HB 366/HB 487 were voted into law on April 13 and delivered to the Secretary of State on April 14. There are many provisions in the 378 pages of this law, but here is a brief summary of those things that will affect your sales to customers:
- The waste tire disposal fee is increasing from $1.00 to $2.00 per tire and is now subject to sales tax
- Sales tax must now be charged on the labor as well as parts portion of any repair service
- The sale of extended warranty contracts is now subject to sales tax
The law goes into effect on July 1, 2018.
We have received many questions from dealers regarding this change. Below, you will find a response to our FAQ from the Department of Revenue that we hope answers most of the questions you may have.
We also recommend that you consult with your CPA to prepare for these and any other changes that will affect your business.
In the meantime, if you have additional questions, please feel free to contact Gay Williams at KADA. firstname.lastname@example.org or 502-695-3333 and we will work to get the answer.
Q&A Provided by the Kentucky Department of Revenue
“Question 1 – The dealers sell many items similar but different from extended warranties. The dealer sells GAP insurance, Credit life insurance, Paint protection and VIN etch. How is sales tax applicable to sale of those items?”
“Question 2 – Where is the money sent for the tax on the items in Question 1?”
July 1, 2018 according to the provisions of KRS 139.200(2)(q), sales tax is imposed upon all retailers at the rate of six percent (6%) of the gross receipts derived from extended warranty services.
Under KRS 139.010(13), “Extended warranty services” means services provided through a service contract agreement between the contract provider and the purchaser where the purchaser agrees to pay compensation for the contract and the provider agrees to repair, replace, support, or maintain tangible personal property or digital property according to the terms of the contract if:
(a) The service contract agreement is sold or purchased on or after July 1, 2018; and
(b) The tangible personal property or digital property for which the service contract agreement is provided is subject to tax under this chapter or under KRS 138.460”.
The sale of extended warranties by automobile dealers on or after July 1, 2018 is subject to the 6% sales tax. The dealers should report the tax collected on the sale of extended warranties on their Sales and Use Tax Return (Form 51A102) for the tax period in which the sale occurs.
There has been no change in the taxability of gap insurance and credit life insurance as it relates to sales tax. The sale of gap insurance and credit life insurance are not subject to sales tax.
Charges for etching identification numbers, paint protection and rustproofing underbodies of automobiles are subject to tax. If provided in conjunction with the sale of the vehicle, the charges for etching identification numbers, paint protection and rustproofing are part of the total consideration paid for the vehicle subject to motor vehicle usage tax and remitted to the local county clerk at the time of titling and/or registration. See KY Regulation 103 KAR 44:060 for further detail on motor vehicle valuation. http://www.lrc.ky.gov/kar/103/044/060.htm
The recent tax law changes do not impact or change the motor vehicle usage tax valuation under current law.
If the etching of identification numbers, paint protection and rustproofing occur after the sale of the vehicle as a stand-alone transaction, the charges are subject to sales tax and should be reported and remitted on the dealer’s Sales and Use Tax Return (Form 51A102).
The motor vehicle usage tax is for deposit into the Road Fund and the sales tax collections referenced are General Fund receipts.
“Question 3 – How does the sales tax apply to vehicle repair services under factory or extended warranty contracts?”
The parts utilized in the repair of tangible personal property under an original/manufacturer’s warranty are not taxable either upon purchase by the repairer or upon their use. Sales tax does not need to be charged for parts utilized in the completion of work performed under a manufacturer’s warranty. The reason is the value of these parts is included in the value of the warranty which is reflected in the original selling price. See KY Regulation 103 KAR 26:060 http://www.lrc.ky.gov/kar/103/028/060.htm.
Prior to July 1, 2018, any separate purchase by the customer of an extended warranty is not subject to sales and use tax at the time of the sale. However, the seller or other party providing the extended warranty service must pay sales or use tax on the cost of tangible personal property used to fulfill the terms of the extended warranty.
Effective July 1, 2018, the sale of extended warranties will be subject to sales tax. With this change the parts utilized in the repair of tangible personal property under an extended warranty are not taxable either upon purchase by the repairer or at the time of use. Because sales tax applies on the front end at the time the extended warranty is sold, the dealer may claim a resale exemption for parts purchased and installed to complete repairs under the extended warranty.
“Question 4- Although not included in your email, another question to consider is, how does the change in the definition of gross receipts to include installation labor impact motor vehicle dealerships when they perform repairs and installation labor on vehicles not covered by an original or extended warranty?
Effective July 1, 2018, when a dealership charges the customer for parts and labor on a vehicle repair job, the associated labor will also be taxable if the parts are taxable.
Also, the Department of Revenue will soon post additional information on a dedicated website for new legislation, TaxAnswers.ky.gov. This platform is now available.