For a Texas motor vehicle repair, can the repairman charge the customer sales tax on parts at a price lower than what the repairman paid for those parts?

Subject

Motor Vehicle Repair — Separated Contracts — Agreed Sales Price of Materials Cannot Be Less Than Repairman's Cost

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9312L1271G03

Plain-English Summary

ALERT (timeline note): The letter itself is dated December 3, 1993, and its analysis rests entirely on former Rule 3.359. A banner at the top of the STAR page states that Rule 3.359 has since been repealed, with motor vehicle repair issues now addressed under Rule 3.290 and aircraft repair issues under Rule 3.280. That means the specific rule subsections cited below — Rule 3.359(a)(12), (c)(2), (a)(5), and (b) — no longer exist in that form. The underlying separated-vs.-lump-sum framework described in this 1993 letter may still reflect current policy in substance, but anyone relying on it today should confirm the equivalent provisions in current Rule 3.290 rather than citing Rule 3.359 directly.

The Texas Comptroller's Tax Administration Division responded to a taxpayer question about how sales tax applies to motor vehicle repairs, distinguishing two contract structures:

• Labor is never taxable. Regardless of contract type, the labor charge to repair a motor vehicle is not subject to sales tax. Sales tax applies to the parts incorporated into the vehicle and to consumable supplies used up during the repair.
• Separated contracts (materials and labor separately stated to the customer): the repairman collects and remits sales tax from the customer on the materials charge, and may buy those materials tax-free from vendors using a resale certificate. Critically, the agreed sales price of the materials — the amount sales tax is charged on — cannot be less than what the repairman actually paid for those materials. The letter cites Rule 3.359(a)(12) and (c)(2) for this rule.
• Lump-sum contracts (materials and labor billed as one undivided charge): the repairman does not collect sales tax from the customer, and instead must pay sales tax when purchasing the materials. The letter cites Rule 3.359(a)(5) and (b) for this rule.

The letter then addresses sublet repairs, where one repairman farms out part of the job to another repairman:

• If a separated repairman sublets to a lump-sum repairman, the lump-sum repairman pays tax on materials and doesn't collect tax from the separated repairman. The separated repairman can pass along that lump-sum sublet charge to the customer without collecting tax on it, but must still collect sales tax on its own separately stated materials charge.
• If a separated repairman sublets to another separated repairman, a resale certificate may be issued for the sublet repairman's separately stated materials charge. The original separated repairman must then collect sales tax from the customer on both its own materials charge and the sublet repairman's materials charge.

The letter also warns that estimates/bids can be treated as either lump-sum or separated agreements depending on how they're structured, so repairmen need to be clear about which type of contract they're operating under. It flags as an error the case of a lump-sum repairman who issues a resale certificate (buying materials tax-free) but then also collects sales tax from the customer on the lump-sum charge — that tax was collected in error, must be refunded to the customer, and cannot be used as a credit against the repairman's own tax liability on the materials (because the resale certificate used to buy those materials was invalid for a lump-sum job). Finally, the letter advises against labeling a third-party sublet repair as "Non-Taxable Parts" or "Net Items" on an invoice, since that's confusing; it's clearer to identify the charge as a lump-sum repair performed by a third party.

What This Means For You

If you run a motor vehicle (or aircraft) repair shop in Texas: This letter's core lesson is that your invoicing structure — separated (materials and labor billed separately) versus lump-sum (one combined price) — determines who collects sales tax and how. Under a separated contract, you must charge sales tax on materials at a price that is at least what you paid for them; you cannot mark down the taxable materials price below your own cost while collecting a higher lump-sum-equivalent amount elsewhere.

If you sublet work to another shop: Track whether the shop you're subletting to operates on a separated or lump-sum basis, because that changes whether you owe tax on the sublet charge and whether you need to collect tax on it from your own customer.

Important caveat: Because Rule 3.359 has been repealed and replaced by Rule 3.290 (motor vehicles) and Rule 3.280 (aircraft), do not cite the rule subsections named in this 1993 letter as current law — confirm the corresponding language in current Rule 3.290 before relying on this letter's specifics.

Q&A

Q: In a separated repair contract, can I charge the customer sales tax on a materials price lower than what I paid for the parts?
A: No. The letter states that under a separated agreement, "the agreed sales price of the materials, on which sales tax is collected, cannot be less than the price the repairman paid for the materials," citing Rule 3.359(a)(12) and (c)(2).

Q: Is labor ever subject to Texas sales tax on a motor vehicle repair?
A: No. The letter states plainly that "the labor to repair a motor vehicle is not subject to sales tax," regardless of whether the contract is separated or lump-sum.

Q: If I'm a lump-sum repairman and I mistakenly collect sales tax from my customer after buying materials with a resale certificate, what do I do?
A: The letter says that tax was collected in error and must be refunded to the customer. You cannot credit that erroneously collected tax against your own tax liability on the materials, because issuing a resale certificate for a lump-sum job made that certificate invalid.

Q: Can I still rely on Rule 3.359 as cited in this letter?
A: No, not directly. The STAR page carries an alert stating Rule 3.359 has been repealed; motor vehicle repair issues are now covered by Rule 3.290, and aircraft repair issues by Rule 3.280. Check those current rules for the equivalent provisions before relying on this letter's specific subsection citations.

Original ruling text

ALERT: The cited rule, Rule 3.359 has been repealed. See Rule 3.290 for issues relating to Motor Vehicle repairs. See Rule 3.280 for issues relating to Aircraft.

December 3, 1993

Dear *:

Thank you for your letter concerning the taxability of motor vehicle repairs.

The labor to repair a motor vehicle is not subject to sales tax. Sales tax is
due on the parts incorporated into the motor vehicle as part of the repair and
on consumable supplies used up in performance of the repair.

The agreement between the repairman and the customer determines how sales tax
is paid on the materials (parts and consumable supplies). I have enclosed Rule
3.359 concerning repairs to motor vehicles and private aircraft.

If the agreement is separated (separately stated charges to the customer for
materials and labor), the repairman collects and remits sales tax from the
customer on the charge for materials. The repairman may issue a resale
certificate to vendors when purchasing the materials sold to customers. The
agreed sales price of the materials, on which sales tax is collected, cannot be
less than the price the repairman paid for the materials. See Rule
3.359(a)(12) and (c)(2).

If the agreement is lump-sum (charge for material and labor is not separately
stated to the customer), the repairman does not collect sales tax from the
customer. The repairman must pay sales tax when purchasing the materials. See
Rule 3.359(a)(5) and (b).

The situation in your letter appears to be a case in which a separated
repairman sublets a portion of the motor vehicle repair to a lump-sum repairman
who provides materials labor for a single charge. In such a case, the lump-sum
repairman pays sales tax on materials and does not collect tax from the
separated repairman. The separated repairman may pass on the lump-sum sublet
repair to their customer without having to collect sales on the charge for the
lump-sum sublet repair. The separated repairman is required to collect sales
tax on their own separately stated charge for materials.

If a separated repairman sublets the repair to another separated repairman, a
resale certificate may be issued for the separately-stated charge for
materials. The charge for labor is not taxable. The original separated
repairman must then collect sales tax from the customer on their
separately-stated charge for materials plus the separately-stated charge for
materials by the sublet repairman.

Estimates by repairman can be considered either lump-sum or separated
agreements (bids) between the parties for sales tax purposes. Repairman should
clearly be aware of what type of contracts (separated or lump sum) that they
are operating under with their customers. A lump-sum motor vehicle repairman
who issues a resale certificate for materials and who then collects sales tax
on the lump-sum contract is collecting tax in error. The tax collected in
error must be refunded to the customer who paid the tax. The lump-sum
repairman cannot credit this error tax against his own liability for the
materials because he issued an invalid resale certificate.

The listing of a third-party sublet repair as "Non-Taxable Parts" or as "Net
Items" is confusing at best. The repairman is better served by clearly
identifying the charge to the customer as a lump-sum motor vehicle repair by a
third party, if such is the case. This opinion is based on the facts you
submitted. Other facts, though similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512-475-0030. You may also write to Tax Administration, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Administration Division

NOTE: Previous Accession Number 9312093L