Sometimes in the law, like in life, “what is old is new again.” GADA has received several questions recently about sales and use tax, particularly on parts used in vehicle repairs. Although most vehicle sales and leases are now subject to TAVT, not sales tax, the “old” sales tax rules still apply to many dealership transactions, particularly in the service department. Hopefully this article will help when questions arise.

The Basics

Parts Purchased for Resale (Not Taxable). Sales tax does not apply to a dealer’s purchase of motor vehicles, parts, and other resale items sold by a motor vehicle dealer when a properly executed Certificate of Exemption (Form ST-5) is provided to the supplier or manufacturer. Rule 560-12-2-.09 (2)(c).

Parts and Labor Itemized Separately. When parts or accessories are installed in a motor vehicle owned by the customer, and the charge for installation or repair labor is itemized on the dealer’s invoice separately from the charge(s) for the parts or accessories, the charge(s) for labor are not subject to sales and use tax. The charge for parts and tangible accessories in a non-warranty repair are taxed to the customer. If the charges for labor and parts or accessories are not itemized on the dealer’s invoice, the entire amount charged to the customer is taxable. Rule 560-12-2-.09 (6)(a).

Parts Used To Restore Vehicles To Salable Condition (Not Taxable). Parts used to repair or restore a used vehicle to a salable condition are not subject to sales and use tax when purchased by the dealer, since they are purchased for resale. The tax collected at the time the used motor vehicle is sold will include the value of the parts installed. However, consumable supplies, such as cleaners and waxes used in the reconditioning of a motor vehicle for sale, are subject to sales and use tax. Rule 560‑12-2-.09 (6)(b).

Warranties and Maintenance Agreements

The tax rules concerning parts on warranty repairs and service agreements can seem more complex. This is the topic on which GADA has received the most questions.

Parts Used in Factory Warranty/Retail Dealer Warranty (Not Taxable). When a motor vehicle is sold at retail, a warranty from the manufacturer or retail dealer is often included in the selling price … When repairs are made under such warranty, no tax is due since a manufacturer’s or retail dealer’s warranty was part of the sales price of the motor vehicle when originally sold. Rule 560-12-2-.09 (6)(c). How does this apply if a third party makes the repairs under the factory/dealer warranty? The Rule states that the customer is not taxed regardless of whether the manufacturer or retail dealer makes the repairs or whether they pay someone else to make the repairs. Rule 560-12-2-.09 (6)(c).

Parts Used in Extended Warranty or Maintenance Agreement (Taxable). The sale of an extended warranty or maintenance agreement is not taxable to the customer provided that the charge for such warranty or maintenance agreement is itemized on the dealer’s invoice to the customer. That said, “The parts associated with repairs pursuant to such agreements are subject to sales and use tax.” Rule 560-12-2-.09 (6)(d). Specifically, the dealer is liable for use tax on the repair parts based on the dealer’s cost. But what if the dealer charges a third-party for the repairs? According to the Rule, “In the event the dealer charges a third party for the repair, the dealer must charge sales tax to the third party… as would apply to any other retail sale.” Rule 560-12-2-.09 (6)(d).