Tax Guide for
Auto Repair Garages

Tax Guide for Auto Repair Garages

We recognize that understanding tax issues related to your industry can be time-consuming and complicated, and want to help you get the information you need so that you can focus on starting and growing your business.

To help you better understand the tax obligations for your auto repair garage, we have created this guide.

If you also operate a gas station, please see our Gas Station Operators guide.

How to Use This Guide

Each section of this guide contains information important to your business. The Getting Started section provides key resources related to registration, filing returns, account maintenance and other important information you need.

The Industry Topics section and the Specialty Repairs or Services section covers many topics in an at-a-glance format that can be expanded to provide more extensive information if you need it.

Lastly, the Resources section provides links to a wealth of information, including web-based seminars, forms and publications, statutory and regulatory information, and access to live help from our customer service representatives.

Please note that the information included is general in nature and is not intended to replace any law or regulation.

If You Need Help

If at any time you need assistance with topics included in this guide – or with others we may have not included – feel free to contact us by telephone or email for assistance. Contact information and hours of operation are available in the Resources section.

If you have suggestions for improving this guide, please contact us by email.

If you own a business in California, and you expect to be making taxable sales, you must register with us for a seller's permit and file regular sales and use tax returns. You may be required to register for other licenses or accounts using our online registration service and file other returns. Listed below are other tax and fee programs that may be applicable to the auto repair industry.

Hazardous Waste Generation and Handling Fee Account (Formerly the Generator Fee Account)

Beginning January 1, 2022, you must register with us for a Hazardous Waste Generation and Handling Fee account if you generate five tons or more of hazardous waste – such as motor oil – within a calendar year. The fee is determined by the rate ($49.25 per ton or fraction of a ton for waste generated in 2021 and thereafter as determined by the Board of Environmental Safety) and the total tonnage of waste generated per site.

Prior to January 1, 2022, the hazardous waste generator fee was imposed on generators of hazardous waste who generated five or more tons of hazardous waste on a tiered category basis.

For more information, see the Hazardous Substances (Waste) Fee Guide.

California Tire Fee Account

If you sell new tires with your vehicle, you must register for a California Tire Fee account to collect and pay the California Tire Fee on every new tire sold. New tire sales include separately sold tires, new tires included with the sale/lease/rental of new or used motor vehicles, recreational vehicles, construction equipment and farm equipment. For more information, see Publication 91, California Tire Fee.

Lead-Acid Battery Fee Account(s)

If you are a retailer of replacement lead-acid batteries with sales occurring in California, you must register for a California battery fee account even if you have a seller's permit or certificate of registration – use tax account. In addition, if you are a retailer who purchases batteries from a manufacturer, not subject to California jurisdiction, you are considered the importer of those batteries in California. Importers must pay the manufacturer battery fee and are required to register for a manufacturer battery fee account with us. Effective January 1, 2020, importers who are responsible for the manufacturer battery fee may agree, in writing, that the manufacturer not subject to California jurisdiction will pay the manufacturer battery fee on behalf of the importer.

For more information, see the Lead-Acid Battery Fees Guide.

Underground Storage Tank Maintenance Fee Account

If you own a tank to store petroleum products, and it is even partially underground, you are required to register with us to pay an Underground Storage Tank Maintenance Fee. In most cases, if you lease an underground storage tank, you are considered an operator and are not required to pay the fee. However, as an operator, you may have an agreement with the owner to report and pay the fee.

For more information, see the Underground Storage Tank Maintenance Fee Guide.

Registration

Online Registration — Register with us for your seller's permit and apply for any of the licenses, permits, or accounts listed above.

Filing and Payments

Notice of Business Change – Keep your information current by using the links below and notifying us of any business changes.

  • Sales and Use Tax
  • Special Tax Accounts
    • Hazardous Waste Generator Fee Account
    • California Tire Fee Account
    • Lead-Acid Battery Fees Program
    • Underground Storage Tank Maintenance Fee Program

In California, all sales are taxable unless the law provides a specific exemption. In most cases, taxable sales are of tangible personal property, which the law defines as an item that can be seen, weighed, measured, felt, or touched.

Use tax is a companion to California's sales tax, and is due whenever you purchase taxable items without payment of California sales tax from an out-of-state vendor for use in California. You also owe use tax on items that you remove from your inventory and use in California when you did not pay tax when you purchased the items. To pay use tax, report the purchase price of the taxable items under "Purchases Subject to Use Tax" on your sales and use tax return. Those purchases become part of the total amount that is subject to tax.

Generally, your charges for labor and services are not taxable. Certain labor items are taxable. You must list the labor charges on a separate line on your invoices.

Nontaxable Labor:

  • Installation labor on used vehicles: replacing parts, installing sound systems.
  • Repair labor: rebuilding carburetors, replacing parts in transmissions, performing body work.
  • Maintenance service: tune-ups, oil changes, fluid flushes.
  • Services: towing, charging batteries, etc.

Taxable Labor:

  • Making or fabricating parts and modifying items or systems as part of a taxable sale.
  • Installing parts on new vehicles.

Core charges are trade-in allowances included in the price of a part, designed to encourage the return of old parts that can be reconditioned. When a core charge gets refunded, whether the tax will also be refunded depends on whether the sale of the part was a new/used part or a reconditioned/rebuilt part.

Sale of a New or Used Part with Core Charge

Example:

When you sell a new or used part and include a core charge, the core charge is taxable. This is true even if you refund the core charge to your customer. The charge is part of the payment for the original sale and the tax on the core charge is not refundable.
Selling price of new starter (with $7 core charge) $54.00
Tax ($54 × 8.5%1) $4.59
Core charge (trade-in credit/refund) - $7.00
Total $51.59

Sale of Reconditioned or Rebuilt Part with Core Charge

Example:

When you sell a reconditioned or rebuilt part and include a core charge, that charge is taxable unless you refund it to your customer. When you refund the core charge, you should also refund any tax you collected on that charge. Tax applies to the "exchange price" only because the part is reconditioned.
Rebuilt alternator (with $9 core charge) $120.00
Core charge credit/refund $9.00
Taxable selling price $111.00
Tax ($111 × 8.5%1) $9.44
Total $120.44

Refundable Deposit for Lead-Acid Batteries

As of April 1, 2017, a refundable deposit is required when a consumer purchases a "new" replacement lead acid battery and does not simultaneously provide a used lead-acid battery to the dealer/retailer. A replacement lead-acid battery is a new lead-acid battery sold at retail in California and it replaces the original battery that came with the vehicle, watercraft, aircraft, or equipment. The refundable deposit is only charged on "new" lead acid batteries. The refundable deposit does not apply to refurbished or reconditioned batteries.

Retailers must refund the deposit if a used lead-acid battery of the same type is returned within 45 days from the date of the purchase of the new lead-acid battery for which the deposit was charged (HSC section 25215.2). This refundable deposit must be separately stated on the customer's invoice and is taxable similar to the core charges discussed in the heading above. The sales tax is not refunded when the deposit is refunded. The deposit is viewed as a trade-in allowance and is considered part of the payment for the sale.

For more information on the lead-acid battery fees, please see the Lead-Acid Battery Fees Guide.

Certain sales and uses of parts are not taxable because they are covered by special exemptions.

You may use a resale certificate when you purchase parts that you will resale in the regular course of business.

You may make sales to other retailers without charging the tax provided they furnish you with a timely resale certificate.

If you sell parts that will be installed on a vehicle that is intended to be sold, you may accept a timely resale certificate and the sale is not taxable.

Sales to the U.S Government are not taxable as long as the payment is made with a government issued credit card. You must retain the government purchase order or remittance advice in support of the non-taxable sale.

In general, passenger vehicles and pickup trucks generally do not qualify as farm equipment and machinery. Therefore, your sales of auto parts and accessories for use on passenger vehicles generally do not qualify for the partial exemption.

Sales of farm equipment and machinery (including repair and replacement parts) for use by a qualified person and primarily used in producing and harvesting agricultural products, are subject to a partial exemption from tax. However, for a vehicle to be considered farm equipment and machinery, it must be designated as an implement of husbandry in the California Vehicle Code and used exclusively in agricultural operations by a qualified person. Examples of implements of husbandry include farm tractors, bale wagons, and fertilizer rigs.

If you sell auto parts or accessories to a qualified person, you may accept a partial exemption certificate in good faith from the purchaser and claim the partial exemption on your sales and use tax return in the limited circumstance where you sell items to a qualified person for use exclusively in agricultural operations. However, you should not accept an exemption certificate from a purchaser if you have reason to believe, or knowledge that, the property does not qualify as farm equipment or machinery or will not be used in an exempt manner.

For more information, including a list of items that generally do not qualify for the farm equipment and machinery partial exemption, please see our Special Notice, Auto Part Retailers' Sales Generally Do Not Qualify for the Farm Equipment and Machinery Partial Exemption.

Invoices should list separately charges for taxable sales of parts and charges for nontaxable labor.

To avoid errors, you should clearly identify amount allowed for trade-ins, core charges, and discounts. All invoices and documents should be kept to support all charges.

If you are registered as an automobile repair business you are required to separately list and subtotal all parts charges. To learn more about this, please contact the Bureau of Automotive Repair.

Supply items that you use, for example rags and tools, are taxable to you when you purchase them.

When you make these charges, whether they are taxable depends on if you are charging for taxable parts or nontaxable labor. The charge for supplies will be taxable if the other invoice items are taxable.

Hazardous waste fees directly related to nontaxable service or repair charges are also nontaxable. Hazardous waste fees made in connection with taxable sales should also have sales tax added to them.

See the Getting Started tab on how to register for a Hazardous Waste Generation and Handling Fee/Generator Fee account.

CalRecycle administers the used oil recycling program. Auto Repair Garages can register to become a Certified Collection Center and receive an incentive payment for used oil.

Once certified, you must accept used lubricating oil from the public at no charge. For more information, please see the CalRecycle page.

Businesses that are required to hold a seller's permit because they make taxable sales or purchases in California must keep books and records that are necessary to accurately determine their tax liability.

In most cases, that means normal "books of account" and the bills, invoices, and other documents that support them.

To make sure your records are adequate to support what you report, you should do the following:

  • Make sure invoices or repair orders are complete and easy to read.
  • File invoices and repair orders in the same sequence as entered in your books.
  • Make sure your books and records separately list purchases of resale inventory and purchases of supplies and other items purchased for your own use.

Records should be maintained for at least four years. In the case of an audit, record should be maintained until the audit is completed.

Beginning January 1, 2014, it is a crime for anyone to knowingly, sell, purchase, install, transfer, or possess software programs or devices that are used to hide or remove sales and to falsify records.

Using these devices gives an unfair competitive advantage over business owners who comply with the law and pay their fair share of taxes and fees. Violators could face up to three years in county jail, fines of up to $10,000, and will be required to pay all illegally withheld taxes, including penalties and interest.

The smog check fee and the smog certificate fee are both nontaxable charges. The certificate fee amount is regulated by the Department of Consumer Affairs. Certificate fees must be separately stated on your invoices.

You cannot perform smog checks unless all of the following are met:

  • You are a licensed smog check station
  • You or one of your employees is a licensed smog inspector, and
  • You have a licensed smog mechanic on your premises, unless you are a "test only" facility.

Note for DMV licensed vehicle dealers: If you perform a smog check on a vehicle you plan to sell, the charge is taxable.

Licenses are issued by the Bureau of Automotive Repair. For more information, contact the Bureau of Automotive Repair

The taxable amount of an insurance bid will be equal to the estimated parts cost of the bid. You should keep all bids with your records to support the cost of the parts.

If the actual price is less than the bid, you owe the full tax on the amount on the bid price. If the actual price is more than the bid, you owe full tax on the actual cost. The tax liability is based upon the bid estimate unless both of the following apply:

  • You inform the insurance company or customer by providing an amended invoice or other written notification.
  • The estimated sales price on the bid is less than your cost for the parts.

Parts and materials that remain on the vehicle are taxable to the customer while supplies and tools are taxable to you.

Parts and materials that remain on the vehicle being repaired are considered items for resale. Materials remaining on the vehicle include such things as putty, primer, paint, sealer, acrylic lacquer, and fisheye eliminator. You may purchase these items with a resale certificate and your charges to your customer will be taxable.

Supplies and tools that do not remain on the vehicle being repaired are taxable when you purchase them for use. This includes sandpaper, steel wool, masking tape, paint thinner, bodywork tools, etc. You may not use a resale certificate to purchase these items. For information on charging for supplies see the Invoicing Your Customer section on the Industry Topics tab.

Labor charges for painting new parts prior to installation are considered fabrication labor and are taxable. Labor charges for painting used parts or a new part after installing it on a used vehicle are considered repair labor and these charges are not taxable. If however, you charge a separate charge for the paint for the used or installed part, the paint charge by itself would be taxable.

When installing auto glass, the charge for the glass is taxable. The installation labor is not taxable unless you are installing custom glass on a new vehicle.

Work to cut and grind glass to size, charges for measuring, cutting, and grinding are fabrication labor and are taxable.

California Battery Fee

Retail sales of "new" replacement lead-acid batteries are subject to the California battery fee. A replacement lead-acid battery is a new lead-acid battery sold at retail in California which replaces the original battery that came with the vehicle, watercraft, aircraft, or equipment. Replacement lead-acid batteries do not include spent, discarded, refurbished, reconditioned, rebuilt, or reused lead-acid batteries. As the retailer, you must collect the $1.00 California battery fee from your customer at the time of purchase. You must also register for a California battery fee account, file, and pay the fees collected to us, even if you have a seller's permit or certificate of registration – use tax account. The California battery fee is imposed on the consumer and is not subject to sales or use tax.

You may retain 1.5 percent of the fee collected as reimbursement for any costs associated with the collection of the fee. The remainder of the fee shall be paid to CDTFA when the fee is due.

Please refer to our Tax and Fee Rates page for current rates.

Manufacturer Battery Fee

California manufacturers or importers of lead-acid batteries must pay a $1.00 manufacturer battery fee on the sale of the battery. A retailer who purchases and imports lead-acid batteries from a manufacturer who is not subject to the jurisdiction of California, is considered an importer and must pay the manufacturer battery fee. If you are making the first sale of lead-acid batteries inside California, you are responsible for both the California battery fee and manufacturer battery fee. You must register, file, and pay both fees to CDTFA. Effective January 1, 2020, importers who are responsible for the manufacturer battery fee may agree, in writing that the manufacturer not subject to California jurisdiction will pay the manufacturer battery fee on behalf of the importer.

Please refer to our Tax and Fee Rates page for current rates.

For more information regarding collecting and reporting the lead-acid battery fees, please see the Dealers/Retailers tab on the Lead-Acid Battery Fees Guide.

Lead-Acid Battery Refundable Deposit

You must charge a refundable deposit (amount not specified) each time a consumer purchases a new lead-acid battery, regardless if the consumer gives you a used lead-acid battery at the same time. You must refund the deposit if a used lead-acid battery of the same type and size is returned within 45 days from the date of the sale of the new lead-acid battery (HSC section 25215.2). The fee and deposit must be separately stated on the customer's invoice. The refundable deposit is only charged on "new" lead-acid batteries and does not apply to refurbished or reconditioned batteries.

This refundable deposit is subject to sales tax, and the sales tax is not refunded when the deposit is refunded. The deposit is viewed as a trade-in allowance and is considered part of the payment for the sale.

Sales of new and used tires, including recapped or retreaded tires, are taxable. Tax is due on the selling price less any discounts allowed before you deduct any trade-in allowances.

Sellers of new tires must register for and pay the California Tire Fee. See the Getting Started tab to register for this account, a license is required.

The fee of $1.75 per tire is not taxable. If a higher amount is charged, you owe tax on the excess charge.

When recapping tires, if you return the original tire to the customer, 75% of the charge is taxable. If you return a similar tire, not the original, the entire charge is taxable.

For more information about recapping, please see Regulation 1548, Retreading and Recapping Tires.

Charges to install a spray-on bedliner are taxable depending on whether the vehicle is new or used and how you charge for the materials.

If you are installing a spray-on bedliner on a new pickup truck, then the entire charge to perform the service is taxable. This charge includes the labor charge as well as the material charge. You may issue a resale certificate to your suppliers for the purchase of the materials you apply to the beds of new pickup trucks. You must also pay tax to your suppliers for purchases of tools used to install the spray-on bedliner.

If you are installing a spray-on bedliner on the bed of a used pickup truck, the labor you charge to install the spray-on the bedliner is nontaxable repair labor. If the retail value of the materials is 10 percent or less of the total charge, you are regarded as the consumer of the materials and the charge to the customer is not taxable. In this case, you must pay sales or use tax to your suppliers or report use tax on the purchase of materials you used to install spray-on bedliners to the beds of used pickup trucks. However, if you make a separate charge for materials you apply to the bed of a used pickup truck when you install a spray-on bedliner, there is a sale of the materials and the charge to the customer is taxable. In this case, you may issue a resale certificate to your suppliers for the purchase of the materials you apply to the beds of used pickup trucks.

Charges to install vehicle wrapping are taxable depending on whether the vehicle is new or used and how you charge for the materials.

If you are installing vehicle wrapping on a new vehicle, then the entire charge to perform the service is taxable. This charge includes the labor charge as well as the material charge. You may issue a resale certificate to your suppliers for the purchase of the vehicle wrapping you apply to new vehicles.

If you are installing vehicle wrapping on a used vehicle, the labor you charge to install the vehicle wrapping is nontaxable repair labor. If the retail value of the materials is 10 percent or less of the total charge, you are regarded as the consumer of the materials and the charge to the customer is not taxable. In this case, you must pay sales or use tax to your suppliers or report use tax on the purchase of materials you used to install vehicle wrapping to used vehicles. However, if you make a separate charge for materials you apply to the used vehicle when you install vehicle wrapping, there is a sale of the materials and the charge to the customer is taxable. In this case, you may issue a resale certificate to your suppliers for the purchase of the materials you apply to used vehicles.

Whether tax applies to parts for warranties depends on whether the warranty is mandatory or optional at the time the vehicle is purchased and whether the customer pays a deductible. The tables below demonstrate when tax applies to warranty repair charges.

Mandatory Warranties
Warranty type terms Application of tax to parts charges or cost Party Responsible for tax on parts
Manufacturer's warranty
No customer deductible
Repair work done by dealer		 Nontaxable resale of parts to manufacturer Customer: no payment
Manufacturer: charges for parts and labor
Manufacturer's warranty
Customer deductible
Repair work done by dealer		 Portion of deductible taxable. Difference is nontaxable resale to manufacturer. (see formula below to compute taxable portion) Customer: deductible only
Manufacturer: total charges (including tax) less deductible paid by customer
Dealer's or Repairer's warranty
No customer deductible		 Sale or use of repair parts not taxable. (considered part of original sale) Customer: no payment
Dealer's or Repairer's warranty
Customer deductible		 Portion of deductible taxable. (see formula below) Customer: deductible only

Optional Warranties
Warranty type terms Application of tax to parts charges or cost Party Responsible for tax on parts
Manufacturer's warranty
No customer deductible
Repair work done by dealer		 Taxable sale of parts to manufacturer. Tax based on retail selling price of parts. Customer: no payment
Manufacturer: total charges (parts, labor, tax)
Manufacturer's warranty
Customer deductible
Repair work done by dealer		 Taxable sale of parts to manufacturer. Tax based on retail selling price of parts. Customer: deductible only
Manufacturer: total charges (including tax due on portion of deductible) less deductible paid by customer
Dealer's or Repairer's warranty
No customer deductible		 Repairer owes tax on the cost of parts. Customer: no payment
Dealer's or Repairer's warranty
Customer deductible		 Portion of deductible taxable plus use cost on the parts used. Customer: deductible only

¹ None of the warranty types described in this table include a provision requiring the customer to pay an amount for tax on the portion of the deductible related to the sale of parts. For more information and calculation examples, see publication 25, Auto Repair Garages and Service Stations.

To calculate the taxable portion of the deductible, use this formula:

(Charges for parts ÷ total charges) × deductible = taxable portion of deductible

Need to know more? Follow the links below for more information about the topics covered in this guide, as well as other information you might find helpful:

Publications

Regulations

Forms

Industry & Tax Fee Guides

Related Websites

Other Helpful Resources