Warranties and Maintenance Agreements (Publication 119)
Mandatory Warranties

Mandatory warranty with no deductible

Tax does not apply to charges for parts used for the repair. Although the repairer will charge the manufacturer for the parts used in the repair, those parts are considered a sale for resale and are not subject to tax under a mandatory warranty. They are considered sold to the customer as part of the original sale of the merchandise.

Mandatory warranty with a deductible

When the customer pays a deductible, tax applies to the portion of the deductible for the charges of parts (see example for calculation method). Unless the warranty states otherwise, the person providing the warranty contract is liable for that tax amount. If the customer makes a specific payment for parts, as required by the warranty (for example, a prorated payment for a new tire), that payment is taxable.

To calculate the taxable portion of the deductible, use this formula:

(charges for parts ÷ total charges) × deductible = taxable portion of deductible

Example

You perform repairs on merchandise and your customer must pay a $50 deductible under a mandatory manufacturer's warranty. Your bill for the repairs is $200, not including tax: $75 for parts and $125 for repair labor. To determine how much tax is due, you must:

Step 1. Divide the parts charge by the total repair charge.

($75 ÷ $200 = 37.50%)

Step 2. Multiply the deductible by the result of step 1.

($50 × 37.50% = $18.75)

Step 3. Multiply the result of step 2 by the tax rate to determine the tax due.

($18.75 × 8.25% = $1.55)

The total charge for the repair work, with tax, would be $201.55.

You charge the customer the $50 deductible and bill the manufacturer the balance due for parts, labor, and sales tax: $151.55 ($201.55 total charge − $50 deductible). If you had issued the warranty yourself, you would owe tax on the taxable portion of the deductible (see step 3 above).

Please note: In this example, the warranty does not require the customer to pay the sales tax on the taxable portion of the deductible. If it did, you would charge the customer $51.55 and the manufacturer $150.