December CATA Bulletin Points to ponder Sales tax issues for

							December 10, 2001                                   CATA Bulletin                                                         3


           Points to ponder: Sales tax issues for parts and service
  First of a two-part article. The        payable to you by either the customer      the state assumes that 50 percent of
conclusion will appear in the Dec.        or the service contract provider. The      the sale represents taxable parts.
24, 2001, edition of this newsletter.     sale of an extended warranty is not        Otherwise, tax is charged only on
                                          considered part of the original vehicle    the parts, not the labor. Because you
        BY JOE ROZNAI, CPA                purchase transaction. Therefore, tax       are collecting tax from your cus-
       AND JUDY MASON, CPA                must be collected when a repair is         tomer, you should not pay the sales
        MICHAEL SILVER & CO.              performed.                                 tax to your vendor. Provide your
                                              Factory Recall Programs Repairs        sublet vendor with a resale certifi-
   Over the past three years or so,       performed under manufacturer recalls       cate.
the Illinois Department of Revenue        generally are nontaxable, even if the          If you incorrectly did not charge
has performed many sales tax audits       original warranty has expired. This        your customer tax but you paid tax
on auto dealers. During the audits,       exemption was only recently con-           to your sublet vendor, we have had
many issues arise that easily could       ceded by the Illinois Department of        some success getting sales tax
have been avoided by improving            Revenue. The department now agrees         auditors to allow credits for sales
training or procedures.                   that recalls should be treated the same    tax incorrectly paid to vendors
   In a previous article, we focused      as original warranty repairs. How-         against the tax that should have
on vehicles sales tax issues. Parts       ever, parts used for repairs performed     been charged to the customers.
and service are a large part of your      under manufacturers’ technical             However, it still is preferable to
dealership operation. Sales and use       service bulletins are not recalls and      collect the tax from your customer.
tax applications in these areas can       are fully taxable, unless the vehicle is        Insurance Claim Repairs
be as complex as they are for             still under the original warranty. (See        Parts used in vehicle accident
vehicle sales.                            goodwill repairs below.)                   repairs are fully taxable, even if the
   The following areas should be              Goodwill repairs Goodwill              repair is part of a claim paid by an
reviewed at your dealership to            repairs typically are performed for        insurance carrier.
ensure proper sales and use tax           problems discovered on a vehicle                   Repairs to Inventory
compliance, and avoid significant         outside the manufacturer’s warranty                 and Demonstrators
audit assessments.                        period, or simply as a matter of               Repair costs for inventory are
        Service Department                customer dissatisfaction. Goodwill         considered as part of your cost to
           Repair Orders                  repairs are taxable transactions. This     acquire the inventory, so they fall
   For sales taxation of repair           is true whether or not the factory         under the resale exemption. Repairs
orders, tax is collected on the sale of   reimburses you for the repair as if it     to demonstrators are considered
parts while labor charges are exempt      was still under the original warranty.     repairs to inventory even if you
from tax. This is true for most               Since the customer is not paying       expense the repair cost. An auditor
customer-pay repairs. The applica-        for the parts, the dealer must self-       might claim initially that if the cost
tion of tax is more complicated           assess Use Tax (6.25 percent). If the      is expensed, it must be taxable. In
when warranty claims and factory          factory reimburses the repair, you         these cases, we stress that the
recalls are involved.                     must also collect full sales tax on the    accounting treatment does not
   Factory Warranty Sales tax             parts.                                     determine the facts. If the repair part
does not apply to factory warranty         Repair Orders – Use of Outside            is added to your inventory vehicle, it
repairs. Such parts are considered             Service Providers (Sublet)            becomes part of your inventory, and
as taxed in the original vehicle              Dealers often use outside service      it therefore is exempt as a resale
purchase.                                 providers (sublet), usually for spe-       purchase.
   Extended Warranty (Service             cialties such as transmissions, tires,         A clear understanding of how sales
Contracts) Sales tax must be              or body work. Sales tax for sublet         tax is applied to the various transac-
collected for parts used in repairs       repairs is similar to in-house re-         tions at a dealership is critical to
completed under extended warranty         pairs—parts are taxable, labor is not.     achieve proper and complete tax com-
service contacts. Depending on the        When your vendor does not provide a        pliance. To reach the authors of this
terms of the contract, the sales tax is   breakdown between parts and labor,         article, call 847-982-0333.