Tax Type
Retail Sales and Use Tax
Description
Services; Repair and installation; Warranties for parts and labor taxable
Topic
Taxability of Persons and Transactions
Date Issued
07-30-1997
July 30, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This is in response to your letter in which you seek correction of a sales and use tax assessment issued to ********(the "Taxpayer") for the period January 1994 through December 1996. I note that the assessment for uncontested issues has been paid.
FACTS
The Taxpayer is in the business of selling and servicing recreational vehicles, including motor homes, travel trailers, and slide-in campers. The only transactions at issue involve the Taxpayer's untaxed sales of extended warranties which call for the provision of repair parts and labor. These warranties are offered by the Taxpayer in connection with the sale of its recreational vehicles.
The warranty plans in this case are underwritten by the *********(the "Underwriter"). You indicate that the Underwriter is regulated by the Virginia State Corporation Commission, Bureau of Insurance. You therefore conclude that the warranty plans in this case are exempt under Virginia Regulation 630-10-62.1 (F).
DETERMINATION
The application of the tax to extended warranty plans is addressed in Title 23 of the Virginia Administrative Code, Section 10-210-910 (formerly Virginia Regulation 630-10-62.1). This regulation indicates that:
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- The tax applies to charges for extended warranty plans which provide for the provision of repair parts and labor. Extended warranty plans issued by an insurance company regulated by the Bureau of Insurance of the State Corporation Commission are insurance transactions and are not subject to the tax.
I have reviewed two sample service contracts which are at issue in this case: one available for a motor home sold by the Taxpayer and one available for a travel trailer sold by the Taxpayer. In most respects, the two contracts are quite similar. For example, the contracts provide for repair parts and labor due to mechanical breakdown of specified parts and coverages; the terms of the contracts are set out and are based on time and mileage limits (e.g., 48 months/48,000 miles) as agreed upon by the issuer and the customer; the service contracts are administered by a third-party Administrator (which appears to be affiliated with the underwriter); and the contracts specify that upon approval of the Administrator, covered repairs may be made by another authorized dealer/repair facility (other than the issuing dealer).
My review of these service contracts indicates that they are not insurance transactions as envisioned in the regulation. The regulation specifies that nontaxable warranty plans are those "issued by an insurance company." The contracts in this case are not issued by an insurance company. It is clearly stated in the Terms and Conditions that the contracts are between the issuing dealer (the Taxpayer, in this case) and the customer. I also note that the contracts are readily transferrable in the event the vehicle is sold from one owner to another. In this regard, the contracts are not at all like insurance transactions.
The maintenance contracts also indicate that a specific amount of the purchase price is held in reserve for payment of covered claims. Excess claims (over the amount held in reserve) are covered by an insurance policy between the Taxpayer and the Underwriter. It is clear, however, that (1) the sale of an insurance policy by the Underwriter to the Taxpayer, and (2) the sale of service contracts by the Taxpayer to its customers are separate and distinct transactions. The first may well be an exempt insurance transaction, but the second transaction is the taxable sale of a parts and labor maintenance agreement.
Accordingly, the service contracts in this case are analogous to those previously addressed in prior determinations. See Public Documents 87-94 (3/20/94), 87-264 (11/30/87), and 89-247 (9/21/89) in which the Tax Commissioner made the same determination as in the instant case. Further, the department discussed the specific provisions of the service contracts in this case with the State Corporation Commission's Bureau of Insurance. Regardless that the Underwriter may be a regulated insurance company, the Bureau does not deem the service contracts in this case to be insurance transactions.
Based on this determination, the assessment is correct. A revised bill, with interest accrued to date, will be issued to the Taxpayer as soon as practicable.
Please contact ******** in my Office of Tax Policy at******* if have any questions regarding this letter.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12517I
Rulings of the Tax Commissioner