Can a motor-repair company buy small parts like nuts, bolts, grease, and paint tax-free under a resale certificate, even if it stops billing customers separately for those items?

Subject

Parts/Materials (Nuts, Bolts, Grease, Paint) — Become Component Part Of Repaired/Rebuilt Tpp

Plain-English summary

A company that repairs and rebuilds electric motors buys small items -- paint, nuts, bolts, and grease -- that become a component part of the motor and are transferred to the customer along with the repaired or rebuilt motor. The company used to classify these items as inventory, buy them tax-free with a resale certificate, and bill the customer a separate charge equal to 3% of the total cost of sales on the job. To simplify bookkeeping, the company reclassified these low-cost items as "overhead" on its books instead of inventory, and stopped billing customers separately for them, even though the items still ended up transferred to the customer as part of the repaired motor.

The company asked whether it could still buy these reclassified "overhead" items tax-free under a resale certificate, since the items' "care, custody, and control" still passed to the customer.

The Comptroller said yes. Under Rule 3.292, a company that repairs, remodels, or restores tangible personal property is a retailer that must collect sales tax on its entire charge for materials, parts, labor, supplies, and equipment -- but it may issue a resale certificate instead of paying tax when purchasing materials that will be transferred to the customer's care, custody, and control. The ruling also confirmed the company does not need to itemize these items separately on invoices to preserve the exemption; it may instead simply fold their cost into its overall taxable service charge.

What this means for you

Repair, remodeling, and restoration businesses

If your business repairs, restores, remodels, or maintains tangible personal property for customers, you're generally a retailer that must collect sales tax on your total charge -- but you can still buy the parts and materials that get transferred to the customer (as part of the repaired item) tax-free using a resale certificate. This ruling confirms that how you classify those items on your own books (inventory vs. overhead) doesn't change that result, as long as care, custody, and control of the items actually passes to the customer.

Businesses deciding how to invoice repair jobs

You don't have to break out a separate line item for small parts and materials to keep the resale exemption on your purchase of them. You can lump their cost into your overall taxable service charge to the customer instead -- either approach preserves the exemption on your own purchase of those items.

Accountants and tax professionals

This letter interprets Texas Tax Code 151.302 (the sale-for-resale exemption) together with Rule 3.292, and confirms that a taxpayer's internal bookkeeping classification (inventory vs. overhead) and invoicing choice (itemized vs. bundled) do not affect whether the underlying purchase of transferred materials qualifies for the resale exemption. Note the ruling is based on the facts presented to the Comptroller and could change on different facts.

Common questions

Q: Does reclassifying parts from "inventory" to "overhead" on the books affect the resale exemption on buying them?
A: No. The Comptroller found the transactions remained essentially the same -- the items still became a component part of the motors and still passed to the customer -- so the bookkeeping reclassification didn't change the tax treatment.

Q: Must the company separately itemize these parts on customer invoices to preserve the exemption?
A: No. The ruling states the company is not required to separately charge for the "overhead" items on its invoices.

Q: Can the company instead just roll the cost of these parts into its overall service charge?
A: Yes. The ruling confirms the company may include the overhead cost of the items in its overall taxable service charge and still preserve the sale-for-resale exemption.

Q: What rule governs this kind of repair/resale question?
A: Rule 3.292 (Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property), which requires the service provider to collect tax on its entire charge as a retailer, but allows it to issue a resale certificate when buying materials that will pass into the customer's care, custody, and control. Note the alerts at the top of the letter: Rule 3.359 (referenced in the quoted rule text) has since been repealed, with motor vehicle repairs now covered by Rule 3.290 and aircraft by Rule 3.280, and resale-certificate guidance now also appears in Rule 3.285.

Citations and references

Statutes and rules:

• Texas Tax Code 151.302 (sale-for-resale exemption; exemption applies when "care, custody, and control of the tangible personal property is transferred to the purchaser of the service")
• Rule 3.292 — Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property (service providers are retailers that must collect tax on their full charge but may issue a resale certificate for materials transferred to the customer's care, custody, and control)
• Rule 3.359 (referenced in the quoted rule text as governing Motor Vehicle and Private Aircraft repairs; per the letter's current alert, Rule 3.359 has since been repealed and superseded by Rule 3.290 for motor vehicles and Rule 3.280 for aircraft)
• Rule 3.285 — Resale Certificates; Sales for Resale (amended 11/01/2017) (per the letter's current alert, for guidance on care, custody, and control of TPP when providing a taxable service)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1441G09

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017).

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.

September 27, 1996

This is in response to your request for a ruling on the taxability of the
following transactions:

FACTS

Your client is in the business of repairing and rebuilding electric motors. In
order to perform this service, the company purchases several small items such
as paint, nuts, bolts, and grease, all of which become a component part of the
motor being serviced, and which are transferred to the customer as a part of
the rebuilt or repaired motor. Each of these items was classified as inventory
on the company's books.

Formerly, your client had purchased these items tax free by issuing a sale for
resale certificate to its vendors. The company would then bill the customer
for the items by adding a charge equal to 3% of the total cost of sales on that
job.

In order to simplify its bookkeeping procedures on these relatively low cost
items, the company started reclassifying these items as "overhead" on its books
instead of classifying them as inventory. Despite this reclassification on the
company's books, the transactions remained essentially the same. The items
still became a component part of the motors being serviced, and care, custody,
and control of the times passed to the customer. However, the customer was no
longer billed separately for the items.

QUESTIONS

1. May the company still purchase the newly reclassified "overhead" items as
   sales for resale entitled to the exemption under Texas Tax Code 151.302, if the
   "care, custody, and control of the tangible personal property is transferred to
   the purchaser of the service?

Response: Yes, Rule 3.292- Repair, Remodeling, Maintenance, and Restoration of
Tangible Personal Property, provides in part:

(b) Services to tangible personal property other than aircraft,
commercial vessels, and motor vehicles. Persons who repair, restore, remodel,
or maintain tangible personal property belonging to another are providing
taxable services. Persons who remodel motor vehicles are also covered by this
section. Persons who repair, maintain, or restore motor vehicles should refer
to sec. 3.359 of this title (relating to Motor Vehicle and Private Aircraft).

(1) A service provider is a retailer and must obtain a tax permit
and collect sales or use tax on the entire charge for materials, parts, labor,
consumable supplies, equipment, and any charges connected to the repair,
remodeling, restoration, or maintenance service.

(2) A service provider may issue a resale certificate instead of
paying sales or use tax to the supplier when purchasing materials that will be
transferred to the care, custody, and control of a customer.

2. If the answer to question 1 is Yes:

a. Is the company required to separately charge for the "overhead" items on
its invoices to its customers in order to preserve the sale for resale
exemption ?; or

Response: No.

b. May the company include the overhead cost of the items in its overall
taxable service charge to its customers and still preserve the sale for resale
exemption?

Response: Yes.

3. If the answers to Question 2(a) is yes, and the answer to 2(b) is no,
   please explain the reason for the disparate treatment between 2(a) and 2(b) in
   light of Texas Tax Code 151.302(b)'s grant of the exemption for tangible
   persona property used to perform a service when "the care, custody, and control
   of the tangible personal property is transferred to the purchaser of the
   service."

Response: No response necessary. See response to 2(a) and (b).

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division

NOTE: Previous Accession Number 9609800L