginia Code § 58.1-609.5 2 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. See P.D. 96-88 (5/14/1996) and P.D. 01-78 (6/14/2001). Diagnostic testing generally occurs prior to an actual repair. Consistent with the Department’s policy on labor and service charges and the definition of “sales price” in Virginia Code § 58.1-602, the diagnostic fees or charges are a taxable service when billed in connection with the sale of tangible personal property. See P.D. 13-223, P.D. 17-188 (11/16/2017), and P.D. 22-101 (6/1/2022). The rationale of the Department’s position is that the true object of a mixed transaction for diagnostic testing and the sale of replacement parts is the installation of the replacement parts in order for the vehicle to operate properly.

Recently, the Virginia General Assembly changed its position with regard to certain services connected with the repair of automobiles. Effective July 1, 2023, Virginia Code § 58.1-609.5 8 was amended to add an exemption 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, repair, replacement part, or shop supply charge. For diagnostic services provided after that date, a dealer’s charges or fees for such testing are exempt of the tax when separately stated on the invoice.

Based on this determination, the assessment is correct. The Department’s records indicate that the Taxpayer has paid the assessment in full. As such, no further action is required.

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 Department’s Office of Tax Policy, Appeals and Rulings, at (804) or email at **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4634.B

Related Documents

96-88

13-223

16-159

17-188

22-101