Is a pager company's self-insured product replacement program (monthly charge plus deductible) exempt from Utah sales tax the same way ordinary insurance is?

Plain-English summary

A nationwide pager sales and leasing company asked whether its optional Pager Replacement Insurance Program (PRIP) — a roughly $2/month add-on covering loss, theft, or unrepairable damage, layered on top of the company's separately taxed maintenance/repair (MMS) fee — was exempt from Utah sales tax as an insurance product, even though the company self-insured the program rather than buying coverage from a third-party insurer. The company argued PRIP was economically different from an ordinary maintenance/warranty plan (which anticipates routine service) since it only pays out on rare loss/theft/major-damage events, more like car or life insurance, and that Utah's insurance exclusion from taxable "tangible personal property" doesn't require the coverage to come from a licensed insurance company.

The Commission largely agreed, but split the answer by transaction type. Utah Code § 59-12-102(23)(b)(iii) excludes insurance certificates and policies from the definition of taxable tangible personal property — and that exclusion doesn't hinge on whether the coverage is self-insured or carrier-issued. So for a pager the customer purchases outright, a separately stated PRIP charge is nontaxable insurance, full stop. For a leased pager, the answer is murkier: ordinary lease charges are generally taxable under Rule R865-19S-32, and whether the PRIP add-on escapes that depends on the transaction's true nature. If PRIP is a blanket charge applied to the company's whole lease inventory with each lessee paying a prorated share, it's taxable as part of the lease. But if the lessee is genuinely buying an individual insurance policy (not just a pro-rata slice of a blanket program), that charge is not taxable. Finally, the Commission flagged a separate wrinkle: if the company replaces a customer's pager at no charge under the program, the company itself becomes the final consumer of that replacement pager and owes sales or use tax on it.

What this means for you

Companies offering self-insured product-protection programs

Self-insuring rather than buying third-party coverage doesn't disqualify a program from the insurance exclusion — the exclusion in § 59-12-102(23)(b)(iii) applies regardless of who bears the risk, as long as the charge is genuinely insurance-like and separately stated.

Leasing companies bundling insurance-like add-ons

The taxable/nontaxable line for leased equipment turns on whether the protection charge is a blanket, pooled-risk charge spread across your lease inventory (taxable as part of the lease) or a genuine individual insurance policy sold to that specific lessee (nontaxable). Structure and document your program accordingly if you want the exemption to apply to leased units.

Businesses that replace products under a self-insured program

Remember that giving a customer a free replacement item under your program makes your company the taxable end consumer of that replacement item — you'll owe sales or use tax on it even though the customer paid nothing.

Common questions

Q: Is a self-insured product-replacement charge exempt from Utah sales tax?
A: For a purchased product, yes — the insurance exclusion doesn't require a licensed third-party insurer. For a leased product, it depends on whether the charge is a blanket lease add-on or a genuine individual policy.

Q: Does it matter that the company processes claims itself rather than through an insurance company?
A: No — Utah's tangible personal property definition excludes insurance certificates and policies without requiring the insurer to be a licensed third party.

Q: What happens tax-wise when the company gives a customer a free replacement pager?
A: The company becomes the final consumer of that replacement pager and owes sales or use tax on it, even though it didn't charge the customer for the item.

Q: Can I rely on this ruling for my own product-protection program?
A: No — it binds the Commission only for the taxpayer and facts described. If your program's structure (purchase vs. lease, blanket vs. individual policy) differs, seek your own guidance.

Citations and references

Statutes and rules cited:

• Utah Code Ann. § 59-12-102(23)(b)(iii) (insurance certificates and policies excluded from taxable tangible personal property)
• Utah Admin. Rule R865-19S-32 (taxability of equipment lease charges)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/97-013.pdf

Original ruling text

97-013

Response March 5, 1997

Request

February 17,1 997

Re: Request for Advisory Opinion on the Applicability of Utah Sales Tax on Pager

Replacement Insurance Program Monthly Charges and Deductibles

Ms. Rees:

COMPANY A respectfully requests that the Utah Tax Commission issue an advisory opinion on whether pager replacement insurance program receipts are subject to Utah sales tax.

Background

COMPANY A sells and leases pagers and paging services to customers nationwide.COMPANY A charges a mandatory fixed monthly fee (approximately $$$$$ per month) for its paging services. A portion of the monthly fee (approximately $$$$$ per month) is charged to COMPANY A customers for their right to receive paging messages. The remaining portion of the monthly fee (approximately $$$$$ per month) represents a service XXXXX("MMS") charge. Payment of this MMS fee, which is a component part of every customer's standard monthly service bill, entitles the customer to free maintenance and repair should the customer's pager malfunction or break. Since Utah imposes sales tax on maintenance/repair service fees, COMPANY A has been collecting and remitting sales tax to Utah on the entire mandatory fixed monthly fee. As such, the MMS fee (which, again, is a component of the standard fixed monthly fee) is already being subjected to Utah sales tax.

Pager Replacement Insurance Program Coverage

COMPANY A also offers its customers an optional XXXXX ("PRIP") insuring a customer's pager against loss, theft or damage beyond repair. The PRlP premium is approximately $2 per month, and is charged in addition to the customer's standard fixed monthly fee (discussed above). Since COMPANY A PRIP coverage will replace the customer's pagers if it is lost or stolen, such insurance plan provides the customer with protections far exceeding those defined under a standard maintenance or extended warranty plan.

When a customer purchases a maintenance contract or extended warranty plan, such proceeds essentially represent the purchase of tangible personal property since it is anticipated that the customer's tangible property will at some point require ordinary service and/or repair. COMPANY A'S PRIP coverage, however, is only utilized when the customer's pager is lost, stolen, or damaged beyond repair. The likelihood that a customer will utilize such pager insurance is remote (similar to car insurance or life insurance), which is why COMPANY A can offer such a low monthly premium for PRIP coverage. As such,COMPANY A contends that its PRIP coverage is substantially different from a maintenance or extended warranty plan, and such pager insurance receipts do not represent the purchase of tangible personal property.

Based on COMPANY A conversations with the Utah Tax Commission as well as the language in Utah's Code and Regulations, insurance receipts are not and were never subject to Utah sales or use tax [see Utah Code Section 59-12-102(23)(b)]. Furthermore, neither the Utah Code nor Utah Regulations require that such exemption apply only to registered insurance companies. The mere fact that COMPANY A self-insures its PRIP coverage (rather than contracting such coverage to a third party insurance company) should have no effect on whether the insurance premium payments are subject to Utah sales tax.COMPANY A contends that had Utah intended to provide more favorable sales tax treatment to registered insurance companies (as opposed to non-insurance companies such as COMPANY A), the state legislature would have expressly stated such intention in Utah law.COMPANY A could not locate any such express language within Utah sales tax law. As such COMPANY A contends that its PRIP coverage premiums should qualify as exempt insurance receipts.

COMPANY A PRIP plan also requires the customer to pay a deductible for each PRIP claim. The deductible payment represents an administrative fee compensating COMPANY A for costs of processing the insurance claims. Since administrative fees are not considered taxable tangible personal property,COMPANY A contends that these deductible receipts should also not be subjected to Utah sales tax.

Conclusion

Based upon the above facts and a literal reading of Utah sales tax law, COMPANY A respectfully requests that the Utah Tax Commission determine that COMPANY A

PRIP monthly insurance charges and deductible receipts are not subject to Utah sales tax. Should the Commission determine otherwise,COMPANY A respectfully requests that the Commission provide COMPANY A with all relevant tax authority(ies) used in arriving at such determination.

Thank you very much for your assistance with this ruling request. Should you have any questions or require additional information regarding COMPANY A pager replacement insurance program coverage, please contact me directly at #####, or my assistant, NAME, at #####. We look forward to hearing from you.

Sincerely,

NAME

March 5, 1997

NAME

ADDRESS

CITY STATE ZIP

Advisory opinion - Application of sales tax on charges for insurance program

Dear PETITIONER,

We have received your request for sales tax guidance pertaining to charges for product replacement insurance. We find as follows:

Utah law imposes sales tax on sales or leases of tangible personal property and certain services. The definition of tangible personal property set out in Utah Code Section 59-12-102 (23)(b)(iii) expressly excludes insurance certificates and policies. When your customer purchases the pager outright, any separate purchase of insurance coverage is nontaxable if the charges are separately stated on the customer's bill.

With regard to equipment leases, the determination is less clear. Generally, the total charge for the rental or lease of tangible personal property made in lieu of an outright sale is subject to Utah sales or use tax. See Utah Administrative Rule R865-19S-32 (enclosed). Whether the PRIP charges associated with a leased pager are taxable depends upon the true nature of the transaction. Charges added to the lease are subject to sales tax if COMPANY has a blanket policy that covers all of its lease inventory and each lessee is charged a prorated amount. However, if the lessee is actually purchasing an individual insurance policy, the insurance charge is not be subject to sales tax.

If COMPANY A replaces a pager at no cost to the customer, we consider COMPANY A to be the consumer of that pager. As the final consumer of a taxable item, COMPANY A is liable for the sales or use tax on that item.

Please let us know if you have other questions.

For the Commission,

Joe B. Pacheco,

Commissioner