Warranties and Maintenance Agreements (Publication 119)
Reporting Tax

Reporting this transaction on your sales and use tax return

The $18.75 taxable portion of the deductible is a taxable sale, include it in gross receipts on your sales and use tax return. Since you are the consumer of parts installed on optional warranties, you also owe use tax on the cost of the parts furnished for this repair. Report the $40 cost of the parts under Purchases subject to use tax on your sales and use tax return.

Note: To make sure you don't pay use tax on the cost of the parts you resold in the deductible, you need to take a "Tax-paid purchases resold prior to use" deduction. Follow these steps:

Step 1. Calculate the amount of markup (markup factor) on your parts by dividing their sales price by their cost.

($75 ÷ $40 = 1.88 markup factor)

Step 2. Divide the taxable portion of the deductible (your parts sale) by the markup factor.

(In the example above: $18.75 ÷ 1.88 = $9.97)

Step 3. List the result ($9.97) as a "Tax-paid purchases resold prior to use" deduction.

Optional warranties offered by the manufacturer with a deductible

The manufacturer is considered the consumer of the repair parts for work performed under an optional manufacturer's warranty. If you are a retailer/repairer who makes a repair under an optional manufacturer's warranty, you are making a retail sale of the parts to the manufacturer. You must report and pay sales tax on the retail-selling price of the parts (your cost plus markup).

Example

Your customer is required to pay a $50 deductible when having repair work done under a manufacturer's optional warranty.

Step 1. Your repair shop charges $200 for repair work, not including tax.

($75 for parts and $125 for repair labor)

Step 2. Tax applies to the full parts charge.

($75 × 8.25% = $6.19 sales tax)

Step 3. The total charge for the repair work is $206.19.

($200 parts and labor + $6.19 sales tax)

Step 4. You charge your customer only the $50 deductible.

Step 5. You bill the manufacturer for the rest of your charges, $156.19.

($206.19 − $50 deductible)

In this example, there is no provision in the warranty contract stating that the customer is responsible for sales tax on the portion of the deductible related to the sale of parts (tangible personal property). If the warranty contract does provide that the customer is liable for sales tax on the portion of the deductible related to parts, as the repairer, you must prorate any charges for tax between the customer and the manufacturer. This calculation can be complicated. Please call our Customer Service Center for assistance.

Note: In these examples we show tax calculated at a rate of 8.25 percent; however, you should use the tax rate in effect at your business location. For current tax rates, please see California City and County Sales and Use Tax Rates.

How do I report warranty sales on my sales and use tax return?