How were manufacturer and extended-warranty roof repairs taxed when commercial roofing warranties crossed Texas's January 1, 1988 real-property repair-law change?

Plain-English summary

The distributor sold commercial roofing material with a five-year manufacturer warranty and separately sold five-year extended warranties. Outside firms performed leak repairs.

For the manufacturer's material warranty, the roofing sale—including the warranty—was taxable tangible personal property. Warranty repair parts and labor were not separately taxed, and the distributor could issue the third-party repairer a resale certificate for labor.

Extended commercial-roof warranties were more complicated because Texas began taxing nonresidential real-property repair and warranty service on January 1, 1988:

• Repair labor performed before 1988 was nontaxable, while the warranty provider paid tax on materials.
• Warranties sold before July 22, 1987 could receive the described prior-contract relief for portions before January 1, 1990 and a temporary lower state rate for some later material use; the provider could refund tax collected on the nontaxable portion using Rule 3.325 procedures.
• Warranties sold on or after July 22, 1987 had no prior-contract exemption for post-1987 service. The post-January 1, 1988 portion was taxable.
• Resale certificates could apply to qualifying repair services and materials transferred as part of taxable warranty service under the periods and rules stated.

Local tax still applied wherever state tax applied. This is historical transition guidance; the page does not extrapolate beyond the dates and warranty facts in the ruling.

Common questions

Were manufacturer-warranty repairs treated like extended warranties? No.

Why did January 1, 1988 matter? Texas began taxing nonresidential real-property repair and extended-warranty service then.

Did every pre-1988 warranty receive prior-contract relief? No; the ruling used a July 22, 1987 sale-date cutoff and period allocations.

Citations and references

• 34 Tex. Admin. Code Rules 3.291, 3.292, 3.357(d)(2), 3.319, and 3.325

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8911L0966A06

Original ruling text

November 3, 1989

Dear *****:

Thank you for your inquiry regarding the taxability of repair work.

You state that you were a wholesale distributor of single-ply roofing material.
You also sold an extended warranty covering leakage to your customers in
Texas. You charged tax on the materials and extended warranties that you sold.
If a roof leak occurs, you hire an outside contracting firm to perform the
necessary repairs.

In our phone conversations, you provided the following additional information:

1. You purchased the roofing materials from your parent corporation who
   manufactured the materials. The roofing materials were sold to contractors who
   were approved to install the roofing material. Your parent corporation
   furnished a 5 year warranty with the material which covered 100% of any defects
   in material and workmanship (i. e. installation labor).

2. The material was installed on only commercial (not residential) structures.
   That is, the structures weren't residences, apartment buildings, nursing homes,
   etc.

3. The building owner could purchase an extended warranty for an additional 5
   years beyond the initial warranty. The owner purchased the extended warranty
   directly from you. The extended warranty also covered 100% of any defects in
   material and workmanship.

4. You furnished any materials and paid for the labor required to perform the
   repairs under the extended warranty. Your parent corporation reimbursed you for
   the materials and labor to perform repairs covered by the initial warranty.

5. You ceased selling roofing materials and extended warranties in Texas prior
   to January 1, 1988. Although you didn't know the exact dates that you made
   your last sales, you stated that some sales of extended warranties were made in
   April, 1987. However, the initial and extended warranties will cover periods
   until approximately 1992. None of the warranties are subject to renegotiation.

First, your company's sales of the roofing materials (including the charge for
the manufacturer's warranty) were subject to tax. However, you could have
accepted a valid, properly completed resale certificate if the contractor had
installed the materials under a separated contract as defined in the enclosed
Comptroller's Rule 3.291 (Contractors). Although the sale included a warranty
related to an improvement to realty (i.e., workmanship on the installation) the
contract as a whole involves a sale of tangible personal property. Therefore,
the contract is treated as a sale of tangible personal property (not an
improvement to realty).

Since the manufacturer of the materials (i.e., your parent corporation)
furnished the warranty on the materials, no tax is due on the parts or labor to
repair the roofing materials as indicated in the enclosed Comptroller's Rule
3.292 (Repair, Remodeling, Maintenance and Restoration of Tangible Personal
Property). Therefore, you should issue a resale certificate to the third party
repairman in lieu of tax on the labor charge.

Second, repairmen of real property were treated as contractors for sales tax
purposes prior to January 1, 1988. Since your extended warranty involves a
roof on a commercial building which is an improvement to realty, your tax
responsibilities for warranties sold and completed prior to January 1, 1988,
are addressed by Rule 3.291. Specifically, you would owe tax on the materials
and other taxable items used for your extended warranties because your warranty
is a lump-sum contract. However, you wouldn't owe tax on labor used in
performing these repairs.

On the other hand, the total charge for an extended warranty on nonresidential
real property became taxable as of January 1, 1988. Specifically, charges for
the repair of real property became taxable as indicated in the enclosed
Comptroller's Rule 3.357 (Real Property Repair and Remodeling).

Since some of your extended warranties involve warranty periods prior to and
subsequent to January 1, 1988, your tax consequences for these warranties are
as follows:

1. For extended warranties sold prior to July 22, 1987, you will qualify for a
   prior contract exemption. In particular, the portion of the extended warranty
   allocable to periods prior to January 1, 1990 isn't taxable. Accordingly, you
   may refund the tax that you collected for the portion of the warranty that
   isn't taxable. I have enclosed Comptroller's Rule 3.325 (Refunds, Interest and
   Payments Under Protest) and Refund Procedure for Tax Paid in Error to a
   Retailer which address the appropriate procedures to obtain credit or obtain a
   refund of tax.

Since you will qualify as a contractor regarding these warranties, you should
issue a prior contract exemption certificate to the repairman in lieu of tax on
the services performed from January 1, 1988, through December 31, 1989.
Accordingly, I have enclosed Comptroller's Rule 3.319 (Prior Contracts) which
has a prior contract exemption certificate. You may reproduce the certificate
as needed.

As a contractor, you will owe tax on all materials used in repairing roofs
under these extended warranties. However, the state tax rate for these
materials will be 5.25% instead of 6% because you will qualify for an exemption
from the tax rate increase which was effective October 1, 1987.

On the other hand, the prior contract exemption doesn't apply to the portion of
the extended warranty allocable to periods after December 31, 1989. However,
the portion of the warranties allocable to the period from January 1, 1990,
through June 30, 1990, will also qualify for a prior contract exemption from
the tax rate increase (i. e. the state tax rate is 5.25% instead of 6%).

You may issue a resale certificate to the repairman for services performed on
or after January 1, 1990 because the repair service is transferred as an
integral part of a taxable service as indicated in Rule 3.357(d)(2). I have
also enclosed a Texas Sales Tax Resale Certificate which you may reproduce as
needed.

2. For extended warranties sold on or after July 22, 1987, the portion of the
   extended warranty allocable to periods prior to January 1, 1988 isn't taxable.
   You may refund the tax that you collected for the nontaxable portion of the
   warranty as I indicated above. Since there is no prior - contract exemption,
   the portion of the extended warranty allocable to periods after January 1, 1988
   is taxable (also there is no exemption from the tax rate increase).

Again, you may issue a resale certificate to the repairman for services
performed on or after January 1, 1988, because the repair service is
transferred as an integral part of a taxable service. In addition, you may
issue a resale certificate in lieu of tax on the materials used in the repairs.

However, the charge for the services performed prior to January 1, 1988,
wouldn't be taxable because this is labor to repair real property. Again, you
will owe tax on all materials used in performing repairs prior to January 1,
1988.

In any case, you are obligated to collect or remit any appropriate local taxes
(city, county, metropolitan transit authority/city transit department) on sales
of warranties or taxable uses of materials if state tax is due on a
transaction.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions, please contact Tax Correspondence. You may call
toll free 1-800-252-5555, or our regular number is 512/463-4600. My extension
is 3-4662.

Sincerely,

Bob Jeffcoat
Tax Correspondence