Virginia Automotive Report E Newsletter for December 2015 The Sales Tax Audit, Part 2– Is it Taxable or Not? In the October issue of the Virginia Automotive Report, Terry Westhafer of Central Tire Corp. in Verona told of his personal account of a recent Sales Tax Audit. Since then, we have spoken to Mark Hornsby of Hornsby Tire Co. in Newport News, who also experienced a recent audit. Both Terry and Mark have contributed to this article, and it became clear in speaking with them and other VAA members, that there is a great deal of confusion within our industry on this subject. Not only do dealers need to be up to speed on what is taxable, but so do Suppliers with the products they sell. The answer to “Is it Taxable or Not” is not al- ways quite as clear as you might think, and as Terry and Mark were told by their auditors, you may not find out until you are audit- ed. While the process of their audits was very time consuming, both Terry and Mark said the auditors they dealt with were reason- able and fair, and willing to listen to their arguments to support their case. Realizing sales tax is a pass through to the consumer, the auditors realized most business owners want to do the right thing, and they expressed a desire to help educate with this pro- cess. Unfortunately, this education can come at a cost if you are not treating these items correctly. As you read in Terry’s Octo- ber article, he won some of his challenges, and lost some too. Ditto that with Mark’s audit. To help members’ take some of the guess work out of this, we took examples from Terry and Mark’s audit, and tried to come up with a list of items frequently used in our industry, and what we believe the ruling to be. We took this list to our contacts within the Virginia Department of Taxation and asked their opinion, and some cases they have provided specific written rulings from the Commissioner. As part of this article, we are including our list of items, is it taxable or not, which can vary depending on circumstances, and some notes on why the ruling is what it is. Think of 4 areas: 1. tangible property (parts, tires, etc.) you buy and resell which you are exempt when buying, and is tax- able to your customer. 2. Labor which has always been exempt in Virginia. 3. Service you provide– may or may not be taxable. 4. Fees you charge your customer– may or may not be taxable. Where the lines get somewhat blurry is in the interpretation of what is labor vs service vs. fees. Here are some examples: You install ball joints on a customer’s vehicle; on the parts side, the ball joints, which you tax; on the labor side what you charge to install, which is not taxable– pretty clear. How about you sell a cus- tomer 4 new tires, balance them and perform an alignment. You charge the State Recycle fee of $.50 per tire which is not taxa- ble (this used to be known as the tire tax). You also charge a waste tire disposal fee to cover your costs of disposing of the cus- tomer’s old tires– is this labor and not taxable? No, this disposal fee is just that, a fee, and not labor. Because it occurred as part of an invoice and in connection with the sale of a new tangible product (the tires), the disposal fee is taxable. The state uses an analogy that might help in understanding their rulings: If you buy a new suit, and have a separate charge to alter the suit, the alterations charge is taxable– seems like labor, but they rule it as a fee which is taxable because it was incurred with the sale of tangible personal property (the suit). Here are a few other items that have come up in audits: Road Service– it’s not labor, and if you go out and just mount a customer’s spare, it’s not taxable. However, if a new product is installed at the same time as the service call (tire, tube), the Road service call is taxable. Flat Repairs– this is a service you provide, and most itemize the charge as all labor and do not tax it. However, what about the items you use as part of this service, the patch/plug, cement and solution? The definition states you should pay tax on these items when you purchase them. Shop Supplies– the Commissioner’s written ruling states, similar to the flat repair example, you would pay tax on the items you consider shop supplies– solvents, chemicals, nuts/bolts, etc. when you purchase them. Then if you charge your customer a line item for shop supplies, that item to your customer would not be taxable. Many may be treating this just the opposite; the tax department has said there is confusion over exactly what is a shop supply because it can mean different things to differ- ent people, and that is why the department has ruled this way. Wheel Balancing– most shops don’t itemize out wheel weights on the invoice– it’s just one line item charge for the entire amount, and most list it on the labor side. If you pay sales tax on the wheel weights when you buy them, then this is fine. If you do not, and are audited, they will rule the entire amount of the charge per wheel should be taxable. Either pay for them when you buy them, or break down the invoice to include the weights you used as parts (taxable) and the labor to balance the wheel (not taxable). Diagnostic Fee– if all you do is perform the diagnosis on the invoice, this charge is not taxable. However if the result of your test leads to the sale of a new part on the invoice (sensor, etc.) the diagnostic fee you charge is taxable. This is one we may question and request a ruling from the tax Commissioner, as it can be argued this is labor. For now, charge tax on it if a part is sold as a result of the diagnosis. Sublet charges– if you take your customer’s car to a specialty shop and have work performed, include a mark up, and then rebill it to your customer, you need to break down the parts and labor separately, and charge tax on the parts. Some just take the total cost of the sublet, mark it up, and list the new total on the customer’s invoice. If you do this, and don’t break it down, the tax department will assume the total charge is taxable. Please scroll to Page 8 to continue this article and see the entire list of items we have compiled
Transcript
Virginia Automotive Report E Newsletter for December 2015
The Sales Tax Audit, Part 2– Is it Taxable or Not? In the October issue of the Virginia Automotive Report, Terry Westhafer of Central Tire Corp. in Verona told of his personal
account of a recent Sales Tax Audit. Since then, we have spoken to Mark Hornsby of Hornsby Tire Co. in Newport News, who also
experienced a recent audit. Both Terry and Mark have contributed to this article, and it became clear in speaking with them
and other VAA members, that there is a great deal of confusion within our industry on this subject. Not only do dealers need to
be up to speed on what is taxable, but so do Suppliers with the products they sell. The answer to “Is it Taxable or Not” is not al-
ways quite as clear as you might think, and as Terry and Mark were told by their auditors, you may not find out until you are audit-
ed. While the process of their audits was very time consuming, both Terry and Mark said the auditors they dealt with were reason-
able and fair, and willing to listen to their arguments to support their case. Realizing sales tax is a pass through to the consumer,
the auditors realized most business owners want to do the right thing, and they expressed a desire to help educate with this pro-
cess. Unfortunately, this education can come at a cost if you are not treating these items correctly. As you read in Terry’s Octo-
ber article, he won some of his challenges, and lost some too. Ditto that with Mark’s audit.
To help members’ take some of the guess work out of this, we took examples from Terry and Mark’s audit, and tried to
come up with a list of items frequently used in our industry, and what we believe the ruling to be. We took this list to our contacts
within the Virginia Department of Taxation and asked their opinion, and some cases they have provided specific written rulings
from the Commissioner. As part of this article, we are including our list of items, is it taxable or not, which can vary depending on
circumstances, and some notes on why the ruling is what it is.
Think of 4 areas: 1. tangible property (parts, tires, etc.) you buy and resell which you are exempt when buying, and is tax-
able to your customer. 2. Labor which has always been exempt in Virginia. 3. Service you provide– may or may not be taxable.
4. Fees you charge your customer– may or may not be taxable. Where the lines get somewhat blurry is in the interpretation of
what is labor vs service vs. fees. Here are some examples: You install ball joints on a customer’s vehicle; on the parts side, the ball
joints, which you tax; on the labor side what you charge to install, which is not taxable– pretty clear. How about you sell a cus-
tomer 4 new tires, balance them and perform an alignment. You charge the State Recycle fee of $.50 per tire which is not taxa-
ble (this used to be known as the tire tax). You also charge a waste tire disposal fee to cover your costs of disposing of the cus-
tomer’s old tires– is this labor and not taxable? No, this disposal fee is just that, a fee, and not labor. Because it occurred as part
of an invoice and in connection with the sale of a new tangible product (the tires), the disposal fee is taxable. The state uses an
analogy that might help in understanding their rulings: If you buy a new suit, and have a separate charge to alter the suit, the
alterations charge is taxable– seems like labor, but they rule it as a fee which is taxable because it was incurred with the sale of
tangible personal property (the suit). Here are a few other items that have come up in audits:
Road Service– it’s not labor, and if you go out and just mount a customer’s spare, it’s not taxable. However, if a new product
is installed at the same time as the service call (tire, tube), the Road service call is taxable.
Flat Repairs– this is a service you provide, and most itemize the charge as all labor and do not tax it. However, what about
the items you use as part of this service, the patch/plug, cement and solution? The definition states you should pay tax on
these items when you purchase them.
Shop Supplies– the Commissioner’s written ruling states, similar to the flat repair example, you would pay tax on the items you
consider shop supplies– solvents, chemicals, nuts/bolts, etc. when you purchase them. Then if you charge your customer a
line item for shop supplies, that item to your customer would not be taxable. Many may be treating this just the opposite; the
tax department has said there is confusion over exactly what is a shop supply because it can mean different things to differ-
ent people, and that is why the department has ruled this way.
Wheel Balancing– most shops don’t itemize out wheel weights on the invoice– it’s just one line item charge for the entire
amount, and most list it on the labor side. If you pay sales tax on the wheel weights when you buy them, then this is fine. If
you do not, and are audited, they will rule the entire amount of the charge per wheel should be taxable. Either pay for them
when you buy them, or break down the invoice to include the weights you used as parts (taxable) and the labor to balance
the wheel (not taxable).
Diagnostic Fee– if all you do is perform the diagnosis on the invoice, this charge is not taxable. However if the result of your
test leads to the sale of a new part on the invoice (sensor, etc.) the diagnostic fee you charge is taxable. This is one we may
question and request a ruling from the tax Commissioner, as it can be argued this is labor. For now, charge tax on it if a part
is sold as a result of the diagnosis.
Sublet charges– if you take your customer’s car to a specialty shop and have work performed, include a mark up, and then
rebill it to your customer, you need to break down the parts and labor separately, and charge tax on the parts. Some just
take the total cost of the sublet, mark it up, and list the new total on the customer’s invoice. If you do this, and don’t break it
down, the tax department will assume the total charge is taxable. Please scroll to Page 8 to continue this article and see the
entire list of items we have compiled
2
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PLEASE THANK AND SUPPORT OUR VAA ADVERTISERS
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3
VAA Board of Directors
President: Bobby Cutchins
Bobby’s Tire & Auto Care, Franklin
Coastal Virginia Region
President-Elect: Scott Brown
Cardinal Plaza Shell, Springfield
Northern Virginia Region
Secretary-Treasurer:Jerry Tatum
Leete Tire & Auto, Petersburg
Richmond Region
Vice President: John Kline
Old Dominion Tire, Midlothian
Richmond Region
Executive Board Member: Mark Anderton
First Landing Auto Care, Virginia Beach
Coastal Virginia Region
Executive Director: Steve Akridge
VAA, Midlothian
Richmond Region
Directors:
Northern Virginia Region:
Myron Boncarosky, MSS, Inc./Va. Tire, Fairfax
Chris Barnett, Tire Tread Service, Fredericksburg
Richmond Region:
Clint Farrar, American Tire Distributors, Richmond
Emmerson Miles, Miles Auto Service, Richmond
Tom McClain, Napa Auto Parts, Richmond
Coastal Virginia Region:
Mike Scaglione, Arrowhead Auto & Align, Virginia Beach
Lynchburg Region:
Eric Hughes, Harris Tire, Lynchburg
Brenda Carpenter, Carpenter Tire, Lynchburg
Southwest Virginia Region:
Matt McCoy, M & M Tire, Blacksburg
Travis Leath, Twin County Tire & Auto, Galax
Bill Hoal, Carroll Tire Co., Roanoke
Shenandoah Valley Region:
Steve Crawford, Hepner Tire, Woodstock
Terry Westhafer, Central Tire, Verona
Tom Jones, Fisher Auto Parts, Staunton
Larry Williams, University Tire & Auto, Charlottesville
Tax article continued from Page 1 Our hope is this will help all VAA members, both Dealers and Suppliers, in better understanding what you should be doing
when it comes to applying sales tax. You may not agree with every ruling on this list, but this is how an auditor is going to
make judgement. Here are a couple of bottom line takeaways: with most of the items, someone is going to pay the tax–
either you when you buy it from your supplier, or your customer when you sell it. And your tax exemption is a resale exemp-
tion; unless you can prove it is a resale item, you need to pay tax on it at purchase.
Review this list with your employees, so that they will apply sales tax correctly, and also be able to explain the rea-
son to a customer who may challenge you. While we feel this list is as accurate as we can possibly get it, if you have ques-
tions or are unsure on items you sell, take this list to your accountant for his or her opinion. Further questions or an item not
covered here, let us know, and we can ask for an opinion from our sources at the tax department.
Line Item– taxable or not? Notes
All parts that are resold to customer yes taxable to customer
Wheel Weights yes most pay tax when purchase or itemize on invoice and customer pays tax
Alignment shims yes similar to wheel weights.
Wheel bearing grease yes similar to wheel weights.
Shop Supplies no ruling states you pay tax on related items when you buy them; no tax to customer
Miscellaneous Charge yes small items a shop may buy
Waste Tire Disposal Fee yes When selling new tires. No, if not part of sale of new tires
State Recycle Fee no similar to tire tax, state fee
Environmental charges yes taxable to customer; fee in connection with the sale of tangible personal property
Fuel Surcharge- products delivered to shop no no if you also have a freight charge on your invoice; if not, this should be taxable to you
Freight charge-products delivered to shop no when you are shipped an item, and freight charge is itemized out, no tax
Road Service call yes if any new product is part of transaction- tire, tube, battery, etc.
Road Service call no if mounting spare, jump starting, etc. with no tangible product sold
Diagnostic charge no if only diagnois and give customer a quote; no parts installed
Diagnostic charge yes if new part is installed as a result of the diagnosis
auto service labor no considered exempt labor
towing no unless a tangible product is installed on the tow call, then tow charge is taxable
Federal Excise Tax on Truck tires yes considered part of the new tire cost
tire repair no shop would pay tax on items used to perform this service- not taxable to your customer
repairs sublet from another shop yes if itemized out parts/labor sub contracted, tax only on parts
repairs sublet from another shop yes if not itemized out the total cost, with no breakdown, entire amount is taxable
tire protection plans yes charge customer tax on total amount
extended warranty plans yes charge customer tax on total amount
items shop buys and is end user yes include: light bulbs, office supplies, small tools, protective items (gloves, earplugs, etc.)
items shop buys and is end user yes cutting bits for brake lathe, tire guages, air chuck, bead breaker, tire iron, equipment
Tire Repair materials- patch, cement yes shop pays tax on these items at purchase
Solvents/Chemicals yes shop pays tax on these items at purchase
Headlight Cleaning kits yes unless shop buys and resells as separate line item on invoice to customer.
Company vehicle repairs yes parts and tires put on a company vehicle are taxed
HVAC Maintenance Contract for shop yes if replacing filters is included, full cost of contract is taxable
Computer Maintenance Contract for shop yes yes on Hardware; yes if software updates are tapes, DVD, etc.
Computer Maintenance Contract for shop no if software updates are web based
Advertising items yes keychains, ice scrapers, pens, etc., shop pays tax at purchase
Shop sells to Churches no tax exempt-must have certificate on file
Shop sells to State Agencies no tax exempt-must have certificate on file
Retread Materials no part of manufacturing process
Retread Supplies no part of manufacturing process
Customer Satisfaction Merchandise yes vendor pays if the merchandise is at no charge
8
Sesco article continued from Page 5
Employee Interaction with Third Parties
Another right employees have under the Act is the right to
communicate with the news media, government agen-
cies, and other third parties about wages, benefits, and
other terms and conditions of employment. The most fre-
quent offenders in this category are company media poli-
cies. While employers may lawfully control who makes
official statements for the company, they must be careful
to ensure that their rules would not reasonably be read to
ban employees from speaking to the media or other third
parties on their own (or other employees') behalf.
Rules Prohibiting Solicitation/Distribution
While the NLRA allows employers to prohibit solicitation by
employees during work time, employers may not prohibit
employees from soliciting during non-work time, even if
the employee is on company property. Thus, employers
may not have a blanket rule barring any solicitation by
employees. In addition, employers cannot infringe on the
right of employees to engage in the distribution of litera-
ture in the company’s non-working areas during non-
working times.
Rules Restricting Use of Company Logos, Copyrights, and
Trademarks
Although copyright holders have a clear interest in pro-
tecting their intellectual property, handbook rules cannot
prohibit employees' fair protected use of that property.
Employer proprietary interests are not implicated by em-
ployees' non-commercial use of a name, logo, or other
trademark to identify the employer. Thus, a broad ban on
such use without any clarification will generally be found
unlawfully overbroad.
Rules Restricting Photography and Recording
Employees also have a right under the Act to photograph
and make recordings in furtherance of their protected
concerted activity. Thus, rules placing a total ban on such
photography or recordings, or banning the use or posses-
sion of personal cameras or recording devices, are unlaw-
fully overbroad.
Conclusion
Based on the positon of the NLRB, it is recommended that
all VAA members have their employee handbooks profes-
sionally reviewed by SESCO to ensure compliance with the
NLRA.
About the Author – Adam Kneisley, Labor and Employ-
ment Attorney. SESCO Management Consultants is the
preferred human resource consulting firm of VAA provid-
ing results-oriented human resource consulting services to
members. SESCO provides a special “retainer” relation-
ship that provides a free “hotline” to discuss day-to-day
employment issues such as policy development, employ-
ee challenges such as disciplinary actions, terminations, or
workers’ compensation issues, compliance to federal and
state employment regulations, and many other manage-
ment and human resource matters. Please feel free to
contact Bill Ford by calling 423-764-4127 or e-mail
