How did South Carolina tax warranty, maintenance, and similar service contracts under Revenue Ruling 05-12?

Plain-English summary

South Carolina Revenue Ruling #05-12 described a historical rule effective for transactions beginning October 1, 2005. Sales and renewals of warranty, maintenance, and similar service contracts for tangible personal property were subject to sales and use tax whether the contracts were optional or mandatory and whether they were bought with the property or later.

The ruling identified an exception for motor-vehicle extended service and extended warranty contracts. It also addressed replacement parts taken from inventory to perform covered repairs. No additional tax applied to the part when tax had been paid on the contract and the customer was not charged for labor or material. For a warranty included free with the original purchase, tax also had to have been paid on the defective part or the property containing it, and the customer could not be charged for the repair.

If the relevant conditions were not met, the ruling said tax applied to the replacement part's fair market value. RR 06-9 expressly superseded this ruling, and RR 11-1 later changed the warranty-contract treatment again for sales beginning September 1, 2011.

What this means for you

Historical transaction review

For a transaction in this ruling's effective period, separate the tax on the contract from the possible tax on parts later withdrawn for repairs. Paying tax on the contract could prevent a second tax on covered replacement parts only when the customer received the repair without an additional labor or material charge.

Warranty and repair businesses

A free original warranty followed a different condition set: the original property or defective component had to have been taxed, and the customer could not be charged for the covered labor or material.

Motor-vehicle contract sellers

The ruling treated motor-vehicle extended service and extended warranty contracts as exempt under the cited statute.

Common questions

Q: Did the contract have to be mandatory to be taxable?
A: No. The ruling covered optional and mandatory contracts.

Q: Did tax apply only when the contract was sold with the product?
A: No. It also covered later sales and renewals.

Q: Was every replacement part withdrawn from inventory taxable?
A: No. The ruling provided conditions under which a covered replacement part was excluded from tax. If those conditions failed, tax applied to the part's fair market value.

Q: Is RR 05-12 current?
A: No. RR 06-9 expressly superseded it, and RR 11-1 later superseded RR 06-9 for the post-September 1, 2011 transition.

Citations and references

• S.C. Code Ann. §§ 12-36-910(B) and 12-36-1310(B) — historical taxation of contract sales and renewals
• S.C. Code Ann. § 12-36-2120(53) — motor-vehicle contract exemption cited by the ruling
• S.C. Code Ann. § 12-36-90 — inventory withdrawals and replacement-part conditions
• South Carolina Act No. 161 of 2005, § 19 — statutory change cited by the ruling
• SC Revenue Ruling 06-9 — expressly superseded RR 05-12
• SC Revenue Ruling 11-1 — later superseded RR 06-9 and reinstated RR 93-6

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR05-12.pdf
• Official superseding RR 06-9 PDF: RR06-9.pdf
• Official later RR 11-1 PDF: RR11-1.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P.O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC REVENUE RULING #05-12
SUBJECT:

Warranty, Maintenance and Similar Service Contracts
(Sales and Use Tax)

EFFECTIVE DATE:

October 1, 2005

SUPERSEDES:

SC Revenue Ruling #93-6 and all previous advisory opinions and
any oral directives in conflict herewith.

REFERENCE:

House Bill 3767, Section 19 (Act No, 161) of 2005

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2004)
SC Revenue Procedure #03-1

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public
and to Department personnel. It is a written statement issued to apply
principles of tax law to a specific set of facts or a general category of
taxpayers. A Revenue Ruling does not have the force or effect of law,
and is not binding on the public. It is, however, the Department’s
position and is binding on agency personnel until superseded or
modified by a change in statute, regulation, court decision, or advisory
opinion.

Effective Date Notice:
This advisory opinion is effective for transactions occurring on or after October 1, 2005. SC
Revenue Ruling #93-6 is still valid with respect to transactions occurring prior to October 1,
2005. (See House Bill 3767, Section 19 (Act No, 161) of 2005.)
Questions:

1. Are charges for warranty, maintenance, or similar service contracts for tangible personal
   property subject to the sales or use taxes?
2. Does the tax apply to the withdrawal from inventory of tangible personal property for use in
   replacing a defective part under a warranty contract?
   Conclusions:
3. Charges for sales or renewals of warranty, maintenance, or similar service contracts (whether
   optional or mandatory) for tangible personal property are subject to the sales and use tax.
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However, charges for motor vehicle extended service contracts and motor vehicle extended
warranty contracts are exempt from the sales and use tax under Code Section 12-36-2120(53).

2. The tax does not apply to the withdrawal from inventory of tangible personal property for use
   in replacing defective part under a warranty contract if:
3. tax was paid on the sale or the renewal of the warranty contract and the customer is not
   charged for any labor or material when the part is replaced; or,
4. the warranty contract is given without charge at the time of the original purchase of the
   defective property, and 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 is not
   charged for any labor or material when the part is replaced.
   Note: If both conditions set forth in Item 1 are not met, or if all three conditions set forth in Item
   2 are not met, then tax is due on the withdrawal from inventory of the tangible personal property
   for use in replacing a defective part under the warranty contract. The tax would be based on the
   fair market value of the property withdrawn from inventory.
   Facts:
   Frequently, when tangible personal property is purchased, the manufacturer warrants that the
   property will be free of defects for a specified period of time. The cost of this warranty is not
   separately stated, but is a part of the sales price of the property.
   The retailer, usually in conjunction with the manufacturer, will offer the customer the opportunity to
   purchase an extended warranty or other maintenance or similar service contract at the time the
   tangible personal property is purchased. For example, a copier manufacturer may warrant that the
   copy machine it manufacturers will be free from defects for twelve months. For an additional fee,
   that will be separately stated on the invoice to the customer, the customer can buy an extended
   warranty. The extended warranty will guarantee that the copier will be free from defects for an
   additional twelve months, for a total warranty period of twenty-four months. If the copier does
   breakdown, the manufacturer (or an authorized service center) will repair the copier, usually, free of
   charge.
   If the customer decides not to purchase the extended warranty or other maintenance or similar
   service contract at the time the tangible personal property is purchased, some retailers will allow the
   customer to purchase such a contract after the sale. In the above example, if the customer had not
   purchased the extended warranty at the time of the sale, the retailer may contact the customer at any
   time within a specified period of time after the sale and offer the customer a second opportunity to
   buy the extended warranty.
   Discussion:
   Effective for sales or renewals on or after October 1, 2005, Code Sections 12-36-910(B) and 1236-1310(B) impose the sales and use tax on the:

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gross proceeds accruing or proceeding from the sale or renewal of warranty,
maintenance, or similar service contracts for tangible personal property, whether or not
such contracts are purchased in conjunction with the sale of tangible personal property.
As such, a charge for the sale or renewal of a warranty, maintenance, or similar service contract
for tangible personal property is subject to the sales and use tax, whether or not such contract
was purchased in conjunction with the sale of the tangible personal property.
However, Code Section 12-36-2120(53) exempts from the tax:
motor vehicle extended service contracts and motor vehicle extended warranty contracts.
Finally, it is important to be aware of an additional statutory provision as it relates to
warranties. The sales tax, in addition to sales of tangible personal property, also applies to
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.” See Code Section 12-36-90.
As such, the sales tax is due on the withdrawal from inventory of the tangible personal property
for use in replacing a defective part under the warranty contract; however, Code Section 12-3690(1)(c)(iii) excludes from the tax:
tangible personal property replacing defective parts under written warranty contracts if:
(A) the warranty, maintenance, service, or similar contract is given without charge, at
the time of original purchase of the defective property, or the tax was paid on the
sale or renewal of warranty, maintenance, or similar service contract for tangible
personal property of which the defective part was a component, whether or not such
contract was purchased in conjunction with the sale of tangible personal property,
(B) in the case of a warranty, maintenance, service, or similar contract that is given
without charge at the time of original purchase of the defective property, 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.
Therefore, the tax does not apply to the withdrawal from inventory of tangible personal property
for use in replacing defective part under a warranty contract if:

1. tax was paid on the sale or the renewal of the warranty contract and the customer is
   not charged for any labor or material when the part is replaced; or,

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2. the warranty contract is given without charge at the time of the original purchase of
the defective property, and 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 is
not charged for any labor or material when the part is replaced.
Note: If both conditions set forth in Item 1 are not met, or if all three conditions set forth in Item
2 are not met, then tax is due on the withdrawal from inventory of the tangible personal property
for use in replacing a defective part under the warranty contract. The tax would be based on the
fair market value of the property withdrawn from inventory.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank III, Director
August 21
, 2005
Columbia, South Carolina

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