Was a machine shop's separately stated EPA processing fee taxable when charged with engine repair work?

Plain-English summary

A machine shop performed lathe work and rebuilt engine blocks, mostly for nonautomotive engines but sometimes for automotive engines. It planned to add an “EPA processing fee” to offset hazardous-waste disposal costs, even though no EPA rule required that particular fee.

The Comptroller said the fee followed the tax treatment of the underlying labor. Under Tax Code § 151.007(a)(2), a taxable item's sales price included labor, services, and other seller expenses. The environmental fee was therefore taxable when the related repair labor was taxable, whether or not separately stated.

The letter also said labor to repair, maintain, or restore a customer's automotive engine was nontaxable. An environmental fee connected with that nontaxable service was likewise nontaxable. Because the shop worked on both automotive and nonautomotive engines, it should obtain exemption certificates from automotive-engine customers to document why tax was not collected.

What this means for you

Repair shops

Adding a separately stated environmental or disposal fee does not give it an independent tax character. The fee generally follows the service that generated it.

Accountants and tax professionals

For mixed lines of work, documentation matters. The letter recommended customer exemption certificates to distinguish nontaxable automotive-engine jobs from taxable nonautomotive work during an audit.

Common questions

Was the EPA processing fee always taxable? No. It was taxable only when connected with taxable labor.

Did separately stating the fee make it nontaxable? No.

What if the fee related to automotive-engine repair? The letter treated both the automotive repair labor and the connected fee as nontaxable.

Why obtain exemption certificates? To document which jobs involved nontaxable automotive-engine repair when the shop also performed taxable work.

Citations and references

• Tex. Tax Code § 151.007(a)(2) (sales price includes labor, service, and other expenses)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1158D06

Original ruling text

February 24, 1992

Dear **:

Thank you for your letter, which has just been transferred to me for
reply. I apologize for the delay. As I understand it, you need a taxability
ruling based on the following situation:

Taxpayer is in the machine shop business. The business does lathe work
and re-working of engine blocks primarily. The engines are generally not
automotive in nature but some percentage of the work is on automotive engines.

Taxpayer currently charges for parts and labor as a taxable transaction.
The taxpayer plans to institute an "EPA processing fee". The charge will be
calculated as a component of the labor charge. Taxpayer is not aware of any
EPA regulation requiring assessment or remittance of any fee of this type. The
fee will be levied to offset the cost of EPA required hazardous waste disposal
requirements.

Question: Is the EPA fee a taxable charge for sales tax purposes?

Answer: The EPA fee, whether or not separately stated to the customer,
is taxable if the labor itself is taxable. This is because the "sales price" of
a taxable item (meaning a taxable good or service) includes "the materials
used, labor or service employed, interest, losses, or other expenses". Tax
Code Section 151.007 (a)(2). The EPA fee you describe simply represents a
potential cost or expense to the seller that he or she uses when calculating
the charges for the services he or she provides.

Please keep in mind that the labor charge to a customer to repair,
maintain, or restore that customer's automotive engine is not taxable. If the
EPA fee is connected to a charge for nontaxable services, the fee is not
taxable.

Note: The service provider should obtain an exemption certificate from
each customer for whom he or she repairs, maintains, or restores automotive
engines. This is necessary primarily because he or she is working on both
automotive and non-automotive engines. In an audit, the certificates would be
necessary to differentiate between these two types of jobs and to document the
reason that the shop owner did not collect tax from a customer.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have further questions, feel
free to write or call me at 1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Tax Administration Division