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Tax must be collected on goodwill repairs

November 18, 2010

Sometimes, even goodwill has a price.


Many dealers provide "goodwill" repair services on vehicles that are out of warranty. However, not all of those dealers are aware—according to recent Illinois Revenue Department audits—that the parts used in goodwill repairs are subject to the state’s 6.25 percent use tax, even though the customer does not pay for the repair.


In cases of warranty and recall repairs, sales tax is not charged on parts because the tax originally paid (when the vehicle was purchased) is deemed to cover all parts used in the repairs. Likewise, any parts used to repair or enhance new or used vehicles held in inventory are covered by the sales tax collected on the eventual sale of the vehicle.


But goodwill repairs are provided at no charge to the customer, at the option of dealer and/or the factory. Because no legal obligation exists to compel the dealer to provide the goodwill repair, the state revenue department considers the repair to be a gift.


Illinois use tax applies to parts purchased tax-free for resale which are used or consumed by the dealership in its use, including as a gift to a customer. The CATA board of directors is considering a challenge to the Revenue Department statute, in an attempt to exclude taxes on parts used in goodwill repairs.