Do Auto Repair Shops Charge Tax on Labor?

Businesses are permitted to charge certain taxes to their customers. Sales tax, for example, is a common state-level tax that businesses charge customers and collect for the state. Auto repair shops often provide the necessary parts as well as the labor for the repair. State law sets the rules for what types of sales are taxable, and might include labor. If services fall under the state's sales tax rules, auto repair shops will need to charge tax on labor.

Sales taxes are set at the state and local level, specifying what type of sales qualify and what rates apply. While the property sales, such as parts for a repair, are typically treated the same among the 45 states with sales taxes, services are subject to much more varied rules. Auto repair shops must check with their state to see what types of services, if any, are subject to sales tax. If services are taxed, then the shop is responsible for filing and paying tax on its labor sales.

Businesses are responsible for collecting sales taxes as a matter of administrative simplicity. States license businesses to charge sales tax and require them to make payments based on sales tax filings. Legally, the retail customer owes the sales tax and has to pay a use tax on any taxable purchase. Auto repair shops that fail to collect sales tax on taxable labor will have to pick up the tab themselves.

Most repair shops will provide the parts and labor necessary to fix a car. If the shop is in a state that doesn't tax labor, providing a detailed invoice is one way of reducing the taxable portion of repair invoices. Many states treat parts used in a repair as if sold by a retailer, making the shop responsible for collecting sales tax on the parts. In exchange, the shop can obtain a reseller's license and buy parts sales tax-free. Some parts might be considered inseparable from the labor, such as if the part is rarely sold for self-application.

Each state has an agency responsible for collecting and administering sales taxes. Most of those agencies maintain websites that clearly list the sales tax rates and what sales are taxable. Some specialty publications summarize this information for every state. The location of the repair shop dictates which sales tax laws apply, even if the customer is a resident of another state. Repair shop owners only need to check with the tax agency for the state in which their shop is located.