How did RR 06-9 historically tax sales and renewals of warranty, maintenance, and similar service contracts?

Plain-English summary

South Carolina Revenue Ruling 06-9 described a historical rule effective for transactions on and after October 1, 2005. Retail sales and renewals of warranty, maintenance, and similar service contracts covering tangible personal property were generally subject to sales and use tax.

Tax applied whether the contract was sold with the property or later and whether the seller was the property retailer, manufacturer, or an unrelated third party. The ruling listed exemptions for motor-vehicle extended service and warranty contracts and for contracts covering property whose sale or purchase was itself exempt or excluded.

The maximum-tax cap on items such as boats and airplanes did not extend to their service contracts. The contract price was separately taxable unless exempt. The ruling also explained when replacement parts could be withdrawn from inventory or purchased without additional tax: generally, tax had to have been paid on the contract and the customer could not be charged for labor or material at replacement.

An out-of-state seller's failure to collect did not eliminate the tax. The South Carolina purchaser remained liable for use tax on a covered contract or renewal. RR 11-1 later superseded this regime for sales on and after September 1, 2011.

What this means for you

Historical contract review

For transactions in the ruling's 2005–2011 window, identify who sold the contract, what property it covered, whether an exemption applied, and whether tax was paid on the contract.

Repair businesses

The replacement-part treatment depended on tax having been paid at the contract stage and on the customer receiving the covered repair without a separate labor or material charge.

Out-of-state contract sellers and buyers

If the seller did not collect South Carolina tax, the ruling placed the use-tax responsibility on the purchaser.

Common questions

Q: Did a contract have to be sold with the property to be taxable?
A: No. The ruling taxed later sales and renewals too.

Q: Did the same person have to sell the property and the contract?
A: No. Third-party retail contract sellers were covered.

Q: Did a boat's or airplane's maximum-tax cap cover its warranty?
A: No. The ruling treated the contract price separately and applied the ordinary tax unless an exemption existed.

Q: Is RR 06-9 current?
A: No. RR 11-1 superseded it for extended-warranty sales beginning September 1, 2011.

Citations and references

• S.C. Code Ann. §§ 12-36-910(B)(6) and 12-36-1310(B)(6) — historical tax on contract sales and renewals
• S.C. Code Ann. § 12-36-2120(53) — historical motor-vehicle contract exemption discussed by the ruling
• S.C. Code Ann. § 12-36-90(2)(l) — replacement parts used under taxed contracts
• Act 386 of 2006, §§ 20, 21, and 23 — statutory changes underlying the ruling
• SC Revenue Ruling #11-1 — superseding transition guidance

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR06-9.pdf
• Superseding guidance: 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 #06-9

SUBJECT:

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

EFFECTIVE DATE:

October 1, 2005

SUPERSEDES:

SC Revenue Ruling #93-6 for transactions on or after
10/1/05, SC Revenue Ruling #05-12, and all previous
advisory opinions and any oral directives in conflict
herewith.

REFERENCE:

S. C. Code Ann. Section 12-36-910(B)(6) (Supp. 2005)
S. C. Code Ann. Section 12-36-1310(B)(6) (Supp. 2005)
Senate Bill 1245, Sections 20, 21, and 23 (Act No. 386) of
2006 (Effective October 1, 2005)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2005)
SC Revenue Procedure #05-2

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to
the public and to Department personnel. It is an advisory
opinion issued to apply principles of tax law to a specific
set of facts or general category of taxpayers. It is the
Department’s position and is binding on agency personnel
until superseded or modified by a change in statute,
regulations, court decision, or another Departmental
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 and Senate Bill
1245, Sections 20, 21 and 23 (Act No. 386) of 2006.)

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INTRODUCTION:
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 often 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.
In addition, other companies may also sell warranty or other maintenance or similar service
contracts for tangible personal property that was sold by another person.
Questions have arisen as to the application of the sales and use tax to the sale or renewal of
warranty, maintenance, or similar service contracts for tangible personal property and to
the sale or use of tangible personal property used in replacing a defective part under the
warranty contract.

LAW AND DISCUSSION:
Effective for sales or renewals on or after October 1, 2005, Code Sections 12-36910(B)(6) and 12-36-1310(B)(6) impose the sales and use tax on the:
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.

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Code Section 12-36-60 defines the term “tangible personal property” to mean:
personal property which may be seen, weighed, measured, felt, touched, or
which is in any other manner perceptible to the senses. It also includes
services and intangibles, including communications, laundry and related
services, furnishing of accommodations and sales of electricity, the sale or
use of which is subject to tax under this chapter and does not include
stocks, notes, bonds, mortgages, or other evidences of debt. Tangible
personal property does not include the transmission of computer database
information by a cooperative service when the database information has
been assembled by and for the exclusive use of the members of the
cooperative service. (Emphasis added.)
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. In addition, since warranty, maintenance and similar service contracts are
subject to the sales and use tax, sales or renewals of warranty, maintenance and similar
service contracts are considered sales of tangible personal property for purposes of the
sales and use tax.
Code Section 12-36-2120 exempts from the tax:

(53) motor vehicle extended service contracts and motor vehicle extended
warranty contracts.

(69) the sale or renewal of a warranty, maintenance, or similar service
contract for tangible personal property if the sale or purchase of the
tangible personal property covered by the contract is exempt or excluded
from the tax imposed by this chapter.
In addition, 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 12-36-90(1)(c)(iii) excludes from the tax:

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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,
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.
   Code Section 12-36-90(2) states that “gross proceeds of sales,” the basis for the sales tax,
   does not include:
   (l) tangible personal property purchased by a person engaged in the
   business of servicing a warranty, maintenance, or similar service contract
   for use in replacing a defective part under the contract if tax was paid on
   the sale or the renewal of the contract and the customer is not charged for
   labor or material when the part is replaced.

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Therefore, the sale at retail of tangible personal property to a person engaged in the
business of servicing a warranty, maintenance, or similar service contract for use in
replacing a defective part under the contract is not subject to the tax if tax was paid on the
sale or the renewal of the contract covering the tangible personal property being repaired
and if the customer is not charged for labor or material when the part is replaced.

QUESTIONS AND ANSWERS:
Sales and Renewals of Contracts

1. Are sales of warranty, maintenance or similar service contracts for tangible personal
   property subject to the sales and use tax?
   Sales at retail of warranty, maintenance or similar service contracts for tangible personal
   property are subject to the sales and use tax, unless otherwise exempt under the law.
2. Are charges for renewals of warranty, maintenance or similar service contracts for
   tangible personal property subject to the sales and use tax?
   Charges for renewals of warranty, maintenance or similar service contracts for tangible
   personal property are subject to the sales and use tax, unless otherwise exempt under the
   law.
3. Must a warranty, maintenance or similar service contract for tangible personal property
   be sold in conjunction with the tangible personal property covered by the contract in
   order for the sale or renewal of the contract to be subject to the sales and use tax?
   No. Sales and renewals of warranty, maintenance or similar service contracts for tangible
   personal property are subject to the sales and use tax, unless otherwise exempt under the
   law, when sold in conjunction with the tangible personal property covered by the contract
   and when not sold in conjunction with the tangible personal property covered by the
   contract.
4. Must a warranty, maintenance or similar service contract for tangible personal property
   be sold by the same person selling the tangible personal property covered by the contract
   in order for the sale or renewal of the contract to be subject to the sales and use tax?
   No. Sales and renewals of warranty, maintenance or similar service contracts for tangible
   personal property are subject to the sales and use tax, unless otherwise exempt under the
   law, when sold by the person selling the tangible personal property covered by the
   contract and when sold by any other person (i.e., a third party who did not sell the
   tangible personal property covered by the contract).

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Exemptions for Contracts:

5. Does the sales and use tax law exempt any retail sales or renewals of warranty,
   maintenance or similar service contracts for tangible personal property?
   Yes. Code Section 12-36-2120 exempts from the sales and use tax the sale or renewal of
   “motor vehicle extended service contracts and motor vehicle extended warranty
   contracts” and the sale or renewal of a “warranty, maintenance, or similar service
   contract for tangible personal property if the sale or purchase of the tangible personal
   property covered by the contract is exempt or excluded from the [sales and use] tax.”
6. If a warranty or extended service contract only covers a particular part or component of
   a motor vehicle, is the sale or renewal of a motor vehicle extended service contract or a
   motor vehicle extended warranty contract exempt from the sales and use tax?
   The sale or renewal of a warranty or extended service contract that only covers a
   particular part or component of a motor vehicle is exempt from the sales and use tax,
   provided the part or component is a major part or component that is integral and
   necessary to the functioning of the motor vehicle as a motor vehicle and the contract was
   originally sold in conjunction with the sale of the motor vehicle or the contract is a
   renewal of a contract that was originally sold in conjunction with the sale of the motor
   vehicle.
   The following two examples are provided as guidance:
   (a) The engine of a motor vehicle is a major part or component integral and
   necessary to the functioning of the motor vehicle as a motor vehicle; therefore, the
   sale or renewal of a warranty or extended service contract that only covers the
   engine of the motor vehicle is exempt from the sales and use tax if the contract
   was originally sold in conjunction with the sale of the motor vehicle or the
   contract is a renewal of a contract that was originally sold in conjunction with the
   sale of the motor vehicle. If the warranty or extended service contract that covers
   the engine was not sold in conjunction with the sale of the motor vehicle (e.g., the
   owner of the motor vehicle purchases a replacement engine for the motor
   vehicle), then contract is not a motor vehicle warranty or motor vehicle extended
   service contract and is not exempt from the tax.
   (b) The radio in a motor vehicle is not a major part or component integral and
   necessary to the functioning of the motor vehicle as a motor vehicle; therefore, the
   sale or renewal of a warranty or extended service contract that only covers the
   radio in the motor vehicle is not exempt from the sales and use tax.
7. What are some examples of an exempt sale or renewal of a warranty, maintenance, or
   similar service contract for tangible personal property when the sale or purchase of the
   tangible personal property covered by the contract is exempt or excluded from the [sales
   and use] tax?

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Each of the following is an example of a sale or renewal of a warranty, maintenance, or
similar service contract for tangible personal property that is exempt from the tax because
the sale or purchase of the tangible personal property covered by the contract is exempt
or excluded from the [sales and use] tax:
(a) the sale or renewal of a warranty, maintenance, or similar service contract for
a manufacturing machine, or a part of a manufacturing machine, that is exempt
from the sales and use tax under Code Section 12-36-2120(17);
(b) the sale or renewal of a warranty, maintenance, or similar service contract for
farm machinery, or a part of the farm machinery, used in planting, cultivating or
harvesting farm crops that is exempt from the sales and use tax under Code
Section 12-36-2120(16);
(c) the sale or renewal of a warranty, maintenance, or similar service contract for
railroad cars, locomotives, monorail cars and the engines or motors that propel
them, and their parts that are exempt from the sales and use tax under Code
Section 12-36-2120(20); and,
(d) the sale or renewal of a warranty, maintenance, or similar service contract for
technical equipment and machinery sold to radio and television stations and cable
television systems used in producing, broadcasting or distributing programs that
are exempt from the sales and use tax under Code Section 12-36-2120(26).
Contracts for Maximum Tax Items

8. Is the sale or renewal of a warranty, maintenance or similar service contract for
   tangible personal property that is subject to the maximum tax provisions under Code
   Section 12-36-2110 subject to the sales and use tax?
   Yes, the sale or renewal of a warranty, maintenance or similar service contract for
   tangible personal property that is subject to the maximum tax provisions under Code
   Section 12-36-2110 is subject to the sales and use tax, unless otherwise exempt under the
   law. In addition, the maximum tax provisions do not apply to sales and renewals of
   warranty, maintenance or similar service contracts.
   Each of the following is an example of a sale or renewal of a warranty, maintenance, or
   similar service contract for tangible personal property that is subject to the maximum tax
   provisions under Code Section 12-36-2110:
   (a) The sale of a boat for $20,000.00 is subject to the tax; however, the tax due is
   limited to $300.00 under the maximum tax provisions under Code Section 12-362110. If the retailer sold the purchaser an extended warranty contract for the boat
   for an additional $1,000.00, the sales price ($1,000.00) of the extended service

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contract is subject to the tax at the rate of 5% (6% beginning June 1, 2007 1 ), plus
any additional local sales and use tax. Based on a 5% state tax rate in a non-local
tax county, the total tax due on the boat and the extended service contract would
be $350.00 ($300.00 tax on the boat and $50.00 on the extended service contract).
Note: See SC Revenue Ruling #92-12 for information as to the calculation of the
tax when a boat is sold in conjunction with a motor and/or a trailer.
(b) The sale of an airplane for $2,000,000.00 is subject to the tax; however, the
tax due is limited to $300.00 under the maximum tax provisions under Code
Section 12-36-2110. If the retailer sold the purchaser an extended warranty
contract for the airplane for an additional $10,000.00, the sales price ($10,000.00)
of the extended service contract is subject to the tax at the rate of 5% (6%
beginning June 1, 2007 2 ), plus any additional local sales and use tax. Based on a
5% state tax rate in a non-local tax county, the total tax due on the airplane and
the extended service contract would be $800.00 ($300.00 tax on the airplane and
$500.00 on the extended service contract).
(c) The sale of a motor vehicle for $20,000.00 is subject to the tax; however, the
tax due is limited to $300.00 under the maximum tax provisions under Code
Section 12-36-2110. If the retailer sold the purchaser an extended warranty
contract for the motor vehicle for an additional $1,000.00, the sales price
($1,000.00) of the extended service contract is exempt from the tax under Code
Section 12-36-2120(53). The total tax due on the motor vehicle and the extended
service contract would therefore be $300.00 ($300.00 tax on the motor vehicle
and $0.00 on the extended service contract since it is exempt under Code Section
12-36-2120(53)).
Note: See Questions #5 and #6 for additional information concerning motor
vehicle warranty contracts and motor vehicle extended service contracts.

1

At the time this document was issued, the total state sales and use tax rate was 5%. Beginning June 1,
2007, the total state sales and use tax rate will be 6%. Code Section 12-36-1110, which increases the sales
and use tax rate by 1% beginning June 1, 2007, states:
Beginning June 1, 2007, an additional sales, use, and casual excise tax equal to one
percent is imposed on amounts taxable pursuant to this chapter, except that this additional
one percent tax does not apply to amounts taxed pursuant to Section 12-36-920(A), the
tax on accommodations for transients, nor does this additional tax apply to items subject
to a maximum sales and use tax pursuant to Section 12-36-2110 nor to the sale of
unprepared food which may be lawfully purchased with United States Department of
Agriculture food coupons.
2

See footnote #1.

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Repairs

9. If a retailer withdraws a part from his inventory to replace a defective part under a
   warranty contract, is the withdrawal of the part from inventory subject to the sales tax?
   When a retailer withdraws an item from inventory for use instead of for sale to a
   customer, the withdrawal is considered a retail sale subject to the sales tax based on the
   fair market value of the item withdrawn from inventory.
   However, with respect to repairs made under a warranty contract, the sales tax does not
   apply to the withdrawal from inventory of tangible personal property for use in replacing
   defective part under the warranty contract if:
   (a) 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,
   (b) 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 (a) are not met, or if all three conditions set forth
   in Item (b) are not met, then the 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.
10. If a person who is engaged in the business of servicing a warranty, maintenance, or
    similar service contract on behalf of another person who sold or issued the contract
    purchases a replacement part at retail to repair the tangible personal property covered by
    the warranty, maintenance, or similar service contract, is the purchase at retail of the
    replacement part subject to the tax?
    No, provided the tax was paid on the sale or the renewal of the contract covering the
    tangible personal property being repaired and the customer is not charged for labor or
    material when the part is replaced. See Code Section 12-36-90(2)(l).
    However, if the tax was not paid on the sale or the renewal of the contract covering
    tangible personal property being repaired, or the customer is charged for labor or material
    when the part is replaced, then the tax is due on the purchase of the replacement part.
    Note: If 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

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charged for any labor or material when the part is replaced, the sales tax does not apply to
the withdrawal from inventory of tangible personal property for use in replacing defective
part under the warranty contract.
Wholesale Sales of Contracts;

11. If a manufacturer of a product also makes available an extended warranty contract or
    extended service contract with respect to the manufactured product, can the manufacturer
    accept a valid resale certificate from, and sell an extended service contract at wholesale
    to, an unrelated retail dealer of its product who will in turn resell the extended service
    contract at retail to the end user?
    Yes, since warranty, maintenance or similar service contracts for tangible personal
    property are considered tangible personal property for sales and use tax purposes under
    Code Section 12-36-60, a manufacturer of a product that also makes available an
    extended warranty contract or extended service contract with respect to the manufactured
    product can accept a valid resale certificate from, and sell an extended service contract at
    wholesale to, an unrelated retail dealer of its product who will in turn resell the extended
    service contract at retail to the end user.
    Remittance of the Tax:
12. If a manufacturer of a product also makes available an extended warranty contract or
    extended service contract with respect to the manufactured product, but the extended
    service contract is sold at retail to the end user by an unrelated retail dealer, who must
    remit the tax to the Department of Revenue on the sale of the contract – the manufacturer
    or the retail dealer?
    The retail dealer is responsible for remitting the tax due on the retail sale of the extended
    service contract – whether such contract was purchased at wholesale and sold at retail by
    the retail dealer, or sold at retail on consignment by the retail dealer, or sold at retail by
    the retail dealer as the agent of the manufacturer.
    However, if the manufacturer establishes a bona fide agent principal relationship with the
    retail dealer with respect to the sale or renewal of extended service contract, then the
    manufacturer can be held responsible for remitting the tax to the Department of Revenue
    on the sale or renewal of extended service contracts by the retailer if the retailer fails to
    remit the tax to the Department.
13. If a customer who purchased an extended warranty contract or extended service
    contract from the retail dealer described above in Question #12, renews the contract, who
    must remit the tax to the Department of Revenue on the sale of the renewal of the
    contract – the manufacturer or the retail dealer?

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If the customer renews the extended warranty contract or extended service contract, then:
(a) the retail dealer must remit the tax to the Department of Revenue on the
renewal of the contract if the customer renews the contract with the retail dealer
(whether such renewal was sold at retail by the retail dealer, or sold at retail on
consignment by the retail dealer, or sold at retail by the retail dealer as the agent
of the manufacturer); or
(b) the manufacturer must remit the tax to the Department of Revenue on the
renewal of the contract if the customer renews the contract directly with the
manufacturer. In addition, if the manufacturer establishes a bona fide agent
principal relationship with the retail dealer with respect to the sale or renewal of
extended service contract, then the manufacturer can be held responsible for
remitting the tax to the Department of Revenue on the sale or renewal of extended
service contracts by the retailer if the retailer fails to remit the tax to the
Department.

14. Since the sale or renewal at retail of a warranty, maintenance or similar service
    contract for tangible personal property is subject to the use tax, can a South Carolina
    purchaser of a warranty, maintenance or similar service contract for tangible personal
    property located in the State be held liable for the use tax on the purchase of the contract
    from an out-of-state retailer of the contract (including retail dealers, manufacturers selling
    or renewing contracts at retail, third-party retail sellers of contracts, etc)?
    Yes. If the purchaser buys or renews the contract with an out-of-state retailer (including
    retail dealers, manufacturers selling or renewing contracts at retail, third-party retail
    sellers of contracts, etc) that has not obtained a retail license from the Department, or that
    does not otherwise collect the tax from the purchaser, then the purchaser is liable for the
    use tax on its purchase or renewal of the contract.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Ray N. Stevens
Ray N. Stevens, Director

November 16
, 2006
Columbia, South Carolina

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