My dealership sells optional vehicle service contracts on behalf of another company that actually does the repairs, and an insurance company backs the contracts -- who's responsible for collecting Virginia sales tax, and does the insurance backing make it exempt?

Plain-English summary

A dealer asked the Department to sort out the Virginia sales tax responsibilities in a multi-party arrangement for optional vehicle service contracts (the kind that can be added to a car loan). Four parties were involved:

• Dealer A (the one requesting this ruling) markets, negotiates, and sells the service contracts, billing the customer for the full amount but keeping only a negotiated cut of the sale, remitting the rest to Dealer B.
• Dealer B actually performs the maintenance (parts and labor), sometimes through independent third parties.
• Dealer C is a regulated insurance company that underwrites the service contracts Dealer B provides.
• The Customer only signs a contract with Dealer A and has no direct relationship with Dealer B or Dealer C.

Question 1: Who's responsible for the tax -- Dealer A or Dealer B? The Department applied the basic definition of a "retailer" (Va. Code § 58.1-602) -- the party making the sale to the actual consumer. Because the customer only contracts with, and is billed by, Dealer A, Dealer A is the retailer for sales tax purposes, not Dealer B, even though Dealer B is the one who ultimately performs the work and pockets most of the revenue. Under Va. Code § 58.1-609.5 10, maintenance contracts covering both parts and labor are taxed on half the total charge -- so Dealer A must collect tax on 50% of what it bills the customer, and report and remit it on its own monthly sales tax returns.

Question 2: Does the insurance company's involvement create an exemption? Virginia's regulations exempt extended warranty plans specifically when they're issued by a licensed insurance company (23 VAC 10-210-910 B 5) -- because those are treated as genuine insurance transactions, not retail sales. But here, the contract is between Dealer A and the customer, not between the insurance company (Dealer C) and the customer -- Dealer C merely underwrites the risk behind the scenes for Dealer B. Because the insurance company isn't the one actually issuing the contract to the customer, this exception doesn't apply, and the Department found the second question moot given how the parties are actually structured. This conclusion lines up with several older rulings (P.D. 97-319, 87-94, 87-264, 89-249) that reached the same result: a warranty issued by a dealer to a customer is taxable, even when an insurance company backs it financially, unless the insurance company itself is the contracting party.

What this means for you

Dealers or brokers who sell service contracts on behalf of another company

If you're the one who signs up and bills the customer, you're the retailer responsible for collecting and remitting Virginia sales tax -- on 50% of the total contract charge for maintenance contracts covering both parts and labor -- regardless of how little of the revenue you ultimately keep or who actually performs the repairs.

Businesses using an insurance company to back a service or warranty contract

Having a regulated insurer underwrite the risk behind the scenes doesn't make the contract tax-exempt. The insurance-company exception only applies when the insurance company itself is the party that issues the contract directly to the customer -- not when it's merely backing a dealer's or broker's contract.

Anyone structuring a multi-party vehicle service contract program

Map out who the customer's actual contracting party is before assuming tax obligations fall elsewhere in the chain -- this ruling shows the Department looks at who bills and contracts with the end customer, not at revenue splits or who performs the underlying service.

Common questions

Q: If I broker vehicle service contracts on behalf of another company that does the actual repairs, am I responsible for collecting Virginia sales tax?
A: Yes, according to this ruling -- whoever bills and contracts with the customer is the retailer responsible for the tax, even if most of the money is passed through to the company that performs the repairs.

Q: Does having a licensed insurance company back a vehicle service contract make it exempt from sales tax?
A: Not unless the insurance company itself is the party issuing the contract directly to the customer. If a dealer or broker (not the insurer) contracts with and bills the customer, the exception for insurance-issued extended warranty plans doesn't apply.

Q: How much of a vehicle service contract's price is subject to Virginia sales tax?
A: For maintenance contracts covering both parts and labor, Va. Code § 58.1-609.5 10 taxes only 50% of the total charge.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-602 -- defines "retailer" and "retail sale"
• Va. Code § 58.1-609.5 10 -- maintenance contracts covering both parts and labor are taxed on half the total charge
• 23 VAC 10-210-910 B 5 -- extended warranty plans are taxed like maintenance contracts, except those issued by a licensed insurance company

Prior rulings referenced (described here, not linked): P.D. 97-319 (7/30/1997), P.D. 87-94 (3/20/1987), P.D. 87-264 (11/30/1987), and P.D. 89-249 (9/19/1989) -- all confirm that a warranty or maintenance contract issued by a dealer to a customer is taxable, even when an insurance company backs it, unless the insurance company itself is the contracting issuer.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-115

Original ruling text

October 19, 2023

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of your client (the “Taxpayer”) requesting a ruling on the application of the retail sales and use tax on optional vehicle service contracts (parts and labor) that can be added to a customer’s loan. I apologize for the delay in responding.

FACTS

According to the requester, four parties are involved in the facilitation of optional vehicle service contracts. A description of each party’s role in the contract follows.

Dealer A (the Taxpayer) markets, negotiates, and sells optional vehicle service contracts on behalf of Dealer B. In practice, Dealer A bills Customer for the entire amount but retains only a negotiated portion of the sale as its revenue. The remainder of the payments are remitted to Dealer B.

Dealer B provides the actual maintenance (both parts and labor). Dealer B may utilize independent third parties to provide the optional vehicle services.

Dealer C is a regulated insurance company that underwrites the optional vehicle service contracts provided by Dealer B. Such contracts are offered and billed by Dealer A in its capacity as an agent or broker.

Customer is the individual or entity that enters into optional vehicle service contracts with Dealer A. Customer only enters into the service contract with Dealer A and is not a party to the contract between Dealer B and Dealer C.

The Taxpayer is aware of the taxability of optional vehicle service contracts, which include both parts and labor pursuant to Virginia Code § 58.1-609.5 10 and Title 23 of the Virginia Administrative Code (VAC) 10-210-910. The Taxpayer asks several questions regarding the retail sales and use tax implications of the sales of the optional vehicle service contracts, which will be addressed separately below.

DETERMINATION

Question 1

Would the Department concur that (1) the true dealer is Dealer B, as Dealer A is a broker for Dealer B; and (2) upon receiving the optional vehicle service contract proceeds from Dealer A (less the negotiated component of the sale retained by Dealer A), Dealer B is responsible for the filing and remittance of sales tax on the gross proceeds billed to Customer with respect to the optional vehicle service contract revenue?

Virginia Code § 58.1-602 defines “retailer” as “every person engaged in the business of making sales at retail, or for distribution, use, consumption, or storage to be used or consumed in the Commonwealth.” This statute further provides the following definition of retail sale in include “a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter. ” In other words, sales at retail, generally, involve a transaction between a dealer and the user or consumer of all tangible personal property included in such transaction.

According to the facts presented, Customer enters into an optional vehicle service or maintenance contract with Dealer A, on behalf of Dealer B, and Customer neither has knowledge or is a party to the agreements or contracts between Dealer A, Dealer B, and Dealer C. Under the transaction described, Customer is the consumer of the optional vehicle service or maintenance contract that is purchased from Dealer A. Accordingly, Dealer A would be the retailer because it makes the sale to Customer.

Further, because Dealer A is making a retail sale to Customer, Dealer A is required to collect the appropriate sales tax when it bills Customer. In accordance with Virginia Code § 58.1-609.5 10, “maintenance contracts, the terms of which provide for both repair or replacement parts and repair labor, shall be subject to tax upon one-half of the total charge for such contracts only.” Thus Dealer A, not Dealer B, must collect tax on 50% of the total charge for the service or maintenance contracts it sells, and must report and remit such tax to the Department on monthly retail sales and use tax returns.

Question 2

If Dealer B is the retailer in the subject transaction, would it be eligible to utilize the exception for automotive service providers who are backed by insurance companies regulated by the Commonwealth?

With regard to extended warranty plans, Title 23 VAC 10-210-910 B 5 provides:

With the exception of extended warranty plans issued by licensed insurance companies, the tax applies to charges for extended warranty plans that provide for the provision of repair parts and labor. The application of the tax to extended warranty plans is calculated in the same manner as maintenance contracts in this subsection. Extended warranty plans issued by an insurance company regulated by the Bureau of Insurance of the State Corporation Commission are insurance transactions and are not subject to the tax.

Because the contract is between Dealer A and Customer and not Dealer B, the requester’s second question is moot. In addition, Dealer C, the insurance company, is not the issuer of the optional vehicle service or maintenance contract. Because the contracts do not appear to be issued by an insurance company, they would be subject to the retail sales and use tax in accordance with Virginia Code § 58.1-609.5 10.

This conclusion is consistent with Public Document (P.D.) 97-319 (7/30/1997), in which extended warranties that included the provision of repair parts and labor were addressed. Based on the contract’s terms and conditions, the warranties were found to be between the issuing dealer and the customer, and were found to be subject to sales tax because they were not issued by an insurance company. See also P.D. 87-94 (3/20/1987), P.D. 87-264 (11/30/1987), and P.D. 89-249 (9/19/1989).

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at (804) ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3541

Related Documents

87-94

87-264

89-249

97-319