N.C Sales & Use Tax Division Directive on Charges for Shop Supplies

On May 25, 2018, the N.C. Department of Revenue Sales & Use Tax Division issued a directive pursuant to N.C. Gen. Stat. 105-264 to address a number of issues relative to the application of sales and use tax to charges for shop supplies. This directive hereby disavows the Secretary’s Final Decision in Docket No. 2003-553, for transactions on or 2 after September 1, 2018, as it relates to the taxation of shop supplies for sales and use tax purposes. For purposes of this directive, shop supplies do not include tangible personal property that becomes a part of, attached to, or transferred as part of a service to a customer’s property.

CHANGES OF INTERPRETATION

Pursuant to the authority granted in N.C. Gen. Stat. 105-264(c), the Department changes its interpretation of the taxability of a separately stated charge made by a retailer for shop supplies in conjunction with the retail sale of tangible personal property.

EFFECTIVE SEPTEMBER 1, 2018, separately stated charges for shop supplies are part of the sales price of tangible personal property sold at retail to repair a motor vehicle, tangible personal property, a boat, or other tangible item subject to the sales and use taxes imposed under N.C. Gen. Stat. 105-164.4(a) and 105-164.6.

Additionally, this directive gives notice that EFFECTIVE SEPTEMBER 1, 2018, any charge for shop supplies in conjunction with taxable repair, maintenance, and installation services is part of the sales price of or gross receipts derived from repair, maintenance, and installation services sold at retail. Therefore, EFFECTIVE SEPTEMBER 1, 2018, any charge for shop supplies, whether separately stated or not, in connection

with a retail sale of tangible personal property or repair, maintenance, and installation services is subject to the general 4.75% State, applicable local (2.00% or 2.25%), and applicable transit (0.50%) rates of sales and use tax. The term “sales price” is defined, in part, to include “[t]he cost of materials used,” “any other expense of the retailer,” and “charges by the retailer for any services necessary to complete the sale.” Thus, any charges to recoup or recover costs of shop supplies are part of the sales price subject to tax. Here are a couple of examples given in the directive:

 Mr. Smith drove into a tree resulting in damage to the right rear fender of his car. Ze Body Shoppe replaces and paints the fender. Tangible personal property that became part of or attached to Mr. Smith’s car as part of the repair include: automotive pins, bolts, a fender, nuts, paint, polishes, primer, sealer, solder, and washers. Items of tangible personal property used or consumed during the repair process that did not become part of or attached to the customer’s repaired car include buffing pads, chamois, detergent, paint thinner, penetrating oil, masking paper, masking tape, rags, and sandpaper and were labeled on the invoice as “shop supplies.” On the invoice to Mr. Smith, the repair maintenance, and installation services are listed as “labor” in the amount of $500.00, the fender and parts are listed in the amount of $200.00, and a charge for “shop supplies fee” is listed in the amount of $50.00 for a total billing of $750.00. Ze Body Shoppe is liable for sales tax at the general 4.75% State, applicable local (2.00% or 2.25%), and applicable transit (0.50%) rates of sales and use tax

on the total taxable sale of $750.00, including the $50.00 charge for shop supplies. Additionally, Ze Body Shoppe is liable for the general 4.75% State, applicable local (2.00% or 2.25%), and applicable transit (0.50%) rates of sales and use tax on the purchase price of the “shop supplies” used in the process of repairing the car no matter that such amount is also included in the sales price.

 Mrs. Bradshaw’s motor vehicle is not starting properly, so she contacts her mechanic, Mr. Gray, to repair her car. Mr. Gray removes and cleans the EGR valve, replaces the gaskets, and a vacuum line. Tangible personal property that became part of or attached to Mrs. Bradshaw’s repaired car include the vacuum line and the gaskets. During the repair process, Mr. Gray uses or consumes the following items of tangible personal property (“shop supplies”) that do not become part of or attached to Mrs. Bradshaw’s car: carburetor cleaner, other solvents, and rags. On the invoice to Mrs. Bradshaw, Mr. Gray charges $20.00 for the gaskets and the vacuum line and $80.00 for the repair, maintenance, and installation services, for a total invoice amount of $100.00. Mr. Gray is liable for sales tax at the general 4.75% State, applicable local (2.00% or 2.25%), and applicable transit (0.50%) rates of sales and use tax on the $100.00 sales price of repair, maintenance, and

installation services sold at retail to Mrs. Bradshaw. Mr. Gray is also liable for the general 4.75% State, applicable local (2.00% or 2.25%), and applicable transit (0.50%) rates of sales and use tax on the purchase price of the “shop supplies” used in the repair of Mrs. Bradshaw’s car no matter that such amount is also included in the sales price of the repair, maintenance, and installation services.

ADDITIONAL INFORMATION AND ASSISTANCE

Information regarding repair, maintenance, and installation services can be found on the Department’s overview page for Repair, Maintenance, and Installation Services; and Other Repair Information, https://www/ncdor.gov/taxes/sales-and-use-tax/

repair-maintenance-and-installation-services-and-other-repair-information.

To the extent that there is any change in the rate or amount of tax, change to a statute or regulation, or new case law subsequent to this directive, the provisions in this directive may be superseded or voided. To the extent that any provisions in any other notice, directive, technical bulletin, or published guidance issued prior to the date of this directive conflicts with this directive,

the provisions contained in this directive supersede.