Could a New Jersey dealership buy oil-change parts for resale when lifetime oil changes were included with a vehicle sale or lease?

Plain-English summary

A dealership could treat included lifetime oil changes as resold services only when the vehicle-sale or lease documents clearly said the oil changes were included in the price.

The dealership promised free oil and filter changes every 5,000 miles through 75,000 miles and said their cost was included in the vehicle price.

When that promise appeared in the invoice, sales contract, or another document given to the customer at the sale or lease:

• property becoming part of the vehicle or transferred to the customer, such as an oil filter, could be purchased for resale;
• tools, supplies, and other property not incorporated or transferred remained taxable to the dealership; and
• the dealership needed records connecting its parts purchases to the included oil-change program.

If the documents did not say oil changes were included, the changes were courtesy transactions. The dealership was then the end user and owed use tax on the property consumed.

Employee labor did not create a taxable receipt. Although auto-repair services were taxable, wages paid to dealership employees performing the included changes were exempt compensation under the TAM's analysis.

What this means for you

Motor-vehicle dealers

Put the included oil-change promise in the customer-facing sale or lease documents. Marketing language or an informal practice was not the documentation described by the TAM.

Parts and supply accounting

Separate transferred or incorporated property from shop tools and consumed supplies. Only the former qualified for resale treatment under these facts.

Courtesy-service programs

If the vehicle contract does not include the service, expect use tax on the dealership's property used to perform it.

Common questions

Q: Could an oil filter be purchased for resale?
A: Yes, because it became part of the vehicle or was transferred to the customer.

Q: Could the dealership buy tools tax-free for resale?
A: No. Tools and supplies not transferred were taxable purchases.

Q: What documentation was required?
A: The invoice, sales contract, or another document furnished at sale had to state that the oil changes were included.

Q: What if the documents did not mention the oil changes?
A: The TAM treated them as courtesy transactions and required use tax on the property used.

Q: Were employee wages for performing the changes subject to Use Tax?
A: No, under the facts described in the TAM.

Citations and references

• N.J.S.A. 54:32B-2(e)(1) — transferred property and resale treatment
• N.J.S.A. 54:32B-3(a) — tangible personal property
• N.J.S.A. 54:32B-3(b) and (b)(2) — services, employee compensation, and auto repair

Source

• Landing page: https://www.nj.gov/treasury/taxation/tam-pubs.shtml
• Original PDF: https://www.nj.gov/treasury/taxation/pdf/pubs/tams/tam16.pdf

Original ruling text

Free Lifetime Oil Changes
TAM 2011-16 – Issued May 13, 2011
Tax: Sales and Use Tax
The taxpayer owns a motor vehicle dealership that sells and leases motor vehicles.
Taxpayer’s invoice for the sale or lease of a motor vehicle includes language which states that
the sale/lease includes free oil and filter changes every 5,000 miles up to 75,000 miles. The
taxpayer states that the cost of the oil changes is included in the price of the motor vehicle.
TAXABILITY OF TANGIBLE PERSONAL PROPERTY USED IN PROVIDING FREE OIL CHANGES
The taxpayer is inquiring whether purchases of tangible personal property used in providing the
free oil changes may be purchased for resale.
Under the New Jersey Sales and Use Tax Act, a taxpayer may purchase personal property for use
in performing services subject to tax under N.J.S.A. 54:32B-3(b) for resale if the property
becomes a physical component part of the property upon which the services are performed or if
the property is actually transferred to the purchaser of the service in conjunction with the
performance of the service. N.J.S.A. 54:32B-2(e) (1).
Under the above facts, a dealership may treat such oil changes as a resale situation. Therefore,
the dealership may purchase tangible personal property which becomes a physical part of the
motor vehicle or is actually transferred to the customer in conjunction with the performance of
the oil change for resale (e.g., oil filter). A dealership’s purchase of tangible personal property,
which does not become part of the motor vehicle and is not transferred to the purchaser, is
subject to tax (e.g., tool, supplies). N.J.S.A. 54:32B-3(a).
To purchase tangible personal property used in providing oil changes for resale, the dealership
is required to indicate that the purchaser will receive free oil changes, which are included in the
purchase price or lease price of the vehicle. This information must be provided in the invoice,
sales contract or any other written document furnished to the customer at the time of the sale.
Under these circumstances, a dealership is deemed to be making sales of the oil changes to
those customer, as part of the sale or lease of the vehicle.
A dealership should maintain proper documentation substantiating that tangible personal
property was purchased for use in performing oil changes that were covered by the sale or lease
of the vehicle.
If the invoice, sales contract or any other written document furnished to the customer at the
time of sale or lease does not indicate that oil changes are included in the transaction, the “free”
oil changes would not be considered “resold” to the purchaser. In this case, oil changes provided
to the customer free of charge would be considered courtesy transactions and the dealership
would be required to remit use tax on the tangible personal property used in providing the oil
change because the dealership is the end-user of this transaction.

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TAXABILITY OF LABOR USED IN PERFORMING FREE OIL CHANGES
The taxpayer also inquired whether the labor to provide the free oil changes under the above
facts is subject to tax.
The Sales and Use Tax Act provides an exemption from taxation for “wages, salaries and other
compensation paid by an employer to an employee for performing as an employee…” services
otherwise subject to tax. N.J.S.A. 54:32B-3(b). Thus, although auto repair services are subject to
tax under N.J.S.A.54:32B-3(b)(2), wages paid to an employee to perform such services do not
constitute a taxable receipt. As such, charges for labor to perform a “free” oil change as
described above are not subject to Use Tax if performed by the dealership’s employee.

Note: A Technical Advisory Memorandum (“TAM”) is an informational statement of the law,
regulations, or Division policies. It is accurate on the date issued. Subsequent changes in the law
or regulations, judicial decisions or changes in Division policies could affect the validity of the
information presented in a TAM.

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