Is a Nebraska warranty or service and maintenance agreement taxable when it covers fixtures, and are the repair parts taxable?

Plain-English summary

Whether a Nebraska sales tax applies to a warranty, guarantee, or service and maintenance agreement turns on what the agreement covers — and repairing a fixture has its own rule.

The three holdings. Under Revenue Ruling 1-97-1:

• An agreement covering only fixtures is not taxable.
• An agreement covering fixtures and other personal property is taxable.
• Parts and materials used to repair a fixture are taxable.

Why. Under Sales and Use Tax Regulation 1-074, the charge for an agreement covering personal property that is not a fixture (nonfixture) is taxable, while the charge for an agreement covering only items that must be annexed to real estate is not.

What counts as a fixture. Regulation 1-017.01F defines a fixture as "a piece of equipment that must be annexed to the building or structure in order to properly function, yet remains identifiable as a separate item." Examples named in the ruling include household and commercial hot water heaters, garbage disposals, central heating and air conditioning systems, and central vacuum systems, plus built-in ranges, dishwashers, trash compactors, and refrigerators.

Mixed agreements. If an agreement covers both fixtures and nonfixtures without separate amounts on the billing invoice, the entire charge is taxable. If the invoice lists separate amounts, only the charge for the nonfixture coverage is taxable.

Repair parts and the contractor rule. Sales and use tax does not apply to parts, materials, and services used to fulfill an agreement to repair or replace nonfixtures, provided there's no separate charge for the parts. But persons repairing fixtures are contractors: under option 1, option 2, or option 3, the repairperson must pay sales tax or remit use tax on all parts and materials purchased or withdrawn from inventory to repair a fixture — even when the agreement itself has already been taxed.

What this means for you

A retailer or service company selling coverage agreements

Look at what each agreement covers. Sell coverage on only fixtures (e.g., a built-in dishwasher or central A/C) and you don't charge tax on the agreement. Bundle fixtures with other personal property and the agreement is taxable — and if you don't break out the amounts on the invoice, the whole thing is taxable. Separately state the fixture and nonfixture charges if you want only the nonfixture part taxed.

A repairperson (contractor) fixing fixtures

You're treated as a contractor. Regardless of your option (1, 2, or 3), you owe sales or use tax on the parts and materials you use to repair a fixture — and that's true even if the customer's warranty or service agreement was itself taxed. Don't assume taxing the agreement covers the parts.

Common questions

Q: Is a service contract on a built-in dishwasher taxable?
A: No — a built-in dishwasher is a fixture, and an agreement covering only fixtures is not taxable.

Q: My agreement covers a built-in oven (fixture) and a freestanding freezer (nonfixture). Is it taxable?
A: Yes. An agreement covering both fixtures and other personal property is taxable. If the invoice separately states the amounts, only the nonfixture (freezer) portion is taxed; if not, the whole charge is taxed.

Q: The warranty was taxed. Do I still owe tax on parts I use to fix the fixture?
A: Yes. A person repairing a fixture is a contractor and must pay sales or use tax on the parts and materials, even when the agreement was taxed.

Citations and references

• Sales and Use Tax Regulation 1-074 — an agreement covering nonfixture personal property is taxable; one covering only items annexed to real estate is not; parts/materials for repairing nonfixtures aren't taxed absent a separate charge.
• Sales and Use Tax Regulation 1-017.01F — defines a "fixture" (equipment annexed to a building to function but identifiable as a separate item).
• Contractor options 1, 2, and 3 — under any option, a fixture-repairperson pays sales or use tax on parts and materials used to repair a fixture.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr019701.pdf

Original ruling text

REVENUE RULING 1-97-1
March 24, 1997
Sales and Use Tax - Taxability of Warranties, Guarantees, Service and Maintenance Agreements,
and Parts. THE SALE OF AN AGREEMENT COVERING ONLY FIXTURES IS NOT TAXABLE.
AN AGREEMENT THAT COVERS FIXTURES AND OTHER PERSONAL PROPERTY IS
TAXABLE. PARTS AND MATERIALS USED TO REPAIR A FIXTURE ARE TAXABLE.
Advice has been requested regarding the application of sales and use tax on warranties, guarantees,
and service and maintenance agreements that covers fixtures and other personal property and the
taxability of parts and materials used to repair a fixture covered under an agreement.
Under Sales and Use Tax Regulation 1-074 the charge for an agreement that covers personal
property that is not a fixture (nonfixture) is taxable and the charge for an agreement that only
covers those items that need to be annexed to real estate is not taxable.
As defined in Sales and Use Tax Regulation 1-017.01F, a fixture is “a piece of equipment that must
be annexed to the building or structure in order to properly function, yet remains identifiable as a
separate item.” Examples of fixtures include but are not limited to:

1. Household and commercial hot water heaters, garbage disposals, central heating and air
   conditioning systems, central vacuum systems, and
2. The following appliances when they are built-in: ranges, dishwashers, trash compactors,
   and refrigerators.
   If a warranty, guarantee, service or maintenance agreement covers both fixtures and nonfixtures
   without separate amounts being listed on the billing invoice, then the total charge for the agreement
   is taxable. If separate amounts are listed on the billing invoice, only those charges for the agreement
   covering nonfixtures are taxable.
   Under Sales and Use Tax Regulation 1-074 sales and use tax does not apply to parts and materials
   used, and services performed in fulfilling the obligations under an agreement to repair or replace
   nonfixtures provided, there is not a separate charge for the parts and materials.
   Persons repairing fixtures are contractors. Under option 1, option 2, or option 3 the repairperson
   (contractor) is required to pay sales tax or remit use tax on all parts and materials purchased
   or withdrawn from inventory and used to replace or repair a fixture covered under a warranty,
   guaranty, or service and maintenance agreement. The parts and materials that are used to replace
   or repair a fixture are taxable even when the agreement has been taxed.
   APPROVED:

M. Berri Balka
State Tax Commissioner
March 24, 1997

Nebraska Department of Revenue, P.O. Box 94818, Lincoln, Nebraska 68509-4818