Do you know the difference between "installation labor" and "repair labor" for state sales and use tax purposes? I know, I know, it depends on the state, right?
Well, let's just talk about one state for now.
Minnesota Rules - Repair Labor
According to Minnesota Revenue Notice #06-11, repair labor means labor to mend or restore an item that was broken, worn, damaged, defective, or malfunctioning, to working order or operating condition so that it can be used for its original purpose. Repair labor includes maintenance labor that sustains or supports safe, efficient, continuous operations; or to keep something in good working order by preventing decline, failure, lapse, or deterioration.
Repair labor is generally exempt from sales tax in Minnesota if the repair charges are separately stated from taxable repair parts or other taxable items on the bill to the customer. A charge to replace a malfunctioning component part of an item with a comparable part is considered nontaxable repair labor. However, when the new part is significantly different from the original component part, or is an upgrade, the replacement labor is considered taxable installation labor.
Minnesota Rules - Installation Labor
In Minnesota, installation labor is taxable.
Installation labor means labor to set an item into position or to connect, adjust or program it for use, or to add something new or different to an item. Installation labor is taxable whether provided by the seller of the item or by a third party, if the installation would be taxable if provided by the seller of the item. As stated earlier, installation labor includes replacement of a component part when the new part is an upgrade of the old part, or when the new part is significantly different from the original component part, regardless of whether the old part malfunctions or not. Installation labor does not include the removal or replacement of a defective part. Installation labor does not include labor resulting in an alteration, repair or improvement to real property.
Repair Service with Transfer of Insignificant Property
According to Minnesota Statutes 8130.0200.4, a transaction involving performance of a nontaxable repair service, and incident thereto, a transfer of tangible personal property to the purchaser is not considered a sale for sales and use tax purposes if the value of the property transferred is insignificant as compared to the total consideration; and no separate charge is made for such property.
In such cases, the repairman is regarded as rendering a nontaxable service. However, if a separate charge is made for the property transferred, a sale within the meaning of the Sales and Use Tax Law is deemed to have occurred.
Example. A jeweler uses a spring costing him 25 cents to repair a watch. He bills the customer $6 for repair services. Since the cost of the spring is insignificant in relation to the charge for repair services, no sale of the spring is considered to have been made.
The jeweler is required to pay a use tax on the spring if he did not pay a sales tax at the time of purchase. However, if the jeweler bills separately for the spring, he must collect a sales tax from the customer.
Transactions that involve repair labor and repair parts could easily be mistreated for sales and use tax purposes. Your repair labor may be considered installation labor or vice versa. Therefore, if you are involved in any of these types of transactions, I would recommend reviewing your facts (contracts, invoices, etc.) and current tax treatment to see if it is accurate or if any changes should be made. If you act now to determine your position, you may be better able to defend it when the auditor arrives.
Questions to Consider
Are you repairing real property or tangible personal property?
Are you charging your customers a lump-sum for your repair services (labor and parts)?
Are you separately stating your charges for labor and parts on your invoices?
Is the part you are installing an upgrade or different part?
Is the cost of the part you are installing "insignificant" when compared to the total charge to your customer?
Are you replacing a part that is malfunctioning or is the old part simply consumed in the production process and needs replaced on a regular basis?
Are your repairing property or simply installing new parts?
Is your labor, repair labor or installation labor?