Warranties and Maintenance Agreements (Publication 119)
Optional Warranties

Optional warranties offered by the dealer

If the customer is not obligated to pay a deductible

The retailer (repairer) is considered the end user (consumer) of the repair parts and owes tax on his or her cost for the parts. In other words, the repairer is not selling the parts but rather using them, and tax does not apply to the transfer of the parts to the customer, but on the cost of the parts to the repairer.

If the customer is required to pay a deductible

When either an optional or a mandatory warranty provides that the customer will pay a deductible towards repairs and services provided under the warranty (unless otherwise stated in the warranty contract), the dealer/repairer also owes sales tax on a portion of the receipts from the sale of the parts and use tax on their cost.

Example

You are a retailer/repairer who has sold a customer an optional warranty with a $50 deductible. The warranty does not require the customer to pay an amount for tax on the portion of the deductible related to the sale of parts. The customer brings in the merchandise for repairs covered by the warranty. Your repair charges total $200, not including tax: $75 for parts and $125 for repair labor. You use parts from your resale inventory for the repair. The cost of the repair parts is $40. Using the method shown in the example above:

Step 1. Divide the parts charge by the total repair charge (to determine the taxable percentage).

($75 ÷ $200 = 37.50%)

Step 2. Multiply the deductible by the result of step 1 (to determine the amount of the deductible subject to sales tax).

($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)

In addition to use tax due on the cost of the parts used in the repair ($40), you will owe $1.55 in sales tax on the sale of the parts.

You charge your customer $50 for the optional warranty deductible.