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.