Does Texas sales tax apply to charges for mechanical warranty inspections that determine what caused equipment or a motor vehicle to break down, without appraising the dollar amount of damage?

Subject

Mechanical Warranty Inspections — Damage Inspection And Advising Clients Of What Caused A Malfunction Or Breakdown Of Equipment/Motor Vehicle

Plain-English summary

A franchisor of damage inspection and appraisal businesses had been charging Texas sales tax on its services, but a client in Florida refused to pay, citing its accountant's understanding of Texas sales and use tax law. The company asked the Comptroller whether it should be charging sales tax at all.

The work at issue was described as "mechanical warranty inspections." The firm's job was to go to a repair facility and advise the client of what caused a mechanical malfunction -- it did not appraise the dollar amount of damage, only determine what caused the breakdown. The company also noted its understanding that mechanical warranty programs are not regulated by the Texas Department of Insurance.

The Comptroller answered that charges for inspecting tangible personal property are not taxable unless the inspections are performed pursuant to a policy or policies of insurance (citing Section 3.355(b)). Because warranties generally are not considered insurance for Texas tax purposes under the Texas Insurance Code, and because this firm's services were neither an insurance inspection nor an insurance loss/damage appraisal, the charges for these inspection and appraisal services were not taxable.

The letter notes this opinion is based on the facts presented, and could change if the facts were different.

What this means for you

Damage-inspection and appraisal businesses

If your business inspects tangible personal property (like equipment or motor vehicles) to determine the cause of a mechanical malfunction or breakdown -- rather than appraising the value of damage under an insurance policy -- your charges for that service are not subject to Texas sales tax under this ruling. That holds even if you've historically been charging tax on those services, as the franchisor here had been doing.

Businesses operating under mechanical warranty programs

The ruling distinguishes mechanical warranty programs from insurance. Because mechanical warranties generally are not treated as insurance under the Texas Insurance Code, inspections performed for warranty purposes (rather than under an actual insurance policy) fall outside the taxable "insurance inspection" or "insurance loss or damage appraisal" categories.

Accountants and tax professionals

The key legal line drawn here is between (1) inspections/appraisals performed pursuant to an insurance policy, which can be taxable, and (2) inspections performed for other purposes, such as determining the cause of a mechanical breakdown under a warranty program, which are not. Section 3.355(b) is the controlling cite. Confirm whether your client's inspection work is tied to an actual insurance policy before assuming it's taxable.

Common questions

Q: Is a charge for inspecting equipment to find out what caused it to break down taxable in Texas?
A: Not under this ruling, as long as the inspection is not performed pursuant to a policy or policies of insurance.

Q: Does it matter whether the inspector also appraises the dollar amount of damage?
A: In this ruling, the firm did not appraise the amount of damage, only the cause of the breakdown, and the Comptroller found the charges not taxable. The ruling also states more broadly that inspection charges are not taxable unless performed under an insurance policy.

Q: Are mechanical warranties treated as insurance for Texas sales tax purposes?
A: Generally, no. The letter states that warranties are not considered insurance for taxation purposes under the Texas Insurance Code.

Q: Could this outcome change under different facts?
A: Yes -- the letter explicitly states the opinion is based on the facts presented, and the opinion may change if there are additional or different facts.

Citations and references

Rules:

• Section 3.355(b) (charges for inspecting tangible personal property are not taxable unless performed pursuant to a policy or policies of insurance)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9611831L

Original ruling text

November 12, 1996

Dear ***:

Thank you for your letter of October 31, 1996, concerning the taxation of
damage inspections or damage appraisals.

CORP X. is a franchisor of damage inspection and
appraisal businesses around the country. Your policy has been to charge state
sales tax for your services. However, recently one of your clients located in
the State of Florida has refused to pay state sales tax based on their
accountant's understanding of the Texas Sales and Use Tax Law.

The work your firm does for this client is "mechanical
warranty inspections." Your firm's job basically consists of going to a repair
facility and advising your client of what caused the mechanical malfunction.
The firm does not appraise the amount of damage, only determine what caused the
breakdown.

Inasmuch as your firm does not appraise the damage, and
that it is your understanding mechanical warranty programs are not controlled
by the Texas Department of Insurance, please advise the appropriateness of
charging state sales tax for this type of business.

Response: The comptroller has determined that charges
for inspecting tangible personal property are not taxable unless the
inspections are performed pursuant to a policy or policies of insurance [see
Section 3.355(b)].

Generally, warranties are not considered insurance for
taxation purposes under the Texas Insurance Code. The charges for services to
perform inspections and appraisals are not taxable because the services
constitute neither an insurance inspection nor insurance loss or damage
appraisal.

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

You may call me toll free 1-800-531-5441, extension 3-4683. The direct line
is 512/463-4683. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division