Publication 119, Warranties and Maintenance Agreements
- Warranties and
- Reporting Tax
Many retailers sell warranties or maintenance agreements along with products such as cars, computers, and home electronic equipment. This publication explains how sales and use tax applies when you sell a warranty or maintenance agreement (sometimes called a "service plan") or when you make a repair covered by such an agreement.
Does sales tax apply when I sell a warranty?
It may. Generally, warranties are divided into two basic types—mandatory warranties and optional warranties. To determine how tax applies, you first need to know the warranty type: mandatory or optional.
A mandatory warranty or maintenance agreement is a contract that comes with a product and is included in the total selling price. Under a mandatory warranty, your customer does not have the option to purchase the product without the warranty. Examples include standard manufacturers' warranties that come with new vehicles, computers, electronic devices, appliances, and auto repair shops' parts-and-labor warranties on repairs.
If your sale of the product is taxable, the mandatory warranty is also taxable. The warranty is usually included in the price of the item sold, but you may show it as a separate charge on your invoice. If you do, that separate charge is taxable (provided the sale of the associated item is taxable).
Example: Your electronics store sells a new computer to a consumer for $1,500. The price includes a one-year parts-and-labor warranty backed by the manufacturer. Your full $1,500 charge is taxable.
An optional warranty or maintenance agreement is a contract your customer may choose to purchase for an additional charge. If your customer can buy the product without buying the warranty from you, the warranty is optional. Separate charges for optional warranties are generally not taxable (exception: see Optional software maintenance agreements below). Examples of optional warranties include an extended repair warranty for a computer or electronic device, an extended mileage warranty for a car, and a service plan for a refrigerator.
Example: Your car dealership sells a used car for $10,500. You offer the customer the option to buy an extended, 18-month warranty for an additional $500. The customer can buy the car without the warranty. If the customer buys the car and the optional warranty, tax would apply to the $10,500 charge for the car but not to the $500 charge for the warranty.
Optional software maintenance agreements
A separate charge for an optional software maintenance agreement is 50 percent taxable if you provide the purchaser with any physical products during the term of the agreement (for example, your customer will receive software updates on CD). If you do not transfer any physical software updates or other tangible personal property to your customer during the maintenance agreement period, charges for the agreement are not taxable (for example, customers will download software updates from a website and no CDs or other tangible media containing the update are sent). For more information, see Regulation 1502, Computers, Programs, and Data Processing.
Note: This publication summarizes the law and applicable regulations in effect when the publication was written, as noted above. However, changes in the law or in regulations may have occurred since that time. If there is a conflict between the text in this publication and the law, the decision will be based on the law and not on this publication.
Does tax apply when I make a warranty repair?
Tax does not apply when a warranty repair includes only labor and does not require parts. However, tax may apply if you furnish parts. The table below shows how tax applies to the sale or use of parts in warranty repairs that do not include a customer deductible or copayment.
For warranty repairs, tax applies to charges for repair parts based on who backs the warranty—that is, the person who is a party to the warranty contract and liable for the repair.
|Type of Warranty||How tax applies to charges for repair parts|
|When someone other than the repairer backs the warranty|
|Mandatory warranty||Parts are considered sold with the original product. A charge for repairer's parts to the backer of the warranty is a nontaxable sale for resale. Example: Dealer repair to a new car under the manufacturer's warranty.|
|Optional warranty||The backer of the warranty is the consumer of parts. Tax is due on repairer's parts charges to the backer of the warranty.|
|When only the repairer backs the warranty|
|Mandatory warranty||Parts are considered sold with the original product. Repairer may purchase the parts for resale.|
|Optional warranty||The repairer is the consumer of parts. Repairer should pay tax at time of purchase or if tax is not paid, report the cost of parts under Purchases Subject to Use Tax on your sales and use tax return.|
Mandatory warranty with no deductible
Tax does not apply to charges for parts used for the repair. Although the repairer will charge the manufacturer for the parts used in the repair, those parts are considered a sale for resale and are not subject to tax under a mandatory warranty. They are considered sold to the customer as part of the original sale of the merchandise.
Mandatory warranty with a deductible
When the customer pays a deductible, tax applies to the portion of the deductible for the charges of parts (see example for calculation method). Unless the warranty states otherwise, the person providing the warranty contract is liable for that tax amount. If the customer makes a specific payment for parts, as required by the warranty (for example, a prorated payment for a new tire), that payment is taxable.
To calculate the taxable portion of the deductible, use this formula:
(charges for parts ÷ total charges) × deductible = taxable portion of deductible
You perform repairs on merchandise and your customer must pay a $50 deductible under a mandatory manufacturer's warranty. Your bill for the repairs is $200, not including tax: $75 for parts and $125 for repair labor. To determine how much tax is due, you must:
($75 ÷ $200 = 37.50%)
($50 × 37.50% = $18.75)
($18.75 × 8.25% = $1.55)
The total charge for the repair work, with tax, would be $201.55.
You charge the customer the $50 deductible and bill the manufacturer the balance due for parts, labor, and sales tax: $151.55 ($201.55 total charge − $50 deductible). If you had issued the warranty yourself, you would owe tax on the taxable portion of the deductible (see step 3 above).
Please note: In this example, the warranty does not require the customer to pay the sales tax on the taxable portion of the deductible. If it did, you would charge the customer $51.55 and the manufacturer $150.
Optional warranties offered by the dealer
If the customer is not obligated to pay a deductible
The retailer (repairer) is considered the end user (consumer) of the repair parts and owes tax on his or her cost for the parts. In other words, the repairer is not selling the parts but rather using them, and tax does not apply to the transfer of the parts to the customer, but on the cost of the parts to the repairer.
If the customer is required to pay a deductible
When either an optional or a mandatory warranty provides that the customer will pay a deductible towards repairs and services provided under the warranty (unless otherwise stated in the warranty contract), the dealer/repairer also owes sales tax on a portion of the receipts from the sale of the parts and use tax on their cost.
You are a retailer/repairer who has sold a customer an optional warranty with a $50 deductible. The warranty does not require the customer to pay an amount for tax on the portion of the deductible related to the sale of parts. The customer brings in the merchandise for repairs covered by the warranty. Your repair charges total $200, not including tax: $75 for parts and $125 for repair labor. You use parts from your resale inventory for the repair. The cost of the repair parts is $40. Using the method shown in the example above:
($75 ÷ $200 = 37.50%)
($50 × 37.50% = $18.75)
($18.75 × 8.25% = $1.55)
In addition to use tax due on the cost of the parts used in the repair ($40), you will owe $1.55 in sales tax on the sale of the parts.
You charge your customer $50 for the optional warranty deductible.
Reporting this transaction on your sales and use tax return
The $18.75 taxable portion of the deductible is a taxable sale, include it in gross receipts on your sales and use tax return. Since you are the consumer of parts installed on optional warranties, you also owe use tax on the cost of the parts furnished for this repair. Report the $40 cost of the parts under Purchases subject to use tax on your sales and use tax return.
Note: To make sure you don't pay use tax on the cost of the parts you resold in the deductible, you need to take a "Tax-paid purchases resold prior to use" deduction. Follow these steps:
($75 ÷ $40 = 1.88 markup factor)
(In the example above: $18.75 ÷ 1.88 = $9.97)
Step 3. List the result ($9.97) as a "Tax-paid purchases resold prior to use" deduction.
Optional warranties offered by the manufacturer with a deductible
The manufacturer is considered the consumer of the repair parts for work performed under an optional manufacturer's warranty. If you are a retailer/repairer who makes a repair under an optional manufacturer's warranty, you are making a retail sale of the parts to the manufacturer. You must report and pay sales tax on the retail-selling price of the parts (your cost plus markup).
Your customer is required to pay a $50 deductible when having repair work done under a manufacturer's optional warranty.
($75 for parts and $125 for repair labor)
($75 × 8.25% = $6.19 sales tax)
($200 parts and labor + $6.19 sales tax)
Step 4. You charge your customer only the $50 deductible.
($206.19 − $50 deductible)
In this example, there is no provision in the warranty contract stating that the customer is responsible for sales tax on the portion of the deductible related to the sale of parts (tangible personal property). If the warranty contract does provide that the customer is liable for sales tax on the portion of the deductible related to parts, as the repairer, you must prorate any charges for tax between the customer and the manufacturer. This calculation can be complicated. Please call our Taxpayer Information Section for assistance.
Note: In these examples we show tax calculated at a rate of 8.25 percent, however, you should use the tax rate in effect at your business location. For current tax rates, please see publication 71, California City and County Sales and Use Tax Rates.
How do I report warranty sales on my sales and use tax return?
You must include the amounts you receive from warranty sales in Total (gross) Sales on your sales and use tax return. List the nontaxable amounts for optional warranty sales in Other deductions.
For more information
Board of Equalization regulations and publications are available on our website or by calling our Taxpayer Information Section.
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