Current through Register Vol. 24-06, March 15, 2024
(1)
Introduction. This rule explains the business and occupation
(B&O) tax, retail sales tax, and use tax reporting responsibilities of
persons selling or performing services covered by warranties, service
contracts, and mixed agreements for tangible personal property. For additional
information on computer software maintenance agreements see WAC
458-20-15502, Taxation of
computer software.
(2)Examples. This rule contains
examples that identify a number of facts and then state a conclusion. The
examples should be used only as a general guide. The tax results of other
situations must be determined after a review of all of the facts and
circumstances.
(3)Definitions. For the purpose
of this rule, the following terms will apply:
(a)
Agreement. Unless otherwise
stated, "agreement" means "service contract," "warranty," or "mixed agreement"
as those terms are defined.
(b)Insurance rider. An insurance
rider is an attachment to an insurance policy that modifies the conditions of
the policy by expanding or restricting its benefits or excluding certain
conditions from the coverage.
(c)Mixed agreement. A mixed
agreement is an agreement that contains provisions of both warranty and service
contracts.
(d)Seller.
"Seller" means every person making sales to a buyer, purchaser, or consumer,
whether as agent, broker, or principal.
(e)
Service contract. A service
contract, sometimes referred to as a maintenance agreement or even an extended
warranty, provides for the repairing, cleaning, altering, or improving of
tangible personal property, generally for the purpose of continued satisfactory
operation. These services may be performed on a regular or irregular basis.
Even though a service contract may be referred to by some other name, it is the
coverage that determines whether the contract is a service contract or extended
warranty.
(f)
Warranty. A warranty, sometimes referred to as a guarantee, is an
agreement which provides for the replacement or repair of tangible personal
property at no additional charge or at a reduced charge for tangible personal
property, labor, or both, or to compensate for the replacement or repair of
tangible personal property, based upon the happening of some unforeseen
occurrence, e.g., a component part fails and the property needs repair. Unless
otherwise stated, the term warranty includes both a warranty and an extended
warranty.
(4)
Sales
of agreements for tangible personal property.
(a)
Retail sales. Income from
agreements sold with or without tangible personal property to consumers is
subject to the retailing B&O tax and retail sales tax, unless a specific
exemption applies. Income from the sales of insurance riders to consumers is
also subject to retailing B&O tax and retail sales tax. See
RCW
82.04.050. Sellers of agreements and
insurance riders to consumers are responsible for collecting the retail sales
tax from the consumers, and remitting it and retailing B&O tax to the
department of revenue (department).
If a seller is acting as agent or broker for another party,
such as the actual warrantor, the seller is still liable for collecting the
retail sales tax from the buyer and remitting it to the department. In this
case, the seller as an agent or broker of the warrantor normally receives a
commission. Commission income is taxable under the service and other business
activities B&O tax classification. See subsection (5) of this rule for
"Sales by third parties." The warrantor's gross income on the sale is taxable
under the retailing B&O tax classification. There is no deduction allowed
for the commission paid to the agent or broker.
(b)
Wholesale sales. Sales of
agreements can be made at wholesale when the buyer will be reselling the
agreement without intervening use, or including the agreement in the sale of
tangible personal property, and the seller takes from the buyer a copy of the
buyer's reseller permit. The reseller permit documents the wholesale nature of
any sale as provided in WAC
458-20-102, Reseller permits.
(Reseller permits replaced resale certificates effective January 1, 2010.)
Example 1. An automobile dealer sells a vehicle to
a customer for a selling price of $20,000 that includes a manufacturer's
limited five years or 50,000 miles warranty. The automobile dealer extends
coverage for an additional two years, as a bonus to the customer. When the
automobile dealer purchases the two-year agreement from a warranty provider,
with the intent to sell the agreement along with the sale of the vehicle to the
customer, the purchase of the extended warranty by the automobile dealer is for
resale.
(i)
Example 2. A
home improvement store (store) sells a lawnmower to a customer. The store also
makes available for purchase a manufacturer's agreement for extended coverage.
The customer decides to purchase an agreement from the store for the lawnmower.
As the store is reselling the agreement, the store may purchase it at wholesale
from the manufacturer with the use of a reseller permit. Both the sales of the
lawnmower and agreement to the customer are taxable retail sales. The store
will collect the retail sales tax from the customer, and remit it along with
retailing B&O tax to the department.
(ii)
Example 3. For a special
holiday sale, the home improvement store in Example 2 purchases the
manufacturer's extended warranties to provide with the sales of lawn-mowers.
The store makes no intervening use of the extended warranties, and does not
charge customers for the warranties. The warranty purchases by the store are
wholesale purchases as long as the store provides a copy of its reseller permit
to the manufacturer. The store is not the consumer of the warranties as the
warranties are provided to customers as a condition of purchase of the
lawnmowers. The store will collect retail sales tax, from the customers on the
sales of the lawn-mowers, and remit it along with retailing B&O tax to the
department.
(c)
Agreement purchases from a third
party. When an agreement is purchased by a manufacturer, wholesaler, or
retailer to be included in the sale of tangible personal property, the purchase
of the agreement can be made at wholesale with the use of a reseller permit. In
this instance, the manufacturer, wholesaler, or retailer is not the consumer of
the warranty. When the retailer sells the tangible personal property including
the agreement, it will collect the retail sales tax from the customer and remit
it and the retailing B&O tax to the department.
Example 4. If a vehicle wholesaler sells a vehicle
to a retailer and includes an agreement with the sale, the sale of the vehicle
with agreement is a wholesale sale. RCW 82.04.-050. The retailer must provide
the wholesaler with a reseller permit.
(d)
Deferred sales or use tax
due. If a manufacturer, wholesaler, or retailer purchases an agreement,
without knowing whether it will be sold or given as an incentive with the sale
of tangible personal property, the agreement can be purchased at wholesale with
the use of a reseller permit. If there is intervening use of the agreement by
the manufacturer, wholesaler, or retailer, deferred sales or use tax will be
due.
(e)
Additional charges
for parts or repair services covered under an agreement. In some cases,
a customer is required to pay an amount for services or parts not fully covered
under an agreement. This additional amount is subject to both the retailing
B&O tax and retail sales tax, unless an exemption applies.
Example 5. The automobile dealer in Example 1
sells a vehicle to a customer for a selling price of $20,000 that includes a
manufacturer's limited five-year or 50,000 miles warranty. The dealer also
sells its own extended warranty to the customer for $200. The dealer insures
itself with an insurance carrier, and under the policy claims are paid on the
retail value of the repairs. The customer has the dealer complete $500 of
repairs under the warranty. The customer pays the dealer a reduced charge of
$100 for the warranty services and the dealer receives $400 from its insurance
carrier. In completing the repair, the dealer installed parts from its
inventory which had a cost to the dealer of $150 and subcontracted part of the
repair to an electrical shop which charged the dealer $200. The tax liability
to the dealer and subcontractor is as follows:
(i) In addition to retail sales tax collected
from the customer on the $20,000 selling price, retail sales tax must be
collected on the $200 selling price for the dealer's own extended
warranty.
(ii) The $20,200 selling
price for both the automobile and warranty is reported under the retailing
B&O tax and retail sales tax classifications on the excise tax return. The
$20,000 paid for the automobile (but not the cost of the warranty) is also
subject to the motor vehicle sales excise tax.
(iii) The $100 charge paid by the customer
for the warranty services performed is subject to the retailing B&O tax,
and the dealer must collect retail sales tax from the customer.
(iv) The $400 received by the dealer from the
insurance company is a nontaxable insurance claim reimbursement.
(v) The $150 cost of the parts taken from
inventory is not subject to use tax.
(vi) The subcontractor is making a $200
wholesale sale to the dealer, if the dealer provides the subcontractor with a
copy of its reseller permit.
(f)
Exemptions. The sale of an
agreement by a retailer is not exempt simply because the sale of the tangible
personal property to which it applies is exempt. Generally, for the sale of the
agreement to be exempt, there must be a provision in statute exempting all
services or products covered by the agreement. If all such obligations are not
exempt, the sale of the agreement to the consumer is subject to retail sales
tax. See RCW 82.08.190 and
82.08.195 for additional
information regarding the taxation of bundled transactions.
(i)
Service contracts. Since a
service contract is a contract for the repairing, cleaning, altering, or
improving of the tangible personal property covered by the contract, the sale
of a service contract by the retailer may be exempt from retail sales tax if
there is a statutory exemption for all activities covered by the contract.
(A)Example 6.RCW
82.08.955 provides a retail sales tax
exemption for both the sales and repair of machinery and equipment used
directly for retail sales of a biodiesel blend or E85 motor fuel. Company A
sells machinery that qualifies for exemption under
RCW
82.08.955 to Dealer BF. The purchase price of
the machinery is $10,000 and includes a ninety-day warranty against defects in
material and workmanship. Dealer BF also purchases a service contract for an
additional $300 that covers the repairing and cleaning of qualified parts. If
Dealer BF provides Company A with an exemption certificate, the $10,000 selling
price and $300 service contract price are exempt from retail sales tax. Company
A reports the total $10,300 under the retailing B&O tax and retail sales
tax classifications, taking a deduction under retail sales tax for the
exemption.
(B)Example
7.RCW 82.08.809 provides an
exemption for the purchase of vehicles using clean alternative fuels provided
the provisions of the exemption are followed. A dealer sells a new vehicle
powered by natural gas for $30,000 and a $500 two-year service contract to a
customer. The sale of the vehicle is exempt from retail sales tax, but the sale
of the service contract is subject to retail sales tax as there is no statutory
exemption for the repair activities covered by the service contract.
(ii)
Warranties. The
sale of a warranty by a retailer is exempt only if a specific statutory
exemption is available. The place of sale for a warranty is the seller's
business location if the buyer receives the warranty at that location. See
RCW
82.32.730 and WAC
458-20-145, Local sales and use
tax for additional sourcing information. See WAC
458-20-15502 for computer
software warranties.
Warranties purchased and received outside of Washington are
subject to use tax when put to use in Washington. See
RCW
82.12.020.
Example 8. Assume that Dealer BF in Example 6 also
purchases an extended warranty for an additional $200. If Dealer BF provides
Company A with a valid exemption certificate, the $10,000 selling price and
$300 service contract are exempt from retail sales tax, but the $200 for the
extended warranty is subject to retail sales tax.
RCW
82.08.955 does not provide for an exemption
for a warranty for eligible equipment. As there is no corresponding tax
exemption for B&O tax, Company A will pay retailing B&O tax to the
department on the total amount of $10,500 along with remitting the retail sales
tax collected from Dealer BF.
(iii)
Mixed agreements. The sale
to a consumer of a mixed agreement for tangible personal property, which by
definition contains provisions of both a warranty and a service contract, is a
"bundled transaction." Retail sales tax must generally be collected from the
consumer on the selling price of a mixed agreement, unless both the warranty
provisions and service contract provisions each separately qualify for a retail
sales tax exemption. Refer to
RCW
82.08.190 and
82.08.195 for additional guidance
on how retail sales tax applies to bundled transactions.
(5)Sales by third
parties. Consideration received by a third party as a commission, for
selling an agreement for the actual warrantor, is generally subject to tax
under the service and other activities tax classification. In this situation,
the third-party seller never takes possession of the agreement, and the
warrantor maintains liability for the provisions of the agreement.
(a)Responsibility for payment of
retailing B&O tax. The warrantor is subject to retailing B&O tax
on the gross sales price received from the sales of agreements by third
parties. No deduction is allowed for commissions paid to third
parties.
(b)Responsibility
for collection of retail sales tax. The third party is responsible for
collecting the retail sales tax from the buyer and remitting it, along with
service and other activities B&O tax on its commission income, to the
department. If the seller of the agreement is licensed under
chapter
48.17 RCW with respect to
this selling activity, the seller owes tax on commissions under the insurance
producers B&O tax classification.
(6)Sales of repair services or parts to
obligor. A person obligated under an agreement, including any
third-party obligor under an agreement sold to a retailer and provided at no
additional charge to the end consumer, may purchase the following from a
supplier or service provider at wholesale without incurring retail sales tax,
provided the obligor provides the supplier or service provider with a reseller
permit:
* Parts purchased to replace or become an ingredient or
component of tangible personal property covered by the agreement, as long as
there is no intervening use of the parts as a consumer; and
* Repair services purchased to satisfy the obligor's
obligations under an agreement.
The supplier or service provider is taxable under the
wholesaling B&O tax classification on the value of the parts and labor
provided.
(7)
Warranties with insurance elements. There are tangible personal
property agreements that include elements of insurance (i.e., theft, loss) and
elements of warranty (operational failure, damage). Income from sales to
consumers of agreements defined as a warranty, service contract or maintenance
agreement, that are not otherwise insurance contracts where tax has been paid
under Title 48 RCW
insurance premiums tax, is subject to retailing B&O tax and retail sales
tax. See RCW 48.14.080. If a bundled
transaction includes both taxable and nontaxable plans, retailing B&O and
retail sales taxes are due on the income. For more information on bundled
transactions see
RCW
82.08.190 and
82.08.195.
(8)Commonly asked questions.
(a)Is it a warranty or service contract
when a credit card company replaces lost or damaged items purchased by one of
their credit card holders? The credit card company (company) covering
the purchased items would be providing an insurance product, but the company
may not be charging the card holders for the benefit of having lost or damaged
items replaced at no charge and if not, the company would not owe premiums tax,
but owe B&O tax on income. When the company replaces items, the company is
responsible for paying sales tax on the items purchased and provided as
replacements.
(b)
Is identity
theft protection considered a warranty? Identity theft protection is not
tangible personal property. The protection plan may be a combination of
products including monitoring a person's accounts. It depends on the coverage
as to whether the protection plan is an insurance product that is subject to
the premiums tax.
(c)Are
agreements that cover accidentally dropping a phone in water an insurance
product? Most agreements are service contracts and not insurance
products, and are covered under chapter 48.110 RCW, Service contracts and
protection product guarantees.
(d)
If a loaner piece of equipment is included in the cost of a warranty,
does the customer using the loaner owe use tax on the loaned piece of
equipment? If the loan of the equipment is included in the warranty, the
customer does not owe use tax on the use of the loaned equipment.
Statutory Authority:
RCW
82.32.300. 90-10-081, § 458-20-257,
filed 5/2/90, effective 6/2/90.