When are optional equipment warranties and repair-part withdrawals taxable in South Carolina?

Plain-English summary

South Carolina Private Letter Ruling #21-1 addresses a medical-equipment manufacturer's optional extended warranties and its use of repair parts taken from wholesale inventory.

An optional extended warranty is taxable when it is sold in conjunction with the equipment sale. It becomes part of the equipment's gross proceeds or sales price even when the warranty is not invoiced until the free original warranty expires. If the warranty is purchased separately rather than as part of the equipment sale—including an optional renewal—it is not included in the equipment's gross proceeds or sales price and is not subject to sales and use tax.

Taking a repair part out of wholesale inventory is generally treated as a retail use taxable at the part's fair market value. The ruling applies the regulatory measure: the price at which the manufacturer offers the part for sale after customary discounts, but never less than the manufacturer's cost.

A part used under the free original warranty can escape tax only when the statutory warranty conditions are met: the warranty was given without charge at the original purchase, tax was paid on the defective part or the property containing it, and the customer is charged for neither labor nor materials. A part is also exempt when the underlying medical equipment sale was exempt and the part would have been exempt if sold directly to that customer.

Because the extended warranty carries an annual charge, parts used for its repairs are generally taxable at fair market value. The exemption for a part that would itself be exempt if sold to the customer still applies.

What this means for you

Equipment manufacturers and dealers

Document whether an extended warranty was contracted for as part of the original equipment sale or bought later as an independent transaction. Delayed billing does not make an originally bundled warranty separate. Track the selling price and cost of repair parts so taxable withdrawals can be measured correctly.

Warranty administrators

For a free original warranty, verify all three statutory conditions before treating a repair-part withdrawal as exempt. A customer charge for either labor or materials prevents that warranty-withdrawal exclusion.

Direct-pay customers

A direct-pay certificate shifts responsibility for tax on the original retail purchase to the customer, but it does not automatically relieve the manufacturer of tax on a later inventory withdrawal. The ruling says the manufacturer remains responsible for the repair-part withdrawal when the original sale was taxable, unless the free-warranty exclusion applies.

Common questions

Q: Is a warranty taxable merely because it is optional?
A: Not by itself. The controlling distinction in this ruling is whether the optional warranty was sold as part of the equipment sale or later as a separate transaction.

Q: Does billing the warranty after the free warranty expires make it nontaxable?
A: No. If the customer contracted for it with the equipment purchase, the later billing remains part of the original sale's gross proceeds or sales price.

Q: Are parts used for a free original warranty always exempt?
A: No. The warranty must have been free, tax must have been paid on the defective part or equipment, and the customer cannot be charged for labor or materials. Alternatively, the part can qualify when it would be exempt if sold to the customer.

Q: What if the manufacturer refunds the full equipment price instead of repairing it?
A: The ruling says the equipment sale is not taxable when the full gross proceeds or sales price is refunded in cash or credit and the equipment is returned to the manufacturer.

Citations and references

• S.C. Code Ann. § 12-36-90 — gross proceeds and warranty-related inventory withdrawals
• S.C. Code Ann. § 12-36-130 — sales price
• S.C. Code Ann. §§ 12-36-910 and 12-36-1310 — sales and use tax, including manufacturer withdrawals
• S.C. Regulation 117-309.17 — fair market value of inventory withdrawals
• S.C. Regulation 117-318.8 — returned property and full refunds
• Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d 920 (Ct. App. 1985)

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: PLR21-1.pdf

Original ruling text

STATE OF SOUTH CAROLINA

DEPARTMENT OF REVENUE
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 125, Columbia, South Carolina 29214-0575

SC PRIVATE LETTER RULING #21-1
SUBJECT:

Warranty Agreements and Withdrawals of Repair Parts from Inventory by
a Manufacturer under a Warranty
(Sales and Use Tax)

REFERENCES:

S.C. Code Ann. Section 12-36-90 (2014; Supp. 2020)
S.C. Code Ann. Section 12-36-130 (2014; Supp. 2020)
S.C. Code Ann. Section 12-36-910 (2014)
S.C. Code Ann. Section 12-36-1310 (2014)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2014)
S.C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #09-3

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific
taxpayer by the Department to apply principles of law to a specific set of
facts or a particular tax situation. It is the Department’s opinion limited to
the specific facts set forth, and is binding on agency personnel only with
respect to the person to whom it was issued and only until superseded or
modified by a change in statute, regulation, court decision, or another
Departmental advisory opinion, providing the representations made in the
request reflect an accurate statement of the material facts and the
transaction was carried out as proposed.

QUESTIONS

1. What is the application of the sales and use tax to the sale of an optional extended warranty
   by ABC, Inc., as described in the facts?
2. What is the application of the sales and use tax to ABC, Inc.’s withdrawal from inventory of
   a part to repair a customer’s equipment under one of its warranty contracts, as described in
   the facts?
   FACTS
   ABC, Inc. (“ABC”) is a manufacturer of certain medical equipment, which it primarily sells to
   medical product distributors, hospitals (e.g., for profit, nonprofit, or federal government
   1

hospitals), and privately owned medical practices. All sales of new equipment manufactured by
ABC are covered by a “new product limited warranty,” which ABC provides without charge.
During the effective period of the new product limited warranty, ABC will repair or replace the
equipment or refund or credit the purchase price if the equipment is found to be defective.
When purchasing equipment, customers may also purchase a service agreement (referred to in
this advisory opinion as an “optional extended warranty”). An optional extended warranty
extends the effective period of the new product limited warranty through the duration of the
optional extended warranty. Some customers enter a contract to purchase an optional extended
warranty in conjunction with their purchase of equipment; however, customers who do not enter
a contract to purchase an optional extended warranty in conjunction with the purchase of
equipment may purchase an optional extended warranty at any time.
Customers who enter a contract to purchase an optional extended warranty in conjunction with
the purchase of equipment are not invoiced for the optional extended warranty until the new
product limited warranty expires. The new product limited warranty expires the earlier of 15
months from the date of shipment or one year from the date of installation. A customer who has
contracted to purchase an optional extended warranty in conjunction with the purchase of
equipment has the right to cancel the optional extended warranty 60 days before the optional
extended warranty is to take effect. Optional extended warranty agreements are billed on an
annual basis, and each renewal of the agreement is optional.
Customers may provide ABC a copy of a direct pay certificate or an exemption certificate from
the Department to purchase the equipment. 1
LAW AND DISCUSSION
Application of the Sales and Use Tax to the Sale of an Optional Extended Warranty
Code Section 12-36-910(A) imposes a sales tax upon every person engaged or continuing within
this State in the business of selling tangible personal property at retail. Code Section 12-361310(A) imposes a use tax on the storage, use, or other consumption in this State of tangible
personal property purchased at retail for storage, use, or other consumption in this State,
regardless of whether the retailer is or is not engaged in business in this State.
The sales tax is imposed on the “gross proceeds of sales” as defined in Code Section 12-36-90.
The use tax is imposed on the “sales price” as defined in Code Section 12-36-130. They are
essentially both defined as the total proceeds or “value proceeding or accruing from the sale,
lease, or rental of tangible personal property,” without deductions for expenses. Expenses that

Code Section 12-36-2510(A)(2)(a) provides for a “direct pay certificate,” which allows its holder to make all
purchases tax free and to report and pay directly to the Department any taxes due. The holder of a direct pay certificate
is liable for any taxes due. Code Section 12-36-2510(A)(2)(b) provides for an “exemption certificate,” which allows
its holder to make only certain purchases tax free, such as machinery. The holder of an exemption certificate is liable
for any taxes due.

1

2

are not deducted include: the cost of goods sold; the cost of materials, labor, or service; interest;
losses; and transportation.
In Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d 920 (Ct.
App. 1985), the Court of Appeals, in interpreting the definition of “gross proceeds of sales” with
respect to lay away fees paid in conjunction with lay away sales, held:
But for the lay away sales, Meyers Arnold would not receive the lay away fees.
The fees are obviously charged for the service rendered in making lay away sales.
For these reasons, this court holds the lay away fees are part of the gross proceeds
and subject to the sales tax.
Based on the above, when the optional extended warranty is sold in conjunction with the sale of
medical equipment, as described in the facts, it is part of the gross proceeds of sales or sales price
of the sale of equipment, regardless of when the payment for the optional extended warranty is
made.
Taxability of Withdrawals of Repair Parts from Inventory for Warranty Contracts
ABC withdraws from inventory parts to repair medical equipment under its new product limited
warranty and its optional extended warranty. A retailer’s withdrawing of parts from inventory
that were originally purchased at wholesale is treated as a retail sale by the retailer under the law
and is subject to sales tax. 2 Code Section 12-36-90(1)(c) defines “gross proceeds of sales,” the
basis or measure of the tax, to impose the tax on the fair market value of the tangible personal
property. Code Section 12-36-90(1)(c) reads, in part:
the fair market value of tangible personal property previously purchased at
wholesale which is withdrawn from the business or stock and used or consumed in
connection with the business or used or consumed by any person withdrawing it.
Code Sections 12-36-910(B)(4) and 12-36-1310(B)(4) similarly impose the sales and use tax on
the “use” by a manufacturer of an item withdrawn from its inventory for use by the manufacturer
based on the fair market value of the item. 3
See Code Section 12-36-110(c).
Although “fair market value” as used in Code Sections 12-36-910(B)(4) and 12-36-1310(B)(4) with respect to
manufacturers is not defined in the sales tax law or regulations, it is defined in SC Regulation 117-309.17 for
purposes of a similar application of the tax for retailers under Code Section 12-36-90(1)(c). With respect to Code
Section 12-36-90(1)(c), the sales tax is imposed on the fair market value of tangible personal property withdrawn
from inventory for the retailer’s use instead of for sale. Similarly, with respect to Code Sections 12-36-910(B)(4)
and 12-36-1310(B)(4), the sales tax and the use tax are imposed on the fair market value of tangible personal
property used by the manufacturer instead of sold by such manufacturer. As such, it is the opinion of the Department
that the definition of fair market value as defined in SC Regulation 117-309.17 (“the price at which these goods are
offered for sale by the person withdrawing them. All cash or other customary discounts which he would allow to his
customers may be deducted; however, in no event can the amount used as gross proceeds of sales be less than the
amount paid for the goods by the person making the withdrawal”) applies to Code Sections 12-36-910(B)(4) and 1236-1310(B)(4), as well as Code Section 12-36-90(1)(c).
2
3

3

Code Section 12-36-90(1)(c)(iii) however, provides an exclusion from sales tax for certain
withdrawals from inventory of tangible personal property for use in replacing a defective part
under a warranty contract and reads:
tangible personal property replacing defective parts underwritten warranty
contracts if:
(A) the warranty contract is given without charge at the time of original
purchase of the defective property;
(B) the tax was paid on the sale of the defective part or on the sale of the
property of which the defective part was a component; and
(C) the warrantee is not charged for any labor or materials.
All three of the above conditions must be met in order for the withdrawal from inventory to be
nontaxable. If a withdrawal fails one or more of the conditions, then sales tax is due on the
withdrawal based on the fair market value of the property withdrawn from inventory. 4
Note: A withdrawal from inventory to repair or replace defective equipment under a warranty is
also exempt from the sales and use tax where the defective part or equipment, if it had been sold
by the retailer to the customer, would have been exempt from sales and use tax.
CONCLUSIONS
Application of the Sales and Use Tax to the Sale of an Optional Extended Warranty
The application of the sales and use tax to the sale of an optional extended warranty, as described
in the facts, is as follows:

1. The sale of an optional extended warranty in conjunction with, or a part of, the retail sale of
   medical equipment is includable in the “gross proceeds of sales” or “sales price” of the
   medical equipment and, therefore, is subject to the sales and use tax, unless the transaction is
   otherwise exempt. 5
2. The sale of an optional extended warranty that is not in conjunction with, or a part of, the
   retail sale of medical equipment (including a renewal of an optional extended warranty) is
   not includable in the “gross proceeds of sales” or “sales price” of the medical equipment and,
   therefore, not subject to the sales and use tax.

See SC Regulation 117-309.17.
A sale to the federal government is one example of a transaction that would be otherwise exempt from sales and use
tax. See Code Section 12-36-2120(2).

4
5

4

Note: When a customer provides a direct pay certificate, ABC is not responsible for collecting
the tax, but the customer is responsible for remitting the tax on the retail purchase, unless the
purchase is otherwise exempt.
Taxability of Withdrawals from Inventory for Warranty Contracts
The application of the sales and use tax to withdrawals from inventory by ABC under a new
product limited warranty or an optional extended warranty is as follows:

1. For a new product limited warranty, the withdrawal from inventory by ABC of the part to
   repair a customer’s equipment is not subject to sales and use tax, provided:
   a. The warranty contract is given without charge at the time of original purchase; the tax
   was paid on the sale of the defective part or on the sale of the property of which the
   defective part was a component; and the customer (warrantee) is not charged for any
   labor or materials; or
   b. The part withdrawn from inventory is for the repair of medical equipment the sale of
   which was exempt from sales and use tax when originally sold by ABC to its customer.
   If the conditions listed above are not met with respect to a new product limited warranty,
   then the withdrawal from inventory, or the use, by ABC of the part to repair a customer’s
   equipment is subject to sales and use tax, based on the fair market value of the part.
   Note: If ABC refunds or credits the purchase price of the defective equipment instead of
   repairing or replacing the equipment, then the sale of the equipment is not subject to sales
   and use tax provided the full price (“gross proceeds” or “sales price”) is refunded to the
   purchaser in cash or by credit and the equipment is returned to ABC. See SC Regulation 117318.8.
2. For an optional extended warranty, because the customer is charged or will be charged an
   annual fee, the withdrawal from inventory by ABC of a part to repair or replace a customer’s
   medical equipment is subject to sales and use tax, based on the fair market value of the part.
   The withdrawal or use of the part from inventory, however, is not subject to the tax provided
   the part, if it had been sold by the retailer to the customer, would have been exempt from the
   sales and use tax.
   When a customer uses a direct pay certificate in making the original purchase of the medical
   equipment from ABC, the application of the sales and use tax upon the withdrawal or use of a
   part by ABC to make the repair under warranty is as follows:
3. If the original sale of the medical equipment is subject to tax, then ABC is responsible for the
   sales and use tax on the withdrawal or use of the part from inventory, unless Code Section
   12-36-90(1)(c)(iii) applies.

5

2. If the original sale of the medical equipment is exempt from tax, then the withdrawal or use
of the part from inventory is not subject to the tax provided the part, if it had been sold by the
retailer to the customer, would have be exempt from the sales and use tax.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/W. Hartley Powell

W. Hartley Powell, Director

June 8
, 2021
Columbia, South Carolina
CAVEAT: This advisory opinion is issued to the taxpayer requesting it on the assumption
that the taxpayer’s facts and circumstances, as stated, are correct. If the facts and
circumstances given are not correct, or if they change, then the taxpayer requesting the
advisory opinion may not rely on it. If the taxpayer relies on this advisory opinion, and the
Department discovers, upon examination, that the facts and circumstances are different in
any material respect from the facts and circumstances given in this advisory opinion, then
the advisory opinion will not afford the taxpayer any protection. It should be noted that
subsequent to the publication of this advisory opinion, changes in a statute, a regulation, or
case law could void the advisory opinion.

6