Does Texas tax an optional extended warranty or service contract sold with a motor vehicle, and are parts used for covered repairs taxable?

Plain-English summary

The Texas Comptroller ruled that an optional extended warranty or service-and-maintenance contract sold with a motor vehicle was not taxable under either Chapter 151 or Chapter 152.

The dealer separately invoiced the optional contracts, which were administered by a third party and covered repair or replacement of malfunctioning parts. Motor vehicle repair and maintenance were excluded from the taxable-service definition, and Chapter 152's taxable consideration for a vehicle excluded labor or service charges for installing, applying, remodeling, or repairing the vehicle.

The result was the same whether the underlying vehicle was sold or leased. But the exemption did not extend to everything used under the contract: repair parts installed while performing covered work remained subject to sales tax under Rule 3.290(k).

What this means for you

Motor vehicle dealers

On these facts, the separately invoiced optional contract was not part of taxable vehicle consideration and was not a taxable Chapter 151 warranty. Keep the warranty charge distinct from taxable merchandise and vehicle price records.

Warranty administrators and repair shops

The contract's sale and the later repair inputs have different treatment. Even though the customer did not pay tax on the warranty itself, parts consumed in covered repairs remained taxable.

Accountants and tax professionals

The ruling distinguishes motor vehicle warranties from warranties on other tangible personal property, which Rule 3.292(d)(2) generally treats as taxable. Confirm that the contract actually concerns motor vehicle repair and matches the stated optional, separately billed facts.

Common questions

Q: Was the warranty taxable when sold with a vehicle?

A: No. The Comptroller excluded the optional, separately invoiced extended warranty or service contract from tax under Chapters 151 and 152.

Q: Did leasing instead of selling the vehicle change the answer?

A: No. The ruling said the warranty was not taxable whether the motor vehicle was sold or leased.

Q: Are parts used in a warranty repair tax-free?

A: No. Rule 3.290(k) treated repair parts used to perform the covered job as taxable.

Q: Does this answer apply to warranties on all tangible personal property?

A: No. The ruling specifically distinguished motor vehicles from other tangible personal property covered by Rule 3.292.

Citations and references

• Tex. Tax Code §§ 151.005(3), 151.0101(a)(5)(C), 152.001(6), 152.002(b)(3)
• 34 Tex. Admin. Code Rules 3.290(k), 3.292(d)(2)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/201505188L

Original ruling text

May 27, 2015

Re: Private Letter Ruling #150120892

Dear *****:

We issue this private letter ruling, in accordance with Rule 3.1, Private
Letter Rulings and General Information Letters, in response to your request
dated November 24, 2014. Detrimental reliance relief is permitted in accordance
with Rule 3.10, the Taxpayer Bill of Rights.

You requested guidance on the comptroller’s interpretation of the taxability of
extended motor vehicle warranties and service contracts sold in connection with
the sale or lease of a motor vehicle. Taxable services are set out in Tax Code
Ann. Section 151.0101. [ENDNOTE 1] Repairs, maintenance, and warranties are
addressed in Rule 3.290, Motor Vehicle Repair and Maintenance; Accessories and
Equipment Added to Motor Vehicles; Moveable Specialized Equipment, and Rule
3.292, Repair, Remodeling, Maintenance, and Restoration of Tangible Personal
Property. Because the taxability of the sale of an extended warranty on a motor
vehicle is not directly addressed within these rules, we issue this response to
explain the agency’s position and provide a definitive answer.

Relevant Facts

The Taxpayer is a used car retail dealer registered in Texas with the
comptroller for sales and use tax. In connection with its motor vehicle sales
transactions, the Taxpayer offers for sale various forms of extended warranties
and service and maintenance contracts and agreements. All agreements are
administered by a third party and cover the costs associated with the repair or
replacement of malfunctioning parts. Moreover, all agreements are optional and
separately invoiced to the customer.

Ruling and Analysis

Section 151.005(3) includes in its definition of a “sale” or “purchase,” “the
charge for an extended warranty or service contract for the performance of a
taxable service.” However, Section 151.0101(a)(5)(C) excludes from the
definition of a taxable service the repair, maintenance, and restoration of a
motor vehicle.

Rule 3.292 addresses extended warranties and service contracts on tangible
personal property. The purchase of an extended warranty for tangible personal
property, other than a motor vehicle or private aircraft, is taxable as
described in Rule 3.292(d)(2).

Rule 3.290 addresses the taxability of parts used in repairs and maintenance
contracts, but does not specifically address the taxability of the sale of the
extended warranty or service contracts themselves. Repair parts used in motor
vehicle repairs performed under an extended warranty are taxable as described
Rule 3.290(k).

Chapter 152 imposes tax on the sale of a motor vehicle and provides that the
tax is calculated on the total consideration paid. Section 152.002(b)(3)
excludes from the definition of total consideration “the amount charged for
labor or service rendered in installing, applying, remodeling or repairing the
motor vehicle sold.” Based on Section 152.002, the total consideration subject
to tax under Chapter 152 on the sale of a motor vehicle does not include
charges for extended warranties and service contracts.

The lease of a motor vehicle is not subject to tax under the Chapters 151 or

152. Motor vehicle lease is defined in Section 152.001(6).

In summary, the sale of an extended warranty for a motor vehicle, whether the
motor vehicle is sold or leased, is not subject to tax under Chapters 151 or

152. However, as explained above, repair parts used in the performance of a job
     under the extended warranty are subject to sales tax under Chapter 151. See
     Rule 3.290(k).

If you have questions about this private letter ruling, please email us at
https://www.window.state.tx.us/taxhelp/ and reference Private Letter
Ruling #150120892.

Regards,
Tax Policy Division

ENDNOTES

1. References to “Section” are to Texas Tax Code Annotated (Vernon 2008 and
   Supp. 2014). References to “Rule” are to sections of Title 34, Texas
   Administrative Code.