Overview
If you are in the business of providing services under a warranty contract, then you do not have an obligation to collect and remit sales tax. Most car dealers and other sellers of machinery encounter this question when they provide repairs under a warranty contract.
If you are undergoing a sales tax audit, it is crucial that your invoices clearly separate the item sold (if any – parts) from labor and other services related to the warranty.
Example of Proper Invoicing
For example, if you machine brake rotors, you should separate that from the sale of the rotors and the labor.
- Machining the rotors under the warranty is fully non-taxable.
- The rotor itself is a tangible item and is taxable.
- The labor associated with this transaction is non-taxable.
Breakdown of Sales Tax Applicability
What Is Subject to Sales Tax
- Parts – ARE subject to sales tax
- Labor – NOT subject to sales tax
- Warranty services – NOT subject to sales tax
How Sales Tax on Parts Is Handled
Parts can work in one of two ways:
- The sales tax can be paid at the time of purchase by the dealer.
- The sales tax can be collected at the point of sale.
Frequently Asked Questions
Are warranty repairs subject to sales tax?
No, warranty repairs themselves are not subject to sales tax. However, if tangible parts are provided during the repair, those parts may be taxable.
Is labor under a warranty taxable?
No, labor performed under a warranty contract is not subject to sales tax. It should be clearly listed separately from any parts on the invoice to avoid tax issues.
Do I need to charge sales tax on parts used in a warranty repair?
Yes, parts are generally subject to sales tax. You can either pay the tax when you purchase the part or collect it from the customer at the time of sale.
How should I structure my invoice to avoid sales tax issues?
Invoices should clearly separate taxable parts from non-taxable labor and services. For example, list the sale of brake rotors separately from the labor of machining them.
Are all warranty services exempt from sales tax?
Yes, as long as they are true warranty services and don’t include the sale of new taxable items. The labor and service components of a warranty repair are non-taxable.