As with most businesses, keeping on top of licenses, fees, and taxes for a heavy duty repair shop is a full-time job requiring extreme organizational skills. Heavy duty shops are subject to a range of different taxes including state sales tax unless you do business in one of the few states that don’t tax retail sales. Among the 45 states that do, the rules for sales tax on auto parts aren’t all the same. That’s why it’s essential that you consult a lawyer or an accountant to get the scoop on the sales tax laws in your state. However, here are some tax facts heavy duty repair shop owners should be aware of.
State Sales Taxes
There is no such thing as federal sales tax. However, you’ll want to study up on your state’s sales tax requirements if your shop is anywhere other than:
- New Hampshire
Those are the only states in the Union that don’t have state sales tax. Everyone else must charge, report, and pay taxes on goods (and sometimes services) sold. The tax rates range from 2.9 percent to 7 percent, depending on the state.
Sales tax isn’t a tax your shop owes as part of doing business. Instead, it’s a tax consumers pay on things they buy. It’s simply more efficient to have businesses collect and pay the taxes to the state, rather than having every individual citizen file a report on items they purchase. Since heavy duty shops sell parts over the counter and with the services they provide, they typically charge sales tax on auto parts.
Sales Tax on Auto Parts
Of course you’ll charge sales tax on auto parts sold directly to a customer, such as wiper blades or a filter. They are obviously retail goods sold to a consumer. But some people question why shops charge sales tax on parts used in a repair or service. The truth is that someone must pay sales tax on the parts no matter what, and you can collect it in one of two ways.
First, let’s say your shop buys wholesale parts and doesn’t pay sales tax at the time of purchase. That makes you responsible for charging sales tax when you use those parts on a customer’s truck. You’ll also be responsible for reporting that sale and paying the tax to your state.
Alternatively, if you pay sales tax when you purchase parts, the vendor you bought from will report the sale and pay the tax to the state. In that case, you won’t charge sales tax when you install the part for your customer.
If the part is under warranty and the manufacturer provides the replacement, you won’t charge sales tax. Then again, customers don’t typically pay anything for parts and repairs related to a warranty.
What’s Taxable in Heavy Duty Repair?
In states with sales tax, heavy duty shops charge sales tax on auto parts and should also charge tax on supplies used in repairs and services, including:
- brake and transmission fluid
- motor oil
- bearing grease
- solvents and thinners
Those are supplies you’re essentially selling to the customer. However, there are shop supplies you wouldn’t charge sales tax on such as cleaning supplies, sandpaper, drop cloths, and shop towels.
But what about labor? In general, you collect sales tax on material goods sold, but not necessarily on services. Logically, that means charging sales tax on auto parts but not on the labor to install them, right? Not necessarily. There are always exceptions to the rule. In Idaho, for example, labor for repairs isn’t taxable, so a typical repair bill would only include sales tax on the parts used but not on the labor. BUT, if your shop fabricates a part to complete the repair, the labor for manufacturing that part is taxable.
What’s more, in some states like Texas, repair shops are required to charge sales tax on labor to install accessories. That means a heavy duty shop in the Lone Star State puts something like a security system or satellite radio in your truck, you’ll pay sales tax on both the parts and labor.
Repair Vs. Remodel
Some states differentiate between repair work and remodeling. They say repair work fixes or corrects what is broken or disabled, and remodeling is modifying the original vehicle. Installing a lift or lowering kit or doing work that improves a truck’s performance, for instance, is remodel work. In many states, including Texas, the labor for remodeling is taxable. Therefore, you must charge tax on the labor along with sales tax on auto parts used in the job.
Taxing Core Charges
Cores are parts so, logically, they’re taxable just like any other parts in states with sales tax. But there’s a specific way to charge tax on cores. You’ll figure tax on the total parts price, then subtract out the core refund. Your shop will account for the full price of the core—not the price after the refund—in the sales report to your state and pay state sales tax on it.
Other Taxable Charges and Fees
Even if your state doesn’t require taxing labor along with charging sales tax on auto parts, you’ll still want to find out how you should handle non-repair services. For instance, in New York, the state expects heavy duty shops to charge tax to tow a disabled truck. Even if you’re not transporting it to your shop, you still need to tax the towing fee. The exception to that rule is if the truck is not broken down or undrivable. Examples would be towing a perfectly good semi from one yard to another or hauling off a repossessed truck. Additionally, if you charge clients a storage fee for trucks left at your shop, the Big Apple requires you to tax that fee, too.
Many shops charge environmental fees, but should they be taxed? They’re a service, in a way, but they’re not linked to one specific element of the repair work you do for any given customer. Instead, they’re a way to help pay for properly disposing of used products. Usually, sales tax isn’t charged on environmental fees, but it’s always best to check with your state tax office to be sure.
Filing Sales Tax on Auto Parts
When you open a retail business in a state that requires sales tax, you’ll need to apply for a resale license. The state will issue you a seller’s permit with a sales tax number on it and you’ll report the amount of your sales to the state on a regular basis. Smaller businesses that don’t have a lot of sales may only have to report quarterly, but most heavy duty repair shops will have to file a report monthly, as well as pay the taxes due on the sales each month.
Although we’ve listed a few examples of specifics, the tax laws vary widely from state to state. Again, it’s important to consult a professional to fully understand sales tax on auto parts and labor in your state. Not knowing the law isn’t an excuse. Whether or not you collect sales tax correctly, your state will still expect you to pay the correct amount. It’s worth the time to learn what to tax and how much so you can protect your bottom line.
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