TINT – ALARMS – STEREO – LIGHTING INSTALLATIONS (What is taxable and not taxable?)

TINT – ALARMS – STEREO – LIGHTING INSTALLATIONS
(What is taxable and not taxable?)

ISSUE:  REPAIR/MAINTAINANCE (NOT TAXABLE) VS. REMODEL (TAXABLE)
Written by Dino Marcaccio, President of Texas Tax Group

Sales tax research documents:

Publication 94-113  April 2021  Motor Vehicle Repairs, Remodels, and Maintenance https://star.comptroller.texas.gov/view/202104036L?q1=202104036L

In this article, I am referring to a business that provides the following installation services (tint, stereos, alarms, and auto lighting). You will learn that almost all initial upgrades/remodeling of vehicles sold to “end-use customers” (except TINT jobs) are subject to sales tax.

In the future, I will write additional articles that cover many other normally taxable initial upgrade/remodel installations, including:

• Body kits
• Auto or van conversions
• General auto/truck accessories
• Performance/suspension upgrades
• Lift or lowering kits
• Paint protection
• Truck bed liners
• Vehicle graphics
• Wheels and tires
• Auto detailing
• Window repair or replacement
• Paintless dent repair
• General collision repairs
• All sales of anything “over the counter” (i.e., sales of tangible personal property).

Yep, buckle up. It’s gonna get a little bumpy.

For each of these three installation services (stereos, alarms, and auto lighting – excluding TINT jobs), the main issue is whether the charge is for a:

• taxable ”remodel” service or
• non-taxable “repair/maintenance” service

QUESTION AND ANSWERS – “END-USE” CUSTOMER SALES of stereos, alarms, and auto lighting

Note 1: Assume all are permanent installation jobs and not a sale of removable AMP/Speakers.

Note 2: Exclude TINT jobs, which are an exception to the rule, because this service (if billing lump sum) is considered “non-taxable” vehicle maintenance for both initial installation and subsequent repair and/or complete replacement. More on TINT later.

The taxability of stereos, alarms, and auto lighting is shown below in a question-and-answer format:

Q: If the job is to REPAIR an existing “defective/broken” stereo, alarm, or lighting system: 

then the labor charge is not taxable whether separately stated on the customer invoice or part of a lump sum invoice (i.e., in this case, the entire lump sum charge is not taxable to the customer and seller owes tax on the purchase price of incorporated materials)

Q: If the job is to REMODEL – (new installation or UPGRADE of a non-defective) stereo, alarm, or lighting system:

then the entire charge (materials and labor) is taxable whether the customer invoice is separated (material and labor separately stated) or lump sum (the single charge for material and labor). See below for further explanation. 

UNTAXED LABOR ON REMODEL/UPGRADE INSTALLATIONS IS THE MAIN PROBLEM AREA. 

WARNING – Many of the shops upgrading/remodeling stereo, alarm, or lighting systems believe that the labor is not taxable. This assumption is wrong. These shop owners incorrectly assume that ANY labor is repair labor on a motor vehicle and is not taxable. The problem is this is not REPAIR labor (non-taxable). It is REMODEL labor (taxable). 

I have represented over 75 shops over the last 15 years, and most get this wrong. They have not charged the customer sales tax on the upgrade labor amounts, and when they get audited, they will owe sales tax on all these labor charges. This mistake can end up costing the shop anywhere from $10,000 to $150,000 in sales tax assessment (plus penalties and interest) depending on the volume of work done. Remember, sales tax audits have a 4-YEAR look-back period. And believe me, 100% of the auditors will assess this sales tax. There is no warning audit like when you almost get a speeding ticket. 

Reminder – Motor vehicle repair labor is not taxable. Motor Vehicle remodel labor is taxable.

WARNING. Sales Tax auditors will often assess sales tax on both REPAIR LABOR (non-taxable) and REMODEL LABOR (taxable). This assessment would result in the shop being over-assessed sales tax on the exempt repair labor. Can auditors do this? Yes, they can. Why? Because almost no shop owners have a place on their invoice that distinguishes whether the stereo, alarm, or vehicle lighting install is a NEW or upgrade install (taxable labor) or a REPAIR of an existing system (labor not taxable). And if your invoice does not say REPAIR or REMODEL, then the auditor gets to assume that it is all taxable remodel labor.

In a sales tax audit, the auditor will begin with the assumption that 100% of your labor charges for all radio/speaker/amp installations are taxable upgrade/remodel labor (vs. repair labor). It is left to you to prove which labor is for repair jobs.

If your invoices for labor are not clear, then it is all taxable. Yep, it is that simple!

And I know what you are all thinking: “I will claim that 100% of my installations are for REPAIR jobs. That way the labor charge is not taxable!” But you and the auditor know very well that probably 90% of your labor charges are for new/upgrade/remodel jobs and the labor is taxable.

So even if you scribble on or redo your invoices before an audit, it will not help. Changing your invoices to EVADE sales tax is a crime in Texas. Sales tax is part of the penal code, and you do not want to Mess with a Texas Comptroller auditor. It would take an auditor less than an hour to just sit in your front office and ask two or three customers if they are coming in to UPGRADE or REPAIR their stereo, alarm, or auto lighting system. And you know all of them would say the same thing….UPGRADE.

If you are not repairing an existing defective/non-working stereo, alarm, or lighting system on the vehicle, then it is a 100% taxable (material and labor) job.

SALES OF TANGIBLE PERSONAL PROPERTY

If the speakers and amp or any other accessories are not permanently affixed to the vehicle, the entire charge is taxable because the stereo equipment is considered “tangible personal property” (TPP), and all TPP is taxable.

Now you understand the BASICS of sales tax for the sale/installation of stereo, alarm, or auto lighting systems to end-use customers. Next, let’s do a Q & A for AUTO DEALER SALES for the same three services. 

QUESTION AND ANSWERS – “AUTO DEALER” SALES of stereos, alarms, and auto lighting

Q. If the job is to REPAIR an existing ”defective/broken” stereo, alarm, or lighting system: 

then the labor charge is not taxable whether separately stated on the customer invoice or part of a lump sum invoice (see below). 

Lump-Sum Invoice. If the seller does the job per a lump sum invoice, then the entire job is not taxable. The seller owes sales (at purchase) or use tax (self-pay on sales tax return under ”taxable purchases”) on the purchase price of incorporated materials. 

Separated Invoice. If the invoice is separated, then the labor is not taxable and the seller should obtain a properly completed resale certificate for the sales tax normally due on the separately stated materials charge to the customer. Many would ask WHY this can occur since sales or use tax is normally due either to seller or buyer? But in this case, no sales tax was ever paid by anybody. In this case, the dealer can legally issue a resale certificate to the seller instead of being charged sales tax on materials charges. The theory is that the materials have been incorporated into a motor vehicle and will be subject to the 6.25% Texas Motor Vehicle sales tax at registration. 

Note: The invoice to the dealer must state that the job is to repair a pre-existing stereo, alarm, or auto lighting system.

Q. If the job is to REMODEL – (new installation or upgrade of a non-defective) stereo, alarm, or lighting system (labor and materials normally taxable)

then the entire charge (materials and labor) is NOT taxable as long as the dealer issued the seller a properly completed resale certificate. In this case, there is no distinction between a separated or lump sum invoice because both the materials and labor are taxable. However, as in the case above of a repair job, the dealer, in this case, can issue a resale certificate to the seller for the entire job (whether billed separately or lump sum). Caution – the resale certificate must be completed correctly. Many auditors will deny certificates based on “ticky-tacky” technicalities, such as not filling out the exemption box. I have seen auditors refuse to accept even a properly completed resale certificate if provided after the audit “start date” based on really ridiculous technical issues. Even though it was obvious, the remodel sale was to a dealer for resale, subject to 6.25% Texas Motor Vehicle Sales Tax. That will be the subject of another article.

TINT JOBS

1. The last of the four services discussed in this article is TINT jobs. TINTING is just a different animal when it comes to sales tax. Here is the general explanation. TINT labor itself is considered non-taxable exempt motor vehicle MAINTENANCE because maintenance labor is the same as REPAIR when it comes to motor vehicle repairs. However, sales tax would be due on tint materials if the seller decided to issue a separated invoice for the tint materials to the customer.

So let’s go through the various sales tax scenarios below (i.e., lump sum vs. separated invoices and customer vs dealer sales). 

CUSTOMER SALES

Q: If the invoice is based on a lump-sum invoice for a new TINT job: 

then the entire lump sum charge (including labor) is not taxable (i.e., in this case, the seller owes sales or use tax on the purchase price of incorporated materials).

Q: If the job is based on a separated invoice for a new TINT job: 

then the materials charge is taxable, and the labor charge is not taxable (i.e., the seller has the legal option to issue either a separated or lump sum invoice). 

DEALER SALES

Q: If the invoice is based on a lump-sum invoice for a new TINT job:

then the entire charge (materials and labor) is not taxable (i.e., in this scenario the seller owes sales or use tax on the purchase price of incorporated materials).

Q: If the job is based on a separated invoice for a new TINT job:

then the materials charge is taxable (unless the dealer issues a completed resale certificate) and the labor charge is not taxable (i.e., the seller has the legal option to issue either a separated or lump sum invoice). In this case, it would be best (most cost-effective) if the dealer issued the seller a resale certificate and the seller issued a separated invoice. 

If for whatever reason, the seller paid its vendor’s sales tax on the purchase of tint materials used in this scenario, then the Texas Comptroller’s Office will allow a “credit” for sales tax paid in error to vendors (Tax Rule 3.338). This credit will be applied in an audit, but only if the seller can provide complete backup that those materials were purchased sales tax paid, and a properly completed resale certificate was received from the dealer.

Stay tuned for further articles on the sale of other related services.

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I am the president of this Texas Sales/Use tax consulting firm and an ex-Texas Comptroller auditor (16 years). Over the last 15 years, TEXAS TAX GROUP has grown to include 15 ex-Texas Comptroller auditors, supervisors, and tax policy experts – https://texastaxgroup.wpengine.com/your-team. TEXAS TAX GROUP has been involved in 100s of Texas Comptroller Redetermination Hearings and defended over 6,000 sales/use tax audits. You can see who we are if you click this link – texastaxgroup.com.