By Ashley Summers, CPA

In good news for the automobile repair industry, Virginia has enacted a new sales tax exemption for separately stated labor charges rendered in connection with diagnostic labor services for auto repair work and emergency roadside service for motor vehicles, even if tangible property is sold as part of the transaction.  This is effective July 1, 2023 under H.B. 1677.

Historically, if diagnostic labor charges or emergency roadside service fees were separately stated on an invoice, but parts were also sold as part of the transaction, the diagnostic labor charge and emergency roadside service fees were also subject to Virginia sales and use tax. The service fees were treated as labor performed in connection with the sale of tangible personal property according to numerous Rulings of the Virginia Tax Commissioner.  This nuance in the Virginia tax code has caught a number of automotive repair shops off guard during sales and use tax audits with substantial unexpected assessments due.  The confusion comes from the fact that labor is generally not a taxable service, therefore, shops did not charge Virginia sales tax on the diagnostic labor charge or emergency roadside service fees.  The automotive shops viewed these charges as separately stated labor charges not subject to sales tax, when in fact, the Virginia Department of Tax did not view these charges as separately stated labor charges.  What made the matter more difficult and confusing was, if the labor costs were charged, and there was no sale of parts or personal property, the charges were not a taxable service.

With this change, it’s important to update your sales system to treat these charges as tax-exempt as of July 1, 2023.