Under South Carolina Revenue Ruling 93-6, when were charges for extended warranties subject to sales or use tax?

Plain-English summary

South Carolina Revenue Ruling 93-6 treated an extended warranty sold with tangible personal property as part of the taxable gross proceeds or sales price. That result applied whether the warranty was optional or mandatory and even when its price was separately stated on the invoice.

A warranty purchased later in a separate and distinct transaction for a separate charge was not subject to sales or use tax under the regulation discussed. The ruling separately noted that a person servicing warranties generally incurred tax on the fair market value of property withdrawn, used, or consumed in performing the work, subject to the written-warranty replacement exception quoted in the ruling.

Common questions

Q: Did separately stating a warranty make it exempt when sold with the product? No.

Q: What if the customer bought the warranty later? A later, separate, and distinct warranty sale was not taxable under the ruling.

Q: Did the ruling address repair parts used under warranties? Yes. It discussed tax on property used to service warranties and quoted an exception for certain no-charge written-warranty replacements.

Citations and references

• S.C. Code Ann. §§ 12-36-90 and 12-36-130 (1992 Supp.) — gross proceeds and sales price
• S.C. Code Ann. §§ 12-36-910(A) and 12-36-1310(A) (1992 Supp.) — sales and use tax
• Regulation 117-174.48 — warranties
• Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d 920 (1985)
• South Carolina Revenue Ruling 93-4 — analogous software-maintenance treatment discussed in the ruling

Subject

Extended Warranties

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR93-6.pdf

Original ruling text

SC REVENUE RULING #93-6

SUBJECT:

Extended Warranties
(Sales and Use Tax)

TAX MANAGER:

John P. McCormack

EFFECTIVE DATE:

July 1, 1993

REFERENCE:

S.C. Code Ann. Section 12-36-90 (Supp. 1992)
S.C. Code Ann. Section 12-36-130 (Supp. 1992)
S.C. Code Ann. Section 12-36-910(A) (Supp. 1992)
S.C. Code Ann. Section 12-36-1310(A) (Supp. 1992)
Regulation 117-174.48

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1992)
SC Revenue Procedure #87-3

SCOPE:

A Revenue Ruling is the Commission's official interpretation of how tax
law is to be applied to a specific set of facts. A Revenue Ruling is public
information and remains a permanent document until superseded by a
Regulation or is rescinded by a subsequent Revenue Ruling.

Question:
Are charges for extended warranties subject to the sales or use taxes?
Facts:
Frequently, when a product is purchased, the manufacturer warrants that the product 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 product.
The retailer, usually in conjunction with the manufacturer, will offer the customer the opportunity to
purchase an extended warranty at the time the product 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.
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If the customer decides not to purchase the extended warranty at the time the product is purchased,
some retailers will allow the customer to purchase the extended warranty 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:
Before we can discuss whether extended warranties are subject to tax, we need to review the
sections of the law that impose the State sales and use taxes.
Code Section 12-36-910(A) states:
A sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every
person engaged or continuing within this State in the business of selling tangible personal
property at retail. (Emphasis added.)
Code Section 12-36-1310(A) reads:
A use tax is imposed 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, at
the rate of five percent of the sales price of the property, regardless of whether the retailer is
or is not engaged in business in this State. (Emphasis added.)
Having established that the sale or purchase of tangible personal property is subject to the sales or
use tax, we must next examine whether charges associated with the acquisition of tangible personal
property are taxable (i.e. extended warranty agreements).
Extended Warranties Sold in Conjunction
with Tangible Personal Property
The sales tax is imposed upon a retailer's "gross proceeds of sales" which is defined at Code Section
12-36-90, in part, as:
...the value proceeding or accruing from the sale, lease, or rental of tangible personal
property... without any deduction for... the cost of materials, labor, or service... [or] any other
expenses....
The use tax is based upon the "sales price" of tangible personal property. The term "sales price" is
defined at Code Section 12-36-130, in part, as:
...the total amount for which tangible personal property is sold, without any deduction for the
cost of the property sold, the cost of the materials used, labor or service cost, interest paid,
losses, or any other expenses.
(1)

The term includes:

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(a)

any services or transportation costs that are a part of the sale, whether paid in
money or otherwise;...

Regulation 117-174.48, entitled "Warranties", reads, in part:
On all sales of tangible personal property which include a charge for warranty which is a part
of the sales price of the property, such warranty charges are to be included in the measure of
the tax, even though said warranty charges may be billed separately from the price of the
merchandise.
Furthermore, in Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d
920, 923 (1985), the Court of Appeals of South Carolina held the element of service involved in a
lay away sale was subject to tax as being part of the sale of tangible personal property. The test used
by the court was as follows:
...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.
Accordingly, the total amount charged in conjunction with the sale or purchase of tangible personal
property is subject to the tax.
Based on the court's finding in Meyers Arnold v. South Carolina Tax Commission, supra, but for the
sale of the tangible personal property, the retailer would not receive the fees for the warranty
agreement.
In an analogous situation concerning computer software maintenance contracts, the Commission,
based on a similar review of the statute in SC Revenue Ruling #93-4, found that:
Maintenance contracts (whether optional or mandatory) sold in conjunction with the sale of
computer software are includable in the measure of the sales or use tax. It is irrelevant
whether the maintenance contract is for tangible personal property, services, or both.
In Commission Decision #90-38, the Commission held that charges for engraving services, even
though optional, were a part of the sale of plaques and trophies by the retailer and includable in gross
proceeds of sales. The decision states, in part:
...We find and conclude that here the "engraving charges" are part of the sale of tangible
personal property since the customer is not seeking a professional service but is seeking an
engraved trophy or plaque....

...The Courts have held that although the amount of materials used may be inconsequential
with respect to the labor involved where the customer seeks to purchase custom made or
designed tangible personal property, the artistic skill of the craftsman is a part of the sales
price of the product and is inextricably linked....
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In summary, charges for extended warranties (whether optional or mandatory) that are made in
conjunction with, or as part of the sale of, tangible personal property are includable in "gross
proceeds of sales" or "sales price", and, therefore, subject to the tax.
Extended Warranties Not Sold in Conjunction
with Tangible Personal Property
The above discussion concerns extended warranties that are sold in conjunction with the sale of
tangible personal property. However, we must also consider sales of extended warranties that are not
made in conjunction with the sale of tangible personal property (e.g. contracts sold at a later date).
Regulation 117-174.48, entitled "Warranties", addresses this issue and reads, in part:
Warranty contracts entered into subsequent to the sale of tangible personal property and
which are separate and distinct from the sale, and for which a separate and distinct charge is
made are not to be included in the measure of the tax....
Therefore, sales of extended warranties that are not made in conjunction with the sale of tangible
personal property are not subject to the sales and use taxes.
Tangible Personal Property Withdrawn, Used
or Consumed in Servicing a Warranty
While it is not directly relevant to the question at hand, it is important to be aware of additional
statutory provisions as they relate to warranties.
Regulation 117-174.48 states, with respect to extended warranties sold in conjunction with the sale
of tangible personal property and those not sold in conjunction with the sale of tangible personal
property:
In either event, the person servicing warranties incurs a tax based on the fair market value of
tangible personal property withdrawn, used or consumed in servicing all warranties.
Note however, Act 302 of 1957 amended paragraph 2 of subsection (3) of [Section] 12-35-30
[Now Code Section 12-36-90(1)(c)] so as to exclude from the measure of the tax, " ...
property withdrawn from such business or stock for use or consumption by such business in
replacing parts under written warranty contracts given without charge to the purchaser at the
time of original purchase, provided the tax was paid on the sale of the part found to be
defective or on the sale of the property of which the defective part was a component; and
provided further no charge for labor or materials is made to the warrantee.
Conclusions:
Extended Warranties Sold In Conjunction With The
Sale Of Tangible Personal Property
Charges for extended warranties (whether optional or mandatory) sold in conjunction with the
sale of tangible personal property are includable in the measure of the sales or use tax and
therefore subject to the tax
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Extended Warranties That Are Not Sold In Conjunction
With The Sale Of Tangible Personal Property
Charges for extended warranties that are not sold in conjunction with the sale of tangible
personal property (e.g. contracts sold at a later date) are not subject to the sales or use tax.

SOUTH CAROLINA TAX COMMISSION

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Chairman

s/T. R. McConnell
T. R. McConnell, Commissioner

s/James M. Waddell
James M. Waddell, Commissioner
Columbia, South Carolina
April 13
, 1993

Note: This advisory opinion is a corrected version. The quote from the Meyers Arnold case
was corrected.

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