How did Texas tax motor-vehicle service contracts, repairs performed under them, and customer deductibles?

Plain-English summary

The requester asked how Texas sales tax applied to motor-vehicle service contracts and repairs performed under them.

The Comptroller said labor to repair, maintain, or restore motor vehicles was not taxed. For a separated repair charge, only the stated materials charge was taxable and the repairer could buy parts for resale. For a lump-sum repair, the customer paid no tax and the repairer paid or accrued tax on the parts.

The sale of a motor-vehicle service contract to the consumer was not taxed. Work under the contract followed the same billing rule: no tax on a lump sum, but tax on separately stated parts. When there was no deductible, the underwriter paid the full charge including any tax. With a deductible, the owner's payment reduced the total and the underwriter paid the balance, including tax if applicable.

The same repair billing treatment applied when another dealership performed work not covered by the policy and the customer paid the whole charge. The letter separately warned that service contracts for pleasure watercraft, appliances, and other tangible personal property were taxable; this page does not apply the motor-vehicle result to those items.

What this means for you

For the motor-vehicle contracts addressed here, billing form determined parts tax, while the deductible changed who paid the repair total rather than the underlying tax classification.

Common questions

Was the motor-vehicle service contract taxed when sold? No.

Was a lump-sum covered repair taxable? No.

What if parts were separately stated? Tax applied to the parts charge.

How did a deductible work? The owner's payment applied to the total charge and the underwriter paid the remaining balance, including any tax.

Citations and references

• 34 Tex. Admin. Code Rule 3.292 — repair services on tangible personal property
• 34 Tex. Admin. Code Rule 3.290 — automotive repair and maintenance shops

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9105L1109B01

Original ruling text

May 2, 1991

Dear **:

Thank you for asking about the taxability of motor vehicle service contracts
(your file **).

Under current state law, labor to repair, maintain or restore aircraft and
motor vehicles, including recreational motor vehicles, is not taxed. When a
charge for motor vehicle repair is separated between labor and material, only
the separately stated charge for materials is taxed. The repairman is
considered a retailer and may purchase parts tax-free for resale.

When the labor and materials charges are not separately stated, the lump-sum
charge for the repair is not taxable. In this case the repairman is considered
the consumer of the parts used in the repair and should pay tax to the supplier
when purchasing parts; or, he owes tax on his cost of the parts taken from his
tax-free resale inventory.

When a motor vehicle dealer sells a motor vehicle service contract to the
consumer, sales tax is not charged. If a third party is responsible for
performance under the service policy, the dealer is considered an agent for the
third party. Service performed under the service contract is taxed or not taxed
depending on whether the charge is lump sum or separated. No tax is due if the
charge is lump-sum; but, tax is due on the charge for parts if they are
separately stated.

If there is no deductible under the terms of the service contract, the owner of
the motor vehicle pays nothing to the dealer performing the work and the
underwriter of the service policy would pay the entire charge including tax, if
any. If there is a deductible, the amount paid by the owner is applied to the
total charge and the service policy underwriter should pay the balance
including tax, if any.

If repairs are performed by a dealership other than the one who sold the
service policy and the service policy does not cover such work, the customer
pays the entire charge but the taxability does not change. Tax would be due on
separately stated charges for parts, and no tax would be due if the repair is a
lump-sum charge.

The repair, maintenance, remodeling, or restoration of pleasure watercraft,
appliances and other tangible personal property is a taxable service. The sale
of a service contract covering these items is taxable to the consumer at the
time of the sale. The service policy underwriter, whether the manufacturer, the
dealer or a third party, should have a sales tax permit.

When work is performed under the service policy, the service underwriter who is
responsible for performing the work may issue a resale certificate for the
parts and labor to the person who actually performed the service and is billing
for the work and parts. The person who actually performed the work and
installed parts taken from inventory or purchased for the job may also issue a
resale certificate for the parts.

I am sending you Rule 3.292, that covers repair services on tangible personal
property and Rule 3.290 that covers automotive repair and maintenance shops.

If you have other questions or need more information please call or write. The
toll-free number is 1-800-531-5441; my extension is 3-4675. The regular number
is (512) 463-4675.

Sincerely,

Tom Soto
Tax Administration