Can a car dealer buy oil and filters tax-free for 'free' oil changes promised to vehicle buyers?

Plain-English summary

A car dealership advertises "Free Oil Changes For Life" to people who buy or lease a vehicle. Its sample invoices say: "This Transaction includes FREE Oil & Filter Changes Every 5,000 Miles up to 60,000 miles." It asked (1) whether the "free" oil changes are actually sold as part of the vehicle, and (2) whether it can buy the oil and filters tax-free for resale.

The Office of Counsel concluded: yes -- when the documents say so.

• The oil changes are sold with the vehicle. Where the sales invoice (or the sale/lease contract, or any other writing given at the time of sale) states the oil changes are included in the transaction price, the dealer is selling the oil changes as part of the vehicle's price. This mirrors West-Herr Ford, where written statements promising loaner cars made the loaners a purchase for resale.
• So the oil and filters qualify for the resale exclusion. Under Tax Law 1101(b)(4)(i)(B), property used in performing a taxable service is exempt for resale if it becomes part of the serviced property or is actually transferred to the customer. The oil and filters become part of (or are transferred with) the vehicle service -- so the dealer buys them tax-free for resale.
• But "promotional giveaways" don't qualify. If no document given at the time of sale shows the oil changes are included, the "free" oil changes are promotional giveaways, and the resale exclusion does not apply (20 NYCRR 526.6(c)(4)) -- the dealer owes tax on the oil and filters.
• Tools/supplies are taxable. Items that don't become part of the vehicle or get transferred to the customer (shop tools, supplies) are taxable retail purchases regardless.

The dealer must keep records substantiating which oil-change materials were tied to a sold (vs. giveaway) oil change (Tax Law 1135; 20 NYCRR 533.2).

What this means for you

Dealers and service businesses bundling "free" extras

A "free" perk you bundle into a sale can be a resale purchase -- if your paperwork proves you sold it as part of the price. Put it in the invoice or contract at the time of sale ("price includes X"). Then the materials you transfer to the customer (oil, filters, parts) ride on the resale exclusion. Leave it as a vague ad promise with nothing in the deal documents, and it's a promotional giveaway you pay tax on.

The recordkeeping hook

Keep records linking the consumed materials to documented, sold oil changes. Tools and shop supplies that aren't transferred to the customer stay taxable.

Common questions

Q: I give 'free' oil changes with every car -- can I buy the oil tax-free?
A: Only if your invoice or contract at the time of sale states the oil changes are included in the price. Then they're sold (not given away) and the oil/filters qualify for the resale exclusion.

Q: What if it's just an advertised promise with nothing on the invoice?
A: Then they're promotional giveaways and the resale exclusion doesn't apply -- you owe tax on the oil and filters.

Q: Are my shop tools and supplies covered too?
A: No. Items that don't become part of the vehicle or get transferred to the customer are taxable retail purchases.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1101(b)(4)(i)(B) (resale exclusion for property transferred in performing a taxable service)
• Tax Law section 1135 (recordkeeping)
• 20 NYCRR section 526.6(c)(4) (property given away for promotion)
• West-Herr Ford, Inc. v Tax Appeals Tribunal, 16 AD3d 727 (loaner cars purchased for resale)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a10_39s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(39)S
Sales Tax
September 14, 2010

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S100421A

On April 21, 2010, the Department of Taxation and Finance received a Petition for Advisory
Opinion from name and address redacted. Petitioner asks (1) whether “free” oil changes provided to
purchasers of motor vehicles are sold to the purchasers as part of the vehicle purchases; and (2) whether
Petitioner’s purchases of tangible personal property for use in providing oil changes may qualify for the
resale exemption.
We conclude that the “free” oil changes are provided by Petitioner to certain motor vehicle
purchasers as part of the sale price of the vehicle. Accordingly, Petitioner’s purchases of tangible personal
property for use in providing those oil changes may qualify for the resale exemption.
Facts
Petitioner owns a car dealership that sells or leases motor vehicles to customers. Petitioner has
advertised in print and other media that it offers free oil changes to customers who purchase or lease vehicles
for the life of the vehicle. Petitioner provided examples of this advertising. The ads include the language
“Free Oil Changes For Life” beneath a picture of the vehicle with the monthly lease price. The fine print
beneath the ads includes the following language: “Oil change included in price of vehicle, every 5k miles see
dealer for details.”
Petitioner also provided sample customer invoices for the sale of its vehicles which include the
following language: “This Transaction includes FREE Oil & Filter Changes Every 5,000 Miles up to 60,000
miles.”
Petitioner states that it is obligated as part of its business plan to supply oil changes at no charge, and
that the cost of the oil changes is included in the price of the vehicle.
Analysis
The “free” oil changes provided by Petitioner to customers in connection with Petitioner’s sales or
leases of motor vehicles are sold to certain customers for purposes of Article 28 of the Tax Law. Petitioner’s
purchases of tangible personal property for use in performing these oil changes may qualify for the resale
exemption.
West-Herr Ford, Inc. v Tax Appeals Tribunal of State of New York, 16 AD3d 727 (3d Dept 2005)
held that loaner cars furnished by the taxpayer to customers whose cars were being repaired were purchased
by the taxpayer for resale because the taxpayer gave written statements to customers upon delivery of a new
vehicle declaring that the taxpayer would pay for a loaner car for the customer’s use. In that case the written
statements were held to be enforceable. In the present case, it appears that Petitioner provided sales invoices
to customers upon the sale or lease of a vehicle which indicate that oil changes every 5,000 miles up to
60,000 miles are included in the transaction price. Accordingly, Petitioner is making sales of the oil changes
to those customers, as part of the sale or lease of the vehicle. It should be noted, however, that if the invoice

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TSB-A-10(39)S
Sales Tax
September 14, 2010

provided to a customer did not indicate that oil changes were included in the transaction, and neither the sale
or lease contract nor any other written document furnished to the customer at the time of sale indicated that
oil changes were included, then the “free” oil changes referred to in Petitioner’s advertisements would not be
sold to the customer. In that case, oil changes provided to the customer free of charge would be promotional
giveaways.
The resale exemption applies to tangible personal property purchased for use in performing services
subject to tax under Tax Law §1105(c) 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. Tax Law §1101(b)(4)(i)(B). Accordingly, Petitioner’s
purchases of tangible personal property, such as oil and filters, for use in performing the oil changes that are
included in the sale or lease of motor vehicles will qualify for the resale exemption, provided the tangible
personal property becomes part of the motor vehicle or is actually transferred to the customers in conjunction
with the performance of the oil changes. Petitioner’s purchases of tools or supplies that do not become part
of the vehicle and are not transferred to customers are retail purchases subject to sales tax under Tax Law
§1105(a).
The resale exemption would not apply to Petitioner’s purchases of tangible personal property for use
in performing oil changes that are provided to customers free of charge for promotion or advertising
purposes. See 20 NYCRR §526.6(c)(4). Petitioner should keep records substantiating that tangible personal
property purchased for use in performing oil changes are used in connection with oil changes that are
included in the sale or lease of a motor vehicle as discussed above, or are otherwise sold for consideration, to
a customer. See Tax Law, §1135, 20 NYCRR §533.2.

DATED: September 14, 2010

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.