Is a petroleum additives package sold with a vehicle warranty taxable in Texas, and is the warranty repair labor taxed?

Plain-English summary

A finance company offered car buyers a petroleum additives product for $470 at the time of financing a new or used vehicle. If the buyer used the product, the manufacturer warranted it would protect the vehicle's power train, and if a breakdown occurred within twelve months, the warranty company would pay a service station for repairs.

The Comptroller's office ruled that the sale of the additives package itself is taxable, since it is a sale of tangible personal property.

Separately, the ruling explains how the later warranty repair labor is taxed. Labor alone to repair or maintain a vehicle is not taxable, but how the warranty repair invoice is structured controls the sales tax outcome:

• If the repair shop bills a single lump-sum charge covering both labor and parts, that lump-sum charge is not taxable — but the repair shop itself must pay tax on the parts when it buys them, or accrue use tax if it pulls them out of a tax-free resale inventory.
• If the repair shop separately states the materials charge from the labor charge, only the separately stated materials charge is taxed, and the shop may buy those parts tax-free from its supplier using a resale certificate.

Because the warranty in this case had no deductible, the car owner pays nothing to the service station; the warranty underwriter pays the full repair charge, including any tax due.

What this means for you

Dealers and finance companies selling add-on warranty products

If you sell an additives, protection, or similar product package alongside vehicle financing, the sale of that product is taxable tangible personal property — tax is due on the $470-type charge itself, regardless of how the later warranty repairs are billed.

Repair shops performing warranty work

Structure your invoices deliberately: a lump-sum labor-and-parts charge avoids sales tax on the customer-facing invoice, but you owe tax yourself on the parts (pay it at purchase, or accrue it if pulled from resale inventory). If you separately state materials, only that materials line is taxed, but you can buy those parts tax-free with a resale certificate.

Accountants and tax professionals

This ruling illustrates the standard Texas treatment of motor-vehicle repair invoices (lump-sum vs. separately stated labor/materials) applied to a warranty-covered repair with no deductible, where the underwriter — not the vehicle owner — ultimately pays the (possible) tax.

Common questions

Q: Is the additives product itself taxable when sold with vehicle financing?
A: Yes. The ruling states plainly that "the sale of the ... automobile additives is taxable."

Q: Is labor to repair a vehicle under this warranty taxable?
A: Labor alone is not taxable. Whether tax applies to the invoice depends on whether the labor and materials charges are combined (lump-sum, not taxable) or separately stated (only the materials charge is taxed).

Q: Who actually pays the tax on a warranty repair with no deductible?
A: The underwriter of the service policy pays the entire repair charge, including any tax, since the vehicle owner pays nothing out of pocket.

Q: Can the repair shop avoid paying tax on parts it buys for warranty repairs?
A: Only if it separately states the materials charge on the repair invoice — in that case it can issue a resale certificate to its parts supplier instead of paying tax at purchase.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9301L1218A13

Original ruling text

January 15, 1993

Dear *****:

Thank you for your letter of December 14, 1992, concerning the taxability
of a petroleum additives/product warranty.

As I understand it, The ** finances new and used automobiles.
Upon credit approval, the dealer selling the automobile will offer the
buyer *'s automobile additives for $470.00. If the products are
used, ****s Oil Company warrants that these products will protect
the buyer's automobile from power train breakdown. If a breakdown does
occur within twelve months, Wynns will pay for repairs by a service
station.

The sale of the *****s automobile additives is taxable.

Labor to repair or maintain an automobile is not taxable. Service
performed under a warranty is taxed or not taxed depending on whether the
charge is lump-sum or separated. When the labor and materials charge is
not separated, the lump-sum charge for the repair is not taxable. The
repairman must pay tax on the parts at the time of purchase or accrue tax
on parts removed from a tax-free inventory for resale. When a charge for
motor vehicle repair is separated between labor and material, only the
separately stated charge for materials is taxed. The repairman may issue
a resale certificate to his suppliers for the parts in lieu of paying
tax. Since there is no deductible, the owner of the automobile pays
nothing to the service station performing the work. The underwriter of
the service policy would pay the entire charge including tax, if any.

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

If you have any questions or need additional information, you may call
toll free 1-800-531-5441, ext. 50037 or the regular Austin number is
512-475-0037. You also may write to Tax Administration Division.

Sincerely,

Lindey Osborne
Tax Administration Division