Paint and Materials Sales Tax: a Case for the Status Quo - BodyShop Business
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Paint and Materials Sales Tax: a Case for the Status Quo

A case against making paint and materials tax-free for Minnesota body shops.

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For the third consecutive year, the Alliance of Automotive Service Providers – Minnesota (AASP-MN) is pushing to have paint and materials taxed at the retail level instead of wholesale. Their position is simply one of financials. By changing the law (or, as they would argue, the interpretation of the law), shops would purchase paint and materials tax free and then charge sales tax to their customers for those supplies. This would remove the cost of sales tax from the shop owner and place it on the customer. The net effect is that the shop’s cost goes down, thus profit goes up.

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Let me start my case against the idea right there. Shop profit goes up. That’s great…however, if someone wins, someone loses. Who loses? We all do. How? The Department of Revenue predicts that if this change happens, it will generate an additional $2.4 million in tax revenue for fiscal year 2012. At my shop, our work is generally 20 percent customer pay work and 80 percent insurance pay. Using that split, insurance companies would be paying 80 percent of the $2.4 million, or approximately $1.9 million. I contend that if insurers’ losses (the amount they pay out in claims) goes up by $1.9 million, their revenue (the amount they collect in premiums) will go up by the same amount or more. If premiums go up, we all pay more for auto insurance.

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Big Business

Let’s detour for a moment into the world of big business, specifically big insurance business. Joanne LaMettry, director of AASP-MN’s collision division, says:

"…there has been no testimony against the proposal – including from the insurance industry – with which we have had many discussions about this matter. They have not raised objections and have not made any reference to raising premiums if this measure were to pass."

I assume from her statement that she takes the silence of insurers as their acceptance of this proposal (similar to the silence of collision repairers as acceptance of it). I view silence as the insurance industry’s only option. For insurers to come out in favor of this change is simply pulling money out of their own pockets. To come out against it is political fodder for big business not wanting to pay its fair share in taxes. They stand to gain nothing by commenting on this issue. Furthermore, to think premiums wouldn’t rise is putting your head in the sand. Applying the same 80/20 customer-pay/insurer pay split mentioned before to the revenue department’s projections through fiscal year 2015, insurers would pay out $9.3 million. How could they do that and not raise premiums?

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Accountability

That leads to my next argument against the proposal: accountability. Maybe I’m naïve, but if you bring an issue to the state legislature seeking a change in taxation, you had better be able to show a need for it or how it’s in the best interest of the state. This proposal has neither. When I asked LaMettry why the association was advocating this change, her response was:

"The simple answer to your question is that this change would add dollars to each and every shop’s bottom line."

That’s the reason eight different legislators signed on to author this file? I find it difficult to believe that was sales pitch that received bi-partisan support in both the state House and Senate. No, it was not.

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The argument the AASP-MN made is that the sales tax paid by shops on these materials is a hardship, and current estimating software doesn’t provide an opportunity for recovery of the sales tax paid. Therefore, it’s a business expense that cannot be recovered by the shop. I counter with the fact that there are many costs associated with owning and running a business; accordingly, you have to price your goods and services to cover those costs. Just because you choose to turn a blind eye to “Business 101” doesn’t make a case for legislative action.

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Measuring Materials

The companion argument to that is that there is no way to accurately measure the amount (physically or financially) of materials used in the course of the repair. Most of the paint and materials are consumed in the course of the repair; therefore, those items should not be taxed at the retail level.

AASP-MN made the case to the Department of Revenue that our current formula-based calculation (dollar amount per hour X number of paint hours = retail cost of paint and materials) is an appropriate basis to calculate sales tax because a significant majority of the value of the paint and materials is physically transferred to the repaired vehicle. In simpler terms, if this change were to take place, the customer would pay sales tax on the paint applied to their car as well as the sandpaper, tape, masking paper and paint overspray that goes in the trash.

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The net effect of this would be moving the point of imposition of the sales tax from where it could be accurately measured (shop buys a gallon of paint pays tax on a gallon of paint; shops buys 100 sheets of sandpaper, pays tax on 100 sheets of sandpaper) to where it can’t be measured. Two repairs may require two hours of paint time, but may use vastly different amounts of materials and supplies. This change will move the taxation of these supplies from an auditable place to one where it will be impossible to track.

This does not make the current legislation any more accurate; nor does it serve the best interest of the state.

If you’re a shop owner in Minnesota, I encourage you to call or e-mail your state legislator and help them understand the impact of House File 359 and Senate File 367 if they become law. Whether you’re a member of the AASP-MN or not, they’re representing your industry, and this change impacts your business.

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Paul Bignall is COO of Dale’s Auto Body, Inc., in Grand Rapids, Minn. He can be reached at (218) 328-5734 or [email protected].

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