Is a breakage/scratch protection guarantee for eyeglasses (and the reduced-fee replacement it provides) taxable under Texas sales tax, and does it matter whether the eyewear is prescription or non-prescription or who sells it?

Plain-English summary

A business asked the Comptroller how sales tax applies to a "breakage protection guarantee" it offers customers who buy eyeglasses (prescription and non-prescription, including sunglasses). Under the guarantee, a customer whose frames or lenses break or scratch within the first year can get an identical replacement for a reduced fee -- $20 for a frame, frame parts, or lenses, or $30 for a full replacement -- paid at the time the replacement is actually needed, not up front at the original sale.

The Comptroller analyzed the guarantee as covering two kinds of transactions: (1) repair of eyewear, and (2) sale of replacement eyewear at a reduced price. Taxability of both turns on two variables: whether the eyewear is prescription or non-prescription, and who is making the sale.

Prescription eyewear is treated the same throughout -- the original sale, any repair, and any replacement sale are all tax-exempt, regardless of who sells it, so long as the seller retains the original prescription (or a copy) as proof in lieu of tax. A prescription is required for this purpose; an exemption certificate will not substitute for it.

Non-prescription eyewear (including sunglasses) is treated differently depending on the seller. If an ophthalmologist or optometrist sells it, the original sale, repair, or replacement is exempt because these licensed practitioners of the healing arts are not treated as retailers when dispensing such items -- though they must themselves pay tax when they purchase the non-prescription eyewear and other taxable items they dispense. If an optician or other retailer sells non-prescription eyewear, however, that seller must collect sales tax on the original sale, repair, and replacement sale; such retailers may buy the eyewear tax-free for resale by issuing a valid resale certificate to their supplier.

What this means for you

Optical retailers and opticians offering breakage/protection plans

If you sell non-prescription eyewear (including sunglasses) and are not a licensed ophthalmologist or optometrist, you must collect sales tax on the original sale, on any repair performed under a breakage guarantee, and on any reduced-fee replacement sale -- even though the guarantee fee is discounted and paid later, at the time of the claim. You can purchase the eyewear tax-free from your supplier using a resale certificate.

Ophthalmologists and optometrists

Non-prescription eyewear (and other taxable items) you dispense to patients are exempt from tax on the sale, repair, or replacement, because you're treated as a licensed healing-arts practitioner rather than a retailer for these sales. But you must pay tax yourself when you purchase that non-prescription merchandise, since you can't buy it tax-free for resale.

Accountants and tax professionals structuring or auditing eyewear guarantee programs

Track two separate variables for each transaction: (1) prescription vs. non-prescription, and (2) the type of seller (optometrist/ophthalmologist vs. optician/other retailer). For prescription eyewear, retain the prescription itself as proof in lieu of tax -- not an exemption certificate. For non-prescription eyewear sold by non-practitioners, tax applies to the original sale, the repair, and the discounted replacement sale alike.

Common questions

Q: Does it matter that the replacement fee ($20 or $30) is discounted and paid only when the customer actually needs a replacement?
A: No. The ruling treats the reduced-fee replacement as a taxable (or exempt) sale based on the prescription/non-prescription and seller-type rules, not on the fact that the fee is discounted or collected later rather than up front.

Q: What proof does a seller need to keep to support tax-exempt treatment of prescription eyewear?
A: The original prescription, or a copy of it -- not an exemption certificate. This applies to the original sale, the repair, and the replacement sale of prescription eyewear.

Q: Are non-prescription sunglasses ever tax-exempt?
A: Yes, but only if sold, repaired, or replaced by a licensed ophthalmologist or optometrist. If sold by an optician or other retailer, the sale, repair, and replacement are all taxable.

Q: Can an optician buy the eyewear it will resell under the guarantee without paying tax on the purchase?
A: Yes -- opticians and other retailers may purchase non-prescription eyewear and other taxable items tax-free for resale by giving their supplier a properly completed, valid resale certificate.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205030L

Original ruling text

May 7, 1992

Dear **:

Thank you for your letter questioning the taxability of breakage protection
guarantee as it relates to eye wear (prescription and non prescription
including sunglasses).

You explained that your client is offering to its customers the ability to
replace frames and/or lenses that have become broken or scratched within the
first year of purchase. Your client will provide an identical replacement for
the low fee of $20.00 for frame, frame parts or lenses or $30.00 for a complete
replacement of the eye wear. The payment for the guarantee does not occur up
front on the original sale, but occurs when the customer requests that the
replacement is needed.

Based upon your description, this protection guarantee is actually two types of
sales transactions: (1) is the repair of prescription eye wear or the repair of
non prescription eye wear and (2) is the sale of prescription eye wear or the
sale of non prescription eye wear at a reduced price. The application of sales
tax to these transactions is determined by the eye wear being prescription or
non prescription and the entity making the sale.

The original sale, the repair, or the replacement sale of prescription eye wear
is not taxed. Any entity must maintain the original prescription (or a copy of
the original prescription) as proof in lieu of tax for the original sale, the
repair, or the replacement. A prescription, not an exemption certificate, is
the required proof in lieu of tax for these transactions.

The original sale, repair, or replacement sale of non prescription eye wear is
not taxed when sold by an ophthalmologist or optometrist. Ophthalmologists and
optometrists are "licensed practitioners of the healing arts" and are not
considered retailers when dispensing these items. Ophthalmologists or
optometrists are required to pay tax at the time of purchase on non
prescription eye wear and other miscellaneous taxable items dispensed by them.

Opticians and other retailers must collect tax on the original sale, repair, or
replacement sale of non prescription eye wear. These entities may purchase the
non prescription eye wear and other miscellaneous taxable items tax-free for
resale by issuing a properly completed and valid resale certificate to their
supplier(s).

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

Sincerely,

Tax Administration Division