Sales Tax on Small Engine Repairs
- Dec 26, 2016 | Jessica Sillers
Small engine repair is a potentially lucrative small business niche if you’re handy with machines. Lots of people own lawn mowers, generators, leaf blowers, power tools, or other equipment that needs the occasional fix.
The United States Bureau of Labor Statistics reports more than 71,000 small engine mechanics jobs. Just do your homework before hanging out your shingle. State laws regulating sales tax for small engine repair vary widely.
Setting Up Your Small Engine Repair Business
The first step is checking for state restrictions on running a small engine repair business. In many states it’s perfectly fine to convert your garage into a repair shop. But other places, such as Salt Lake County, Utah, don’t allow home-based small engine repair businesses. Also, whether this is a part-time side gig or full-time career, keeping business license and tax compliance in line is essential.
Generally, business owners should expect to collect and remit sales tax for repair services. Many states, including Ohio, Mississippi, and New York, consider repairs to tangible personal property to be a taxable service. The broad exception is repairs to property that's exempt from sales tax. Religious and charitable organizations are usually tax-exempt, so you likely wouldn't collect sales tax to repair your local church's leaf blower. Your state’s sales tax law may also offer tax exemptions for certain workers, such as farmers.
Not every state expects you to collect taxes on labor, though, or they may follow other rules that can be confusing at first. In Florida, labor and service alone aren’t taxable. If the repair person supplies any parts, then both the parts and labor charges are subject to sales tax. As you may expect, business owners in Florida must keep careful documentation to prove they didn’t supply any parts in a non-taxable transaction.
North Carolina is a particularly relevant example right now of how closely business owners must pay attention to sales tax law changes. In March 2016, the state passed legislature that made many repair services taxable, but excluded business owners who aren't considered retailers. If the business owner’s “only business activity is providing repair, maintenance, and installation services,” he or she wouldn't need to collect sales tax. Effective January 2017, however, new legislation takes effect. The new bill includes repair services as taxable by default, with a few narrow exemptions such as repair services to real property as part of certain bundled transactions. Quickly changing laws can be confusing, so it's important to have systems in place to help your business keep up with sales tax requirements.
Wherever you live, investigate whether supplying parts for a repair job qualifies your business as a form of (taxable) retail.
Small Engine Repair Sales Tax Can Vary by Job
Not every job is alike. Some customers may simply want to check that their generator is running smoothly before bad weather season starts. Others may ask for a job that feels more aesthetic than functional. These and other variations can have sales tax implications.
Sales tax on parts versus labor can be one important distinction. Idaho law doesn't tax repair charges that appear as their own invoice line item. Business owners only charge sales tax on the parts, unless there's a case where parts and labor are combined as one item on the invoice. This might happen, for example, if a business owner outsources part of the repair work and bills the customer to recoup the expense. The invoice line item for the subcontracted work is subject to sales tax, even though part of that original charge was for labor.
In Nebraska, repairs and refinishing services (painting, etc.) are taxable. An appointment just to test machinery isn’t. But if the test reveals a telltale clunking noise that needs repair work, then the whole charge of the visit--both repair and testing charges--is taxable.
Finally, check your local tax law to see if repair and fabrication services are taxed differently. A repair generally means restoring an item to its previous working condition. Fabrication generally means altering an object in some way to serve a new function. In some states, adding a new paint or coating that wasn’t part of the original object may be considered a form of fabrication that adds value.
Knowing the distinctions between services isn’t only important for keeping sales tax compliance clear. It’s smart from a customer service perspective to be clear about which small engine repair services are taxable. Customers who are clear on what to expect on their bill are that much more likely to seek your repair business out again.