When a repair company fixes real-property equipment (like a restaurant refrigeration system) under a manufacturer's warranty, or provides a free 'goodwill' repair afterward, who owes Texas sales/use tax on the labor and parts?

Plain-English summary

This letter, signed by David Somerville of the Comptroller's Tax Policy Division, answers two related questions from a company that remodels and repairs restaurant refrigeration systems — equipment that is treated as an improvement to realty (like a freezer storage room) rather than as tangible personal property such as a standalone refrigerator or freezer.

First situation — repairs covered by a manufacturer's warranty. The refrigeration system's manufacturer (located out-of-state) includes a one-year parts-and-labor warranty with the purchase. When the system breaks down during that warranty period, the repair company fixes it, does not bill the restaurant owner for the labor or covered parts, and instead bills the out-of-state manufacturer. The Comptroller's answer: the manufacturer may give the repair company a properly completed exemption certificate in lieu of paying tax on that repair service, citing subsection (e)(1) of Rule 3.292 on manufacturer's warranties.

Second situation — a free "goodwill" repair with no warranty or contract behind it. The same repair company later fixes the same refrigeration system again after a previously repaired part fails again shortly after the original repair. This time there is no manufacturer's warranty and no extended warranty or service contract covering the part — the company simply chooses to redo the repair for free as a goodwill gesture, without billing the restaurant owner for labor or parts. Here the answer is different: the repair company owes tax on its own cost of the repair part used in the goodwill repair. The letter adds that if the company had instead sold the restaurant owner a nonresidential repair service contract, the company would collect tax on the sale of that contract, and could then buy the parts it uses to fulfill contract repairs tax-free using a resale certificate.

What this means for you

Repair companies servicing real-property equipment under manufacturer warranties

If you repair equipment that's an improvement to real property (not stand-alone tangible personal property) under a manufacturer's warranty, and you bill the manufacturer rather than the property owner for your labor and parts, the manufacturer can give you an exemption certificate instead of paying tax on that repair charge — provided the requirements of Rule 3.292(e)(1) are met.

Repair companies that do free "goodwill" repairs

If you perform a free repair that isn't covered by any manufacturer's warranty, extended warranty, or paid service contract, you — not the property owner — owe tax on your own cost of the parts you use, even though you aren't charging the customer anything for the repair.

Businesses considering selling repair service contracts instead

Selling a nonresidential repair service contract changes the tax picture: you collect tax on the sale of the contract itself, and you can then purchase the parts used to perform repairs under that contract tax-free with a resale certificate, rather than paying tax on your own cost of those parts.

Accountants and tax professionals

Watch the distinction between (1) warranty repairs billed to a manufacturer — potentially exempt via an exemption certificate under Rule 3.292(e)(1) — and (2) unbilled "goodwill" repairs with no warranty or contract backing them, where the repairer owes use tax on its cost of parts. The label "free repair" does not by itself create a tax exemption.

Common questions

Q: If a manufacturer's warranty covers a repair to equipment installed in real property, who owes the tax on the repair labor and parts?
A: The out-of-state manufacturer may give the repair company a properly completed exemption certificate in lieu of paying tax on the repair service, under subsection (e)(1) of Rule 3.292.

Q: Does a repair company owe tax on parts used in a free "goodwill" repair with no warranty or service contract behind it?
A: Yes. The letter states the company owes tax on its cost of the repair part used in the goodwill repair.

Q: How would the tax result change if the company had sold the customer a repair service contract instead?
A: The company would collect tax on the sale of the nonresidential repair service contract, and could then use a resale certificate to buy the repair parts used to fulfill that contract tax-free.

Q: Does it matter that the refrigeration system is part of the building (realty) rather than a standalone appliance?
A: Yes — the letter specifically frames both situations around a refrigeration system that is an improvement to realty (the freezer storage room) rather than tangible personal property like a refrigerator or freezer, which is the backdrop for how Rule 3.292 applies.

Citations and references

Regulations:

• 34 Tex. Admin. Code Rule 3.292 (subsection (e)(1), manufacturer's warranties)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9508L1362E07

Original ruling text

August 16, 1995

Dear *****:

Thank you for our recent phone conversation regarding your questions about
the warranty of equipment incorporated into real property. You have two
questions to address.

First Situation: Your company remodels or repairs a refrigeration system
in a restaurant. The refrigeration system is an improvement to realty
(i.e., freezer storage room) rather than tangible personal property such
as a refrigerator or a freezer. The manufacturer of the refrigeration system
provides a warranty that covers parts and labor for a year after purchase. The
manufacturer's warranty is included with the purchase of the refrigeration
system. The manufacturer is located out-of-state.

Prior to the expiration of the manufacturer's warranty on the refrigeration
system, the refrigeration system breaks down. Your company provides labor
and, in some cases, repair parts to repair the refrigeration system. Your
company does not bill the restaurant owner for the repair labor or for the
repair parts covered under the manufacturer's warranty. Instead, your company
bills the out-of-state manufacturer for the costs of the labor and/or parts to
repair the refrigeration system.

Question: Does the out-of-state manufacturer owe tax on your charges for
repair labor and/or repair parts used in the taxable service?

Response: The out-of-state manufacturer may give your company a properly
completed exemption certificate in lieu of paying tax on the repair service
covered under a manufacturer's warranty. See subsection (e)(1) of
enclosed Rule 3.292 regarding manufacturer's warranties.

Second Situation: Your company repairs a refrigeration system in a restaurant.
The refrigeration system is an improvement to realty (freezer storage room)
rather than tangible personal property such as a refrigerator or a freezer.
The parts used in the repaired refrigeration system are not covered
by a manufacturer's warranty or under an extended warranty or service contract
sold to the customer. However, your company will provide a "goodwill" repair
for a short period of time following a repair service.

The previously repaired part on the refrigeration system breaks down again
not long after our repair service. Your company provides repair labor and
the repair part to repair the refrigeration system again. Your company does
not bill the restaurant owner for the repair labor or for the repair part to
repair the refrigeration system.

Question: Does your company owe tax on the repair part used in the "goodwill"
repair by your company?

Response: Your company owes tax on its cost of the repair part used in the
"goodwill" repair service. Please note that if your company had sold a repair
service contract to the restaurant owner, your company would collect
tax on the sale of the nonresidential repair service contract. Your company
may give a resale certificate when purchasing repair parts used in service
contracts sold to customers for nonresidential repair services.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Policy Division

NOTE: Previous Accession Number 9508386L