How should a repair shop tax an overhead or disposal charge connected with taxable parts and nontaxable labor?

Plain-English summary

A repair shop's overhead charge followed the activity it actually funded. A charge related only to ordering, storing, or transporting taxable parts was fully taxable. A charge related solely to nontaxable repair labor was not taxable. If a general overhead charge could not be tied exclusively to either category, the shop had to allocate it between taxable parts and nontaxable labor in the same ratio as its separately itemized parts and labor charges.

For the tire-dealer facts, a disposal-only service with no property sale was nontaxable. When a $2 charge applied only if the customer left an old tire for disposal, the letter treated it as nontaxable installation-and-disposal service. If the buyer had to pay the $2 whether or not leaving a tire, the charge was part of the tire sale: all $2 was taxable when no tire was left, while $1.75 was taxable when the then-current $0.25 statutory recycling fee was separately collected.

This January 27, 1995 letter superseded an earlier July 12, 1994 response because the first response had not addressed all common scenarios.

Citations and references

• California Revenue and Taxation Code sections 6012 and 6051 (as cited)
• California Public Resources Code sections 42860 et seq. and 42885(a) (as cited)
• California Sales and Use Tax Regulation 1546(b)(1) (as cited)
• April 19, 1994 tire-dealer association letter describing earlier advice, a Board speaker's association presentation, and disposal-fee questions — letter and attachments, other than quoted passages, not reproduced in the official PDF
• July 12, 1994 counsel letter giving an incomplete treatment of common scenarios — letter, analysis, recipients, and attachments not reproduced; January 27, 1995 source expressly supersedes and replaces it
• Board speaker's presentation to the redacted Southern California association about taxable and nontaxable disposal fees — speaker, date, agenda, slides, recording, attendee notes, and written guidance not supplied
• Tire and repair-part sales, taxable parts and fabrication, nontaxable troubleshooting and installation, repair-shop overhead, $2 disposal charges, $0.25 statutory fees, customer tire-retention choices, dealer tire pickup, ten-percent retention, fee remittance, and parts-to-labor allocation — invoices, work orders, customer elections, disposal records, fee returns, remittances, and allocation workpapers not reproduced in the official PDF
• January 27, 1995 supervising-staff-counsel replacement letter copied to a redacted district administrator — no association response, member guidance, transaction treatment, audit, assessment, refund claim, appeal, or later outcome supplied
• Official Annotation 295.1318's parts-only, labor-only and general-overhead allocation rules, January 27, 1995 date, and literal (Am. 2000-3) marker — annotation omits the April 19 request, Board presentation, superseded July 12 letter, tire-specific $2/$0.25 scenarios, 1990 Act and authorities, copied administrator, underlying records, amendment basis, later outcome, and reliance status and supplies no additional proceeding record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-1318.pdf

Original ruling text

295.1318

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
Telephone: (916) 445-5550
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

January 27, 1995

BURTON W. OLIVER
Executive Director

Ms. S--- M--C--- T--- D--- &
R--- A--- North
XXXX --- --- Avenue, Suite X
---, CA XXXXX-XXXX
Dear Ms. M---:
In a letter dated July 12, 1994, I responded to your letter dated April 19, 1994 regarding the application of sales tax to tire disposal fees collected in connection with a $0.25 tire recycling fee. I stated that when the charge was part of the sale of the tire, the entire charge was taxable except for the $0.25 fee imposed on the purchaser by statute. This rule is correct; however, after further review I have concluded that since I did not apply this rule to all the common scenarios which will occur for your members, the conclusion in my previous letter is not entirely accurate. Rather than merely correct my previous letter to you on this subject, this letter supersedes and replaces it. In your letter dated April 19, 1994, you stated: "In the past, we were told that there is no sales tax charged on the state's $.25 fee and, if the dealer charges a fee, that there is no sales tax charged on the tire dealer's disposal fee since this was a service provided to the customer and not a product. "Recently, a speaker from the Board did a presentation for our Southern California association, C--- South, and told them that the tire dealers' disposal fee, except the mandated $.25[, is] taxable. In addition, he confused the issue more by saying that if the dealer picked up the scrap tires from the customer (for disposal) the disposal fee was not taxable if it was not part of the sale."

Ms. S--- M---

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January 27, 1995
295.1318

Discussion
Sales tax is imposed on a retailer's gross receipts from the retail sale of tangible personal property in this state. (Rev. & Tax. Code § 6051.) The taxable gross receipts include all amounts received with respect to the sale, with no deduction for the cost of the materials, service, or expenses of the retailer passed on to the purchaser, unless there is a specific statutory exclusion. (Rev. & Tax. Code § 6012.) Thus, unless there is a specific exclusion, charges for services which are part of the retail sale of tangible personal property, such as tires, are included in the taxable gross receipts, as are any other costs of the retailer which are passed on to the purchaser (even if those costs are separately itemized). On the other hand, charges that are completely unrelated to the sale of tangible personal property are not subject to sales tax. You state that the Board speaker indicated that if the dealer picked up the scrap tires from the customer, the disposal fee was not taxable if it was not part of the sale. This is true: if the fee is not part of the sale of the tires, the charge is not taxable. The disposal fee would not be regarded as part of a sale of tangible personal property if the tire dealer made no sale of tires to the customer (whether the dealer picked up the tire from the customer or the customer delivers it to the dealer is irrelevant to the analysis). That is, if a customer simply wishes to dispose of tires through the tire dealer without purchasing any property from the dealer, none of the disposal fee would be taxable. When, however, the dealer sells a tire and collects a disposal fee, further analysis is required. In 1990, the Legislature adopted the California Tire Recycling Act. (Public Resources Code § 42860 et seq.) That act imposes a $0.25 per tire disposal fee on every person who leaves tires for disposal with a seller of new or used tires. The seller is required to collect the fee and remit it to the state, but may retain 10 percent of the fee as reimbursement for any costs associated with the collection of the fee. (Public Resources Code § 42885(a).) If, prior to the adoption of the California Tire Recycling Act, a dealer made a retail sale of a tire and had charged a disposal fee which was regarded under the Sales and Use Tax Law as part of the sale, the disposal fee would have been a taxable part of the sale. Even with passage of the act, if a dealer of a tire makes a "tire disposal charge" which is regarded as part of the retail sale of a tire, the entire amount would be taxable except for that portion for which there is a basis for exclusion from the measure of tax. Since the $0.25 tire recycling fee is imposed on the purchaser by statute and not on the tire dealer, we do not consider the $0.25 as part of the dealer's taxable gross receipts. However, there is no statutory basis for excluding from the measure of tax the remaining $1.75 charged to the customer when the charge is part of the sale of the tire. Thus, the remaining issue to be resolved is when the disposal fee is regarded as part of the sale of the tire. Since the same analysis applies in many repair shop situations (the replacement of a tire is a repair of the vehicle), I will first discuss the rules applicable to certain scenarios involving

Ms. S--- M---

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January 27, 1995
295.1318

charges that might be made by a repair shop, and I will then apply those rules to the transactions in question here. In each of the scenarios, the repair shop performs repairs and itemizes charges for parts (including any charge for fabrication of parts) and labor (including, e.g., troubleshooting and installation, but excluding fabrication of parts). The repair shop also makes an additional charge for overhead expenses (there are many different designations used to itemize such charges). The charge for the parts is subject to tax and the charge for the labor is not subject to tax. (Reg. 1546(b)(1).) As in the transaction you present, whether the charge for overhead expenses is subject to tax depends on whether the charge is regarded as related to the sale of the parts, the providing of the labor, or both. When the overhead charge made by the repair shop is related only to the sale of the parts, the entire charge is subject to tax (e.g., a charge to cover expenses for ordering, inventorying, and storing parts or for transportation of the parts to the repair shop). If, on the other hand, the charge were related solely to the nontaxable labor performed by the repair shop, then none of the charge would be taxable (e.g., a charge solely to cover expenses related to cleaning the oil remaining on the garage floor after draining oil from a car). The final possibility is that the charge, no matter how itemized on the bill to the customer, is actually related to all overhead expenses of the repair shop. We would regard the charge as related to all overhead expenses of the repair shop if the charge cannot be shown to be clearly related solely to nontaxable labor or solely to the taxable sale of tangible personal property. Under these circumstances, a portion of the charge is taxable and a portion of the charge is not taxable, prorated in the same ratio as the itemized taxable charges for parts bears to the itemized nontaxable charges for labor. As we understand the facts in the transactions about which you inquire, the dealer sells a tire and installs it onto the customer's vehicle. As part of the installation, the dealer removes the customer's old tire and, unless the customer chooses to retain it, disposes the old tire. The dealer makes a charge for the tire and for the installation, and makes a $2.00 charge for each tire itemized as a disposal fee unless the customer chooses to keep the old tires. Under these facts, where the customer pays the $2.00 charge only when disposing of the tire, we would not regard the charge as related entirely to the sale of the tire nor to all overhead expenses of the dealer, but rather would regard the charge as part of the installation and disposal of the tire. Thus, none of the $2.00 charge would be taxable. On the other hand, if the customer must pay the $2.00 charge whether leaving the tire with the dealer for disposal or not, the entire $2.00 would be subject to tax except for the portion of the charge ($0.25) that is actually collected pursuant to the California Tire Recycling Act. In summary, if a tire dealer makes no sale of tangible personal property to the customer, none of the tire disposal fee charged by the dealer is taxable. When a person purchases a tire from a dealer and is required to pay the $2.00 "disposal" fee whether or not an old tire is left for disposal, then the entire amount is taxable when no tire is left for disposal, and $1.75 is taxable when a tire is left for disposal (the $0.25 fee imposed under the California Tire Recycling Act

Ms. S--- M---

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January 27, 1995
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should be separately itemized). If instead the purchaser is required to pay the $2.00 fee only when leaving a tire for disposal, then none of the charge is taxable. I hope you find that this letter clarifies my previous letter (rather than making things more confusing or causing you and your members any inconvenience). If you have further questions, please contact me. Sincerely,

David H. Levine
Supervising Staff Counsel
DHL:cl

cc:

--- District Administrator