Tax Type
Retail Sales and Use Tax
Description
Warranty plans
Topic
Taxability of Persons and Transactions
Date Issued
11-30-1987
November 30, 1987
Re: Ruling Request/ Sales and Use Tax
Dear ****************
This will reply to your letter of August 5, 1987 seeking a ruling on the correct application of the sales and use tax to transactions between *********** (taxpayer), and a Virginia motor vehicle dealer (dealer) in connection with the provision of repair parts and services under extended service agreements issued by the dealer. This also has reference to additional information you have provided in conversations with a member of my staff.
FACTS
According to your letter, at the same time the dealer issues an extended warranty plan or service agreement, (service agreement), to a customer, it also enters into a mechanical reimbursement insurance policy (insurance policy) with the taxpayer, to protect itself from any losses it might incur in connection with the service agreement.
As explained to a member of my staff, a typical transaction involving the processing of a claim pursuant to such a service agreement and insurance policy is as follows:
A customer brings his vehicle in to the dealer as a result of some mechanical breakdown. The customer claims that the breakdown is covered under the terms of a service agreement entered into with the dealer at the time the vehicle was purchased. After an inspection of the vehicle, the dealer contacts the taxpayer to report the nature of the mechanical breakdown. Based on the information provided, it is determined
that the breakdown is covered by the terms of the service agreement. The taxpayer then determines the portion of the total charge for the repairs which it will reimburse, and the deductible amounts, if any, which must be paid by the dealer's customer. The dealer then bills the taxpayer and its customer accordingly.
In the past, you state, the dealer has not charged the sales tax when billing the taxpayer for these reimbursement amounts. However, recently, the dealer has begun to add the tax to the repair parts portion of the reimbursement amounts.
Accordingly, you ask whether the dealer should charge sales tax on any portion of reimbursement amounts billed to the taxpayer for parts and services provided to customers pursuant to dealer issued service agreements.
RULING
In accordance with a March 20, 1987 ruling of the department, (copy enclosed) the total charge by a dealer for service agreements which identify the dealer or the manufacturer as the guarantor against specified motor vehicle breakdowns. are not considered contracts of insurance subject to licensure or regulation by the Bureau of Insurance of the State Corporation Commission. According to the Bureau, this is true, notwithstanding the fact that such agreements might be issued through an insurance agent, or underwritten by an insurance company which may be licensed or regulated by the Bureau.
Since virtually all service agreements issued by dealers fall within these guidelines, the March 20 ruling held all sales of such agreements to be taxable at the time of sale to customers, in the absence of specific instructions from the department to the contrary. However, while the March 20 ruling addressed the application of the tax to sales of service agreements, it did not consider the application of the tax to reimbursement amounts paid to dealers by third parties such as the taxpayer for service agreement covered repairs.
Repair parts furnished to customers pursuant to service agreements issued by a dealer, may be purchased by the dealer under resale certificates of exemption. In addition, when the tax is properly collected and remitted by the dealer on the full sale price of service agreements sold to customers, reimbursement amounts paid to the dealer for repair parts provided to customers pursuant to such agreements, are not subject to the tax. of course any repair parts sold to customers which are not covered by the terms of such service agreements continue to be taxable.
Accordingly, the dealer in this case should not add the tax to reimbursement amounts billed to the taxpayer for parts or labor provided under service agreements which were previously sold by the dealer subject to the tax.
It should be noted however, that this ruling is strictly limited to transactions involving the provision by dealers of repair parts and services under dealer issued service agreements, on which the tax was collected and remitted at the time of sale to customers. Therefore, this ruling has no application to transactions involving the provision of repairs pursuant to general automobile liability insurance policies or to any other insurance transactions.
I hope that all of the foregoing has responded to your question but let the department know if you have any further questions.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner