A frustrated body shop owner recently shared a story which again illustrates another tax trap (see article dated 6/98). This collision repair shop was recently audited by the State Board of Equalization and was asked what seemed like an innocent question. The question was whether or not the parts replaced (bumpers, moldings, hoods & deck lids) were painted on or off the vehicles. Of course the body shop owner honestly answered that they paint these parts before they install them as it produces a better result. The taxpayer had no idea of the significance of his answer. The auditor proceeded to explain to the disbelieving body shop owner that the labor to paint a new repair part would be exempt only if the part was attached to the vehicle before the painting was done.

In researching the State's position I found Annotation 315.0220 which states the charge for painting a new repair part, performed before the part is attached to the article being repaired, is part of the taxable sales price of the part. After the part is attached, however, it becomes a part of the article being repaired, the painting of which, including the installed part, is part of the repair labor which is not taxable.

In discussing painting, Regulation 1524 states tax applies to charges for painting, polishing and otherwise finishing tangible personal property in connection with the production of a finished product for consumers, whether the article to be finished is supplied by the customer or by the finisher. Tax does not apply to charges for painting or finishing real property.

Example: Boyfriends in Trouble Inc. manufacturers dog houses. The finished product is a deluxe 1 bedroom no bath freshly painted dog house. Even if the manufacturer were to separately state the paint charge it would still be subject to tax as it is a step in the manufacturing process. If however, it was later repainted this labor would be exempt (see regulation 1551).

Neither Regulation specifically addresses the issue of how tax applies to this body shop owner which is why the Board of Equalization is left only to point to the Annotation. As stated in the Yamaha Case however (see article dated 10/98) the Annotations are only stated opinions for the Board of Equalization and are not the final authority. The circular reasoning that an item is taxable because it's the Board's stated opinion does not carry a lot of weight in the courts.

Good Luck To This Taxpayer!!!