Texas Sales Tax: Motor Vehicle Repair and Maintenance Shops, Oil Change and Lube Businesses

When an automotive repair or maintenance shop bills a customer one amount for both labor and materials (a lump-sum charge), the shop should not collect tax on that charge. The shop must pay sales tax on all equipment, parts, supplies and materials used to perform the service, but the shop may not bill the customer directly for the sales tax paid on those items. Instead, the shop may build those costs into the lump-sum charge for the service.

A shop that bills separately for parts and labor must collect tax from its customers on the separately stated charge for the parts. The shop can purchase parts tax free by providing a resale certificate (Texas Sales and Use Tax Resale Certificate - PDF) to suppliers.

If there is a contract (including a bid or estimate) to perform the repair, the contract terms determine the type of billing. If the contract is for a lump-sum amount, invoices separating charges for parts from labor will not change a lump-sum billing into a separated billing unless required by the terms of the contract.

A shop that wants to charge a customer a lump-sum amount for an oil change, but separates charges for some additional repair, should use one invoice for the oil change and another for the repair. Alternatively, the shop can put the lump-sum oil change on one line of the invoice, not break down those "lump sum" charges anywhere else on the invoice and then separate the charges for repair labor and repair materials and parts. The shop must also separately state a charge for tax on the materials and parts used in the repair.

Because the shop is responsible for paying tax on the parts under a lump-sum charge, and the customer is responsible for paying tax for separately stated charges, the invoice must clearly state each service and charge.


Examples

An auto parts supplier, Auto Parts Inc., sells oil and filters to lube shops for $20.

There are two lube shops in town: ABC Lube and XYZ $39.90 Lube.

ABC Lube bills its customers using separated contracts and XYZ $39.90 Lube uses lump-sum contracts.


ABC Lube

When ABC Lube goes to Auto Parts, Inc. to buy oil and filters, it will present a resale certificate and buy the oil and filters for $20 without tax. ABC Lube can either sell the oil and filters to its customer at cost and charge tax on that amount, or as in this example, mark the price up and charge tax on that amount. The customer could be presented a bill that looks like this:

Oil                                           $12.00 
Oil Filter                                  $11.00 
Tax on oil and filter at 8.25%      $1.90 
Total Charge for Parts                          $24.90
Labor                                                  $15.00
Total Charge                                       $39.90


XYZ Lube

When XYZ Lube goes to Auto Parts, Inc. to buy the oil and filter it will pay tax on its purchase, bringing its cost of the oil and filter to $21.65, if the tax is 8.25 percent. That amount will presumably be built into its lump-sum charge. The customer could be presented with a bill that looks like this:

Charge for oil change: $39.90

Note that XYZ Lube does not charge tax on a lump-sum contract because it has already paid tax to its supplier, Auto Parts, Inc.


How ABC Lube Could Run Into Trouble

ABC Lube must be careful not to use a lump-sum contract by combining the charges for the oil filter and the labor on its invoice to the customer. If ABC Lube had charged its customer the right amount of tax ($1.90), but combined the charges of $23 for the oil filter and $15 for labor, it might have presented a bill to its customer that looked like this:

Charge for oil change           $38.00
Tax on oil filter at 8.25%        $1.90
Total Charge                       $39.90

This method would result in an assessment of $1.65 to ABC Lube since it should have paid tax to Auto Parts, Inc. of $20 x 8.25 percent if it were to use a lump-sum contract. Also, the invoice to the customer is confusing because the tax, while stated at 8.25 percent, appears to have been levied at 5 percent. Under this scenario, the tax levied by ABC Lube would be considered "error tax" that the customer should not have been required to pay under a lump-sum contract. This invalid tax assessment does not substitute for the tax that ABC Lube should have paid as the customer under a lump-sum contract.

TAX NEWS - NOVEMBER 2009

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