Does a car dealer owe sales or use tax on loaner vehicles it provides free to customers under an extended warranty's rental-car benefit?

Plain-English summary

A car dealer's customers can buy a DaimlerChrysler extended service contract that includes a rental-car benefit: if their vehicle needs overnight repairs, the plan pays up to $30/day (capped at $150) for a rental car. Rather than sending customers to a rental agency, the dealer provides a car from its own dealer-owned rental fleet at no charge to the customer, and DaimlerChrysler reimburses the dealer for it. The dealer asked whether it owes sales or use tax anywhere in this chain.

The Department walked through three layers, and found no tax at any of them. First, because the dealer's rental fleet is used exclusively for rental purposes (never for any other dealer use), the dealer can buy those vehicles in the first place without paying sales tax, treating them as inventory purchased for resale -- and this holds regardless of whether the eventual "rental" is paid for by the manufacturer, another warranty company, or a paying customer, as long as the vehicles are never put to any non-rental use. Second, DaimlerChrysler's payment to the dealer for supplying the loaner is itself a purchase for resale (DaimlerChrysler is fulfilling its own extended-service-contract obligation to the customer), so that reimbursement isn't taxable either -- the dealer should get a resale certificate from DaimlerChrysler to document this. Third, the customer owes nothing extra for using the free loaner, because the value of that rental benefit was already baked into and taxed as part of the extended service contract the customer bought earlier. The one exception: any charges to the customer that go beyond what the service contract actually covers remain taxable at the usual rate.

What this means for you

Auto dealers offering warranty-plan loaner vehicles

Keep your rental fleet genuinely exclusive to rental use (not mixed with regular dealer or demo use) to preserve the tax-free purchase treatment, and get a resale certificate from the manufacturer or warranty company reimbursing you for loaner cars -- that documents why you're not charging tax on that reimbursement.

Customers using an extended warranty's rental benefit

You shouldn't see any additional sales tax charge for a loaner car that's within your plan's covered benefit -- that cost was already taxed when you bought the extended service contract. Only charges beyond the plan's coverage (extra days, upgrades, etc.) should be taxed.

Accountants and tax professionals

This ruling chains together three separate resale-exclusion analyses (dealer's fleet purchase, manufacturer's reimbursement, and the earlier-taxed service contract) -- useful as a checklist for any dealer or repair-shop loaner-vehicle program tied to a warranty or service contract, distinguishing it from a mixed-use vehicle scenario under TSB-M-02(3)S.

Common questions

Q: Does a dealer owe sales tax buying vehicles for its rental fleet?
A: No, as long as the vehicles are used exclusively for rental purposes and never for any other dealer use -- they can be purchased for resale without sales tax.

Q: Is the manufacturer's reimbursement to the dealer for providing a warranty-plan loaner taxable?
A: No -- it's treated as a purchase for resale by the manufacturer fulfilling its own service-contract obligation to the customer, supported by a resale certificate from the manufacturer.

Q: Does the customer owe tax on the free loaner car?
A: No, if there's no additional charge -- the value was already taxed as part of the extended service contract purchase.

Q: What if the customer is charged something beyond what the warranty plan covers?
A: Any charges not covered by the service contract are subject to sales tax at the applicable rate.

Citations and references

Statutes and guidance:

• Tax Law § 1101(b)(4)(i) (retail sale)
• Tax Law § 1105(a), (c)(3) (retail sales; installing/maintaining tangible personal property)
• 20 NYCRR 526.6(c) (resale exclusion)
• 20 NYCRR 527.5(c), (d) (maintenance/service contracts; warranty work)
• 20 NYCRR 541.1(g) (guarantee and warranty work between contractors)
• TSB-A-85(29)S (John B. Pike and Son, Inc., July 26, 1985)
• TSB-M-02(3)S (Sales and Use Tax Treatment of Motor Vehicles Used by Dealers, June 7, 2002)
• West-Herr Ford, Inc. v Tax Appeals Trib., 16 AD3d 727 (3d Dept 2005)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a05_27s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(27)S
Sales Tax
June 23, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S040810A

On August 10, 2004, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Transitowne Dodge Associates L.P., 7408 Transit Road, Williamsville,
NY 14221.
The issue raised by Petitioner is whether Petitioner’s vehicles provided to customers for
no charge under the provisions of an extended warranty plan are purchased for resale and, as
such, are exempt from sales and compensating use tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner operates a Dodge automobile dealership, selling and servicing new and used
automobiles. In addition to the basic manufacturer’s warranty, new and used car customers may
purchase a DaimlerChrysler extended service contract for an additional charge plus the
applicable State and local sales tax. The extended service contract contains a provision entitling
the customer to a car rental allowance when the customer’s vehicle requires overnight repairs. In
fulfillment of the rental car requirement under the service contract, Petitioner provides the
customers with a dealer-owned “rental” vehicle.
Petitioner receives payment from
DaimlerChrysler for the provision of the rental vehicle to the customer, pursuant to the terms of
the extended service contract.
The extended service contracts typically provide coverage similar to the following
provision:
Car Rental Allowance (overnight repairs): Coverage starts on the date you purchase
the Plan and is not subject to a deductible. The Plan will pay up to $30 per day ($150
maximum) for a rental any time repairs take overnight, and a component covered by the
Plan or the manufacturer’s Basic Warranty fails.
Petitioner currently uses dealer-owned vehicles from its rental fleet to provide the service
contract customers with the required car. Since Petitioner provides these cars to customers for
no additional charge, Petitioner has not collected sales tax from the customers. Sales tax was
previously paid by the customer on the extended service contract when it was purchased.
Applicable law and regulations
Section 1101(b)(4)(i) of the Tax Law defines the term retail sale, in part, as:

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TSB-A-05(27)S
Sales Tax
June 23, 2005

A sale of tangible personal property to any person for any purpose, other than (A)
for resale as such or as a physical component part of tangible personal property, or (B)
for use by that person in performing the services subject to tax under paragraphs (1), (2),
(3), (5), (7) and (8) of subdivision (c) of section eleven hundred five where the property
so sold becomes a physical component part of the property upon which the services are
performed or where the property so sold is later actually transferred to the purchaser of
the service in conjunction with the performance of the service subject to tax. . . .
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax On and after June first, nineteen hundred seventy-one,
there is hereby imposed and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
*

*

*

(3) Installing tangible personal property, excluding a mobile home, or
maintaining, servicing or repairing tangible personal property, including a mobile home,
not held for sale in the regular course of business, whether or not the services are
performed directly or by means of coin-operated equipment or by any other means, and
whether or not any tangible personal property is transferred in conjunction therewith. . . .
Section 526.6(c) of the Sales and Use Tax Regulations provides, in part:
Resale exclusion. (1) Where a person, in the course of his business operations,
purchases tangible personal property or services which he intends to sell, either in the
form in which purchased, or as a component part of other property or services, the
property or services which he has purchased will be considered as purchased for resale,
and therefore not subject to tax until has transferred the property to his customer.
*

*

*

(2) A sale for resale will be recognized only if the vendor receives a properly
completed resale certificate. . . .
Section 527.5 of the Sales and Use Tax Regulations provides, in part:

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Sales Tax
June 23, 2005

(c) Maintenance and service contracts. (1) The purchase of a maintenance or
service contract is a taxable transaction.
(2) The vendor making sales of such contracts may purchase for resale any
tangible personal property which is transferred to his customer in connection with the
services rendered.
(3) Any charge made for services rendered in addition to the purchase price of the
maintenance or service contract is taxable.
*

*

*

(d) Warranty work. (1) Repair or maintenance services rendered, without charge
to a customer under a warranty agreement are not taxable.
(2) The vendor performing the warranty services may purchase for resale any
tangible personal property which is transferred to his customer in connection with the
services rendered.
(3) Charges for services rendered which are not covered by the warranty are
taxable.
(4) Where a manufacturer reimburses a vendor or repairman performing warranty
work, the reimbursement is not taxable, as it was for resale.
Section 541.1(g) of the Sales and Use Tax Regulations provides, in part:
Guarantee and warranty work. (1) Payments by a contractor to another contractor
to perform maintenance, service and repair of real and tangible personal property when
purchased to fulfill a guarantee or warranty are not subject to tax.
Opinion
The terms of the extended service contracts purchased by Petitioner’s customers provide
that the customers are entitled to a rental vehicle, without charge, while the customer’s vehicle is
being held for repair overnight. In fulfillment of the rental car requirement under the service
contract, Petitioner provides the customers with a dealer-owned rental vehicle. Petitioner
receives payment from DaimlerChrysler for the provision of the rental vehicle to the customer,
pursuant to the terms of the extended service contract.
Petitioner has a fleet of rental vehicles. To the extent that the vehicles in such fleet are
used exclusively for rental purposes by Petitioner, such vehicles may be purchased by Petitioner
for resale without payment of sales tax. See John B. Pike and Son, Inc., Adv Op St Tx Comm,

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TSB-A-05(27)S
Sales Tax
June 23, 2005

July 26, 1985, TSB-A-85(29)S; P-H Fine Arts, Limited et al, Dec Tax App Trib, October 13,
1994, DTA Nos. 807860-807867. DaimlerChrylser has agreed to pay the cost of the rental
vehicles provided to Petitioner’s customers whose vehicles require overnight repairs pursuant to
the extended service contract. Such vehicles are used exclusively as rental vehicles by
Petitioner, whether the rentals are paid for by (a) DaimlerChrysler or (b) DaimlerChrysler, other
warranty and service contract companies, and customers, so long as such vehicles are not used
by Petitioner for any other purpose. Accordingly, Petitioner may purchase vehicles which are
provided to customers as rental vehicles pursuant to extended service contacts for resale without
payment of sales tax. Vehicles used exclusively for rental purposes by Petitioner as described in
this Opinion are not mixed use vehicles and are not subject to use tax. See Technical Services
Bureau Memorandum entitled Sales and Use Tax Treatment of Motor Vehicles Used by Dealers,
June 7, 2002, TSB-M-02(3)S, with respect to mixed use vehicles.
The purchase of property for use in fulfillment of a warranty or repair contract is a
purchase for resale which is not subject to tax. In the present case, customers are entitled to a
rental vehicle pursuant to their extended service contract with Daimler Chrysler. Thus, the rental
of the vehicle from Petitioner by DaimlerChrysler for use in fulfilling its extended service
contract with the customer is a purchase for resale by DaimlerChrysler and is not subject to sales
tax. See section 527.5(c) of the Sales and Use Tax Regulations and West-Herr Ford, Inc. v Tax
Appeals Trib. of State of N.Y., 16 AD3d 727 (3rd Dept 2005). Petitioner should receive a resale
certificate from DaimlerChrylser to substantiate the nontaxable status of this transaction. See
section 1132(c) of the Tax Law and section 532.4 of the Sales and Use Tax Regulations.
No tax is due from the customer on the rental vehicle if there are no charges to the
customer for the use of the vehicle. The use of such vehicle was previously purchased by the
customer as part of the purchase of the extended service contract, and such contract has already
been taxed. However, any additional charges to the customer not covered in the service contract
are subject to sales tax at the applicable rate.

DATED: June 23, 2005

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.