Collision repair shops in Northern Virginia hit with tax on labor

The new tax was one of seven new or increased taxes and fees activated by a vote of NVTA on July 12 following a public hearing in Falls Church, Va. Five of the seven are related to vehicles.

All seven taxes and fees are expected to raise an additional $300 million per year to fund road and bridge improvements within the taxing region. The region consists of nine jurisdictions including the counties of Arlington, Fairfax, Loudon and Prince William; and the cities of Alexandria, Fairfax, Falls Church, Manassas and Manassas Park.

"Transportation funding is a highly politically charged environment," says Chris Zimmerman, NVTA chairman. "We could not wait another five, 10 or 20 years to address funding these infrastructure improvements."

He said the tax on auto repairs is an extension of the 5 percent tax now charged on auto parts to the labor charged to install those parts.

"The Virginia legislature was looking for things that were auto-related to tax because the money raised will benefit those who drive vehicles," he says. The package also includes an additional 2 percent tax on motor vehicle rentals, an initial vehicle registration fee of 1 percent, a safety inspection fee of $10 and a regional registration fee of $10.

The collision repair industry, the insurance industry and the Virginia Automobile Dealers Association all opposed the additional 5 percent tax on labor.

"There were lots of politics behind this, but the bottom line is the Virginia legislature felt Virginians would oppose any new sales tax or additional levies," says Pete Petursson, executive director of the Virginia Autobody Legislative Committee (VALC). "They kind of snuck this into their massive budget package before anybody got wind of it and stuck it to the auto repair industry. It will be passed along to consumers, who will be upset. It is bad for business in Virginia, and this was an unfairly targeted audience."

He said opponents did become aware of the tax being added to the budget package, but it was too late to do anything about it.

"Those of us who actually read this stuff caught wind of it and discussed it with them, but we were outgunned," Petursson says. "It was part of a package that had a lot of momentum going. They ramrodded it down our industry's throat."

New car dealers opposed the increase for the same reason, plus, they will have to charge consumers 5 percent on the labor involved in warranty work, Petursson said. Opposition also came from the insurance industry.

"The insurance industry always opposes bills and taxes that have an inflationary impact on the product they sell," says Chris LaGow, owner of LaGow and Associates, a Richmond, Va., based law firm that represents insurers. "Insurance companies that write business in those areas can estimate very well the repair bills there, and the increase would have to be factored into future insurance premiums."

LaGow agreed with Petursson about the last-minute tactics used to pass the new tax. "It was a moving target and it was in and out of various drafts," LaGow says. "Within 24 to 48 hours of the final vote on the final version, I was informed the 5 percent tax was coming out of the bill." But that didn't happen.

The auto repair industry had more to lose and fought this increase harder than the insurance industry, according to LaGow. "The auto repair industry will be burdened with tax collection, paperwork and making payments."

And that burden is one that Kris Burton, secretary of the Washington Metropolitan Auto Body Association and vice president of Rosslyn Auto Body, is not looking forward to. "It's more paperwork, responsibility and administrative work," says Burton, who owns two repair shops in the taxing district. "We'll be passing along more dollars to Uncle Sam."

Burton said he's more concerned that the additional tax might hurt his business by creating an unlevel playing field. "Some unscrupulous dealers in the industry might use this to their advantage by collecting the tax and not paying it," he says. "Some of these guys operate under different names and move around a lot."

Petursson said Burton has a legitimate concern. "This tax puts the burden on the reputable business without any repercussions on the disreputable repairer," he says. "The reputation of this industry has been bad. Now operators have the key to the vault to collect an extra $1,000 to $2,000 per month. The ghosts in the industry can cheat the system for another 5 percent profit opportunity."

He said reputable businesses like Burton's will be watched closely because it's easy to track them. "Operators who own brick and mortar stores will be the first to get audited because they know those guys aren't going anywhere," Petursson says. "But shops with poor recordkeeping or those that move from warehouse to warehouse and frequently change names will be difficult to follow."

Opening the floodgates

This is the first time that Virginia has opted to tax services. The fact that only auto repair services are being taxed has people in the industry wondering who's next.

"This is a shift in ideology in the Virginia legislature," Petursson says. "They decided to slip it to the automotive guys because they can't defend themselves and are not powered up. Will the tax on services be extended to electrical, HVAC, plumbers and contractors next? Once you crack the door open to allow a tax on services, you might as well have blown it off with dynamite. It can be applied to all others, because there is never enough money to satisfy the taxing authorities."

Zimmerman said those concerns are unfounded. "Virginia is an anti-tax state and this will not open the floodgates to tax all services," he says. It is one of the lowest taxed states in the nation, among the bottom 10 or 15 states. It also is a high-income state, in the top 10 or 15 states. It's not good for business to have failing roads and be forced to spend hours in traffic. It is quite possible that nothing else will be done for a long time."

While raising taxes can be political dynamite, it appears that these seven taxes have bipartisan support. One day after NVTA voted to activate the taxes, it filed a bond validation suit in the Circuit Court of Arlington asking the court to affirm the constitutionality of the NVTA and to issue the debt to fund the projects. This action was supported by the Virginia governor, a democrat; the speaker of the house, a republican; and the attorney general.

The Loudon County Board of Supervisors filed a lawsuit Aug. 6 challenging NVTA's authority to tax, but no ruling was made as of presstime.