Was a dealer's Free Tires for Life promotion a taxable service warranty, and what taxes applied when replacement tires were provided?

Plain-English summary

Florida classified Free Tires for Life as a sales promotion rather than a service warranty. Adding invoice language that a dealer handling charge included the program did not change that classification.

Customers signed an ancillary agreement and had to follow the manufacturer's schedule and obtain specified service exclusively from the dealer. Florida treated replacement-tire cost as included in taxable maintenance charges, so the dealer did not separately owe use tax on the tires.

Customer-paid installation and other costs remained taxable. The dealer also owed the historical waste-tire fee on every replacement tire withdrawn for the promotion.

What this means for you

Promotions should be analyzed using the full sales and service arrangement, not only “free” marketing language. Invoice wording, customer obligations, taxable maintenance charges, installation, inventory withdrawals, and environmental fees can produce separate consequences.

Common questions

Q: Was the program a service warranty?
A: No, under both invoice scenarios considered.

Q: Did the dealer owe use tax on replacement tires?
A: No, because the ruling treated their cost as included in taxable maintenance charges.

Q: Were installation charges taxable?
A: Yes.

Q: Did the tire fee apply?
A: Yes, to each replacement tire under the historical rule.

Citations and references

• Fla. Stat. § 212.0506 — service warranties
• Fla. Stat. § 403.718 — waste-tire fee
• Fla. Admin. Code r. 12A-12.001 — waste-tire fee administration
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-029

Original ruling text

SUMMARY

QUESTION: The taxpayer is concerned with the sales and use
tax implications of its "Free Tires For Life" promotional
campaign. As such, the taxpayer presented the following
two scenarios:

Scenario One (Factual Situation)

The taxpayer is concerned with the sales and use tax
implications of the above "Free Tires for Life" promotional
campaign. The taxpayer has presented the issues and the
conclusions of the applicable law and rules as follows:

1. This transaction will not be treated as a taxable
   service warranty, due to the fact that there is no
   consideration paid by the customer for the agreement;
2. The dealer will be subject to use tax on the cost of
   the tires used to fulfill its obligation under this
   agreement;
3. The dealer will be subject to the $1.00 per tire waste
   tire fee that must be paid on each tire replaced under
   this program; and
4. The dealer should charge and collect sales tax from
   the customer for the installation charges incurred to
   replace the tires.

Scenario Two (Modification of Factual Situation)

The taxpayer is considering a modification to the wording
of charges on the sales invoice for the purchase of a
vehicle. The modification would be a notation on the sales
invoice that the amount charged for the dealer handling
charge also included the tires for life service agreement.

As with the facts presented under Scenario One, the
taxpayer is concerned with the sales and use tax
implications of the above "Free Tires for Life" promotional
campaign. The taxpayer has presented the issues and the
conclusions of the applicable law and rules as follows:

1. This transaction will be treated as a taxable service
warranty, in light of the fact that there [was]
consideration paid by the customer for the agreement;

2. The dealer will [not] be subject to use tax on the
   cost of the tires used to fulfill its obligation under
   this agreement;
3. The dealer will be subject to the $1.00 per tire waste
   tire fee that must be paid on each tire replaced under
   this program; and
4. The dealer should charge and collect sales tax from
   the customer for the installation charges incurred to
   replace the tires.

ANSWER - Based on Facts Below: The Department finds that:
First, under both Scenario One (Factual situation as
presented) and Scenario Two (Modification of factual
situation), the taxpayer is engaged in a "promotional
campaign" associated with the sale of tangible personal
property, the cost of which is borne entirely by the
taxpayer, and is not engaged in the business of
"soliciting, offering, providing, entering into, issuing,
or delivering any service warranty in this state." Thus,
whether the taxpayer does or does not have wording on its
purchase invoice, to indicate that the cost of the "Free
Tires for Life" agreement is included in the taxable sales
price of an item of tangible personal property (i.e.,
"dealer handling charge"), the transaction is not the sale
of a service warranty.

Therefore, under the facts presented, the taxpayer is
engaged in a "promotional campaign" associated with the
sale of tangible personal property. The taxpayer's
customer signs an ancillary contract, "Free Tires for Life
Statement," at the time of the sale, evidencing the
acceptance of the terms contained within that contract,
then such contract is a part of the agreement to abide by
the terms and conditions stated therein. Accordingly, as
part of the agreement to have the vehicle exclusively
serviced by the Taxpayer, pursuant to the schedule provided
in the manufacturer's owner manual including one alignment
every 15,000 miles whichever comes first, the cost of the

free tires provided, to the Taxpayer's customer, is
included in the taxable "maintenance charge" for servicing
the vehicle. Thus, the taxpayer does not owe any use tax
on the replacement tires. Taxpayer will, however, be
subject to the $1.00 waste tire fee, as a charge to the
taxpayer for the privilege of engaging in the business,
pursuant to the provisions of section 403.718, F.S., and
Rule 12A-12.001(6)(b), F.A.C.

Jun 18, 2003

Re: Technical Assistance Advisement 03A-029
Sales and Use Tax
XXX (Taxpayer)
"Tires for Life" Sales Promotional Campaign
Section 212.0506, F.S.

Dear :

This is in response to your letter of August 14, 2002, in which
you request the issuance of a Technical Assistance Advisement
regarding the sales/use tax issues arising in connection with a
sales promotional campaign, under which the dealer, in return
for the customer's purchase of an automobile, will provide tires
for life for the vehicle.

FACTS

Your request provided the following information:

Description of the Transaction:

The taxpayer... (hereinafter referred to as either "taxpayer,"
"dealer," or "[Taxpayer]"), is a retail dealer of new and used
automobiles as well as parts for various vehicles. As a sales
promotional campaign, the taxpayer has begun to offer "Tires for
Life." The dealer, in return for the customer's purchase of an
automobile, will provide tires for life for the vehicle, for no

charge, subject to the terms of the agreement provided below.

The customer must sign a "Free Tires for Life Statement." A true
copy of this agreement has been included with this request for
reference. The details of this agreement are as follows:

[Taxpayer] will replace the tires on your vehicle for as
long as you own your vehicle under the following
conditions. In order for the program to be in effect and to
make a claim you must have your vehicle exclusively
serviced by [Taxpayer] for all factory recommended
maintenance according to the schedule provided in the
manufacturer's owner manual, and 1 alignment per year or
every 15000 miles[, whichever] comes first. The tires must
be worn down to 2/32 tread depth and must be rotated every
5-6000 miles.

You must provide receipts for such services or a duly
signed maintenance log upon request. Customer is
responsible for installation charges when tires are
replaced. Charges will be based on the current price
schedule.

The program is limited to wear and tear. [Taxpayer] will
replace your tires under this program with tires of a like,
and kind or quality of an equal value. You agree to
reference this program at the time you request service to
your tires. This program expires when you sell your
vehicle. This program excludes and does not cover repair or
replacement of tires which are damaged by accidents,
improper vehicle alignment, road hazards, improper use, or
alteration of tire or vehicle components not authorized by
the manufacturer. This program is not applicable to damage
caused by collision, falling objects, theft, larceny,
explosion, lightning, earthquakes, fire, windstorms, hail,
water, floods, subfreezing temperature, riots, wars, civil
commotion, malicious mischief, vandalism, or acts of God.
This program is void if the vehicle is used [in a]
commercial or competitive manner, or if used for
principally off-road purposes. This program is secondary to
any other type of coverage including warranties which cover

your tires.

This program specifically excludes any consequential
damages or cost you may suffer as a result of the need for
repair or replacement of your tire, liability for damages
to property, injury or death to any person arising out of
the operation, maintenance or use of your vehicle whether
or not related to the tires.

You agree to be governed by any dispute resolution
agreement in force between [Taxpayer] and its retail
customers. This dispute resolution Agreement may limit some
of your rights and will be made available to you upon
request. In no event will [Taxpayer's] monetary liability
arising out of a breach of this program exceed the amount
you paid to [Taxpayer] for service of the tires on your
vehicle. The terms and conditions outlined above are the
full and complete agreement between the parties. No other
oral representation or statement should be relied upon by
the customer. [Taxpayer] may delegate its duties and
obligations and assign its rights and benefits hereunder.

It should be noted that the cost incurred for the replacement
tires will be borne entirely by the dealer. In addition, there
is no agreement for such costs to be reimbursed either directly
or indirectly by any factory or manufacturer. This is strictly a
sales promotional campaign, which is being financed entirely by
the dealer.

Every sale invoice has a charge for "dealer handling charge"
which is subject to sales tax. This charge covers a multitude of
items, including the anticipated cost of the Tires for Life
agreement. Upon the receipt of the dealer handling charge, a
charge is made on the dealership to the cost of goods sold with
an offsetting liability for the anticipated cost to be incurred
for the tires under this program.

REQUESTED ADVISEMENT

You present the issues and taxpayer conclusions in two scenarios
as follows:

Scenario One (Factual Situation as Presented Above)

The taxpayer is concerned with the sales and use tax
implications of the above "Free Tires for Life" promotional
campaign. The taxpayer has presented the issues and the
conclusions of the applicable law and rules as follows:

1. This transaction will not be treated as a taxable
   service warranty, due to the fact that there is no
   consideration paid by the customer for the agreement;
2. The dealer will be subject to use tax on the cost of
   the tires used to fulfill its obligation under this
   agreement;
3. The dealer will be subject to the $1.00 per tire waste
   tire fee that must be paid on each tire replaced under
   this program; and
4. The dealer should charge and collect sales tax from
   the customer for the installation charges incurred to
   replace the tires.

Scenario Two (Modification of Factual Situation)

The taxpayer is considering a modification to the wording of
charges on the sales invoice for the purchase of a vehicle. The
modification would be a notation on the sales invoice that the
amount charged for the dealer handling charge also included the
tires for life service agreement.

As with the factual situation in Scenario One, upon the receipt
of the dealer handling charge, a charge is made on the
dealership to the cost of goods sold with an offsetting
liability for the anticipated cost to be incurred for the tires
under this program.

As with the facts presented under Scenario One, the taxpayer is
concerned with the sales and use tax implications of the above
"Free Tires for Life" promotional campaign. The taxpayer has
presented the issues and the conclusions of the applicable law
and rules as follows:

1. This transaction will be treated as a taxable service
warranty, in light of the fact that there [was]
consideration paid by the customer for the agreement;

2. The dealer will [not] be subject to use tax on the
   cost of the tires used to fulfill its obligation under
   this agreement;
3. The dealer will be subject to the $1.00 per tire waste
   tire fee that must be paid on each tire replaced under
   this program; and
4. The dealer should charge and collect sales tax from
   the customer for the installation charges incurred to
   replace the tires.

STATUTORY AND REGULATORY AUTHORITY

Section 212.0506, F.S., provides, in applicable part:

(1) It is the intent of the Legislature that every person
is exercising a taxable privilege who engages in this state
in the business of soliciting, offering, providing,
entering into, issuing, or delivering any service warranty.
(E.S.)

(2) For exercising such privilege, a tax is levied on each
taxable transaction or incident, which tax is due and
payable at the rate of 6 percent on the total consideration
received or to be received by any person for issuing and
delivering any service warranty.

(3) For purposes of this section, "service warranty" means
any contract or agreement which indemnifies the holder of
the contract or agreement for the cost of maintaining,
repairing, or replacing tangible personal property....

Section 212.02(2), F.S., provides, in part:

"Business" means any activity engaged in by any person, or
caused to be engaged in by him or her, with the object of
private or public gain, benefit, or advantage, either
direct or indirect....

Subsubparagraph (a)1.a., of Subsection 212.05(1), F.S., provides
that the State's sales tax is levied on each taxable
transaction, as follows:

At the rate of 6 percent of the sales price of each item or
article of tangible personal property when sold at retail
in this state....

Section 212.02(16), F.S., provides, in part:

"Sales price" means the total amount paid for tangible
personal property, including any services that are a part
of the sale....

Section 212.06(1)(a), F.S., provides, in part:

The aforesaid tax at the rate of 6 percent of the retail
sales price as of the moment of sale, 6 percent of the cost
price as of the moment of purchase, or 6 percent of the
cost price as of the moment of commingling with the general
mass of property in this state, as the case may be, shall
be collectible from all dealers as herein defined on the
sale at retail, the use, the consumption, the distribution,
and the storage for use or consumption in this state of
tangible personal property or services taxable under this
chapter....

The wording in Rule 12A-1.105(1)(b)1., F.A.C., with respect to
the definition of the term "service warranty," mirrors the
statute and explains that the consideration paid for the service
warranty is taxable "... whether or not the contract provides
for the furnishing of parts." The Rule continues in subparagraph
(4)(a)1., stating "[t]he payment of any claim arising under a
taxable service warranty by the person issuing the service
warranty made to a person performing repairs or maintenance of a
product listed under the taxable service warranty, or made
directly to a lessor of the product listed under a taxable
service warranty, is not subject to sales tax."

The term "use," as defined in section 212.02(20), F.S.,
"includes the exercise of any right or power over tangible

personal property incident to the ownership thereof,..., except
that it does not include the sale at retail of that property in
the regular course of business."

For the privilege of engaging in business, a $1.00 waste tire
fee is imposed, on any person engaging in the business of making
retail sales of new motor vehicle tires in this state, under
section 403.718(1), F.S., "for each new motor vehicle tire sold
at retail." The statute further provides that "[s]uch fee shall
be subject to all applicable taxes imposed in chapter 212."

Rule 12A-12.001, F.A.C., provides, in part:

(2) The fee is imposed upon the dealer selling the tire and
not upon the purchaser.

(3) The fee is required to be stated separately on the
sales invoice or other tangible evidence of sale given to
the purchaser.

(4) The fee is to be included in the price upon which sales
or use tax or any other tax imposed by... Chapter 212,
Florida Statutes, is computed, even though the fee is
listed as a separate item on the invoice....

(6)(b) A motor vehicle dealer can purchase one or more
tires exempt from the fee as a sale for resale by
presenting a sales tax resale certificate to the seller of
the tires. However, if thereafter the motor vehicle dealer
withdraws any such tire from inventory to use on the
dealer's own vehicle, to give away, or for any purpose
except for resale, the motor vehicle dealer will owe the
fee at the time the tire is withdrawn from inventory....

DETERMINATION

First, under both Scenario One (Factual situation as presented)
and Scenario Two (Modification of factual situation), the
taxpayer is engaged in a "promotional campaign" associated with
the sale of tangible personal property, the cost of which is
borne entirely by the taxpayer, and is not engaged in the

business of "soliciting, offering, providing, entering into,
issuing, or delivering any service warranty in this state."
Thus, whether the taxpayer does or does not have wording on its
purchase invoice, to indicate that the cost of the "Free Tires
for Life" agreement is included in the taxable sales price of an
item of tangible personal property (i.e., "dealer handling
charge"), the transaction is not the sale of a service warranty.

It should also be noted that the Legislature has established
strict filing, licensing, and reporting requirements and
procedures for motor vehicle service agreement companies in Part
I of Chapter 634, F.S., administered by the Florida Department
of Insurance. Based on the information provided, there is no
indication that the taxpayer has complied with any of those
requirements and procedures to date.

Under the terms of the promotional agreement, the taxpayer is
obligated to provide replacement tires to a customer, free of
charge, for as long as the customer owns the vehicle purchased
from the taxpayer. This is subject to the customer having met
several requirements, as mentioned above. Any costs associated
with meeting these requirements are the responsibility of the
taxpayer's customer, including installation charges associated
with the replacement of any tire under the agreement, and are
subject to sales tax on the charge for such costs.

Under the facts presented the taxpayer is engaged in a
"promotional campaign" associated with the sale of tangible
personal property. The taxpayer's customer signs an ancillary
contract, "Free Tires for Life Statement," at the time of the
sale, evidencing the acceptance of the terms contained within
that contract, then such contract is a part of the agreement to
abide by the terms and conditions stated therein. Accordingly,
as part of the agreement to have the vehicle exclusively
serviced by the Taxpayer, pursuant to the schedule provided in
the manufacturer's owner manual including one alignment every
15,000 miles whichever comes first, the cost of the free tires
provided, to the Taxpayer's customer, is included in the taxable
"maintenance charge" for servicing the vehicle. Thus, the
taxpayer does not owe any use tax on the replacement tires.
Taxpayer will, however, be subject to the $1.00 waste tire fee,

as a charge to the taxpayer for the privilege of engaging in the
business, pursuant to the provisions of section 403.718, F.S.,
and Rule 12A-12.001(6)(b), F.A.C.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material, and this response, deleting names,
addresses, and any other details which might lead to
identification of the taxpayer. Your response should be
received by the Department within 15 days of the date of this
letter.

Sincerely,

Horace Royals
Tax Law Specialist
Technical Assistance and Dispute Resolution

Control No. 51476