Did an auto dealer owe additional sales or use tax on ex-tax parts installed free under a factory warranty?

Plain-English summary

An automobile dealer acquired replacement parts ex tax for resale, installed them at no charge to vehicle owners under a factory warranty, and received factory reimbursement—usually as a credit against its parts account.

California said the dealer owed no additional sales tax. Parts furnished under the original sale contract's guaranty were treated as purchased by the vehicle buyer when the automobile was sold, and the original taxable gross receipts already included their value.

No use tax applied either. Because the replacement parts were treated as sold in the original taxable transaction, their later storage, use, or consumption did not create a second tax.

Common questions

Did the factory's reimbursement method matter?

No. The source noted that reimbursement usually came as an account credit rather than cash.

Did the customer pay tax when the parts were installed?

No additional tax was due at installation.

Why was there no use tax?

The parts were treated as included in the original taxable automobile sale.

Citations and references

• California mandatory-warranty rule — replacement parts furnished under the original sale contract were treated as sold with the automobile

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/490-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/490-0500.pdf

Original ruling text

490.0500

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

October 31, 1963
Mr. W--- D. H--Attorney at Law
--- Tower
XXXX --- ----- ---, California
Dear Mr. H---:
Your letter of September 17 to Mr. Harry L. Say was referred to the legal staff for reply. Please accept our apologies for not answering it any sooner. The inquiry concerns the application of the sales or use tax to replacement parts furnished to purchasers of automobiles under a factory warranty. The parts are installed by the dealer at no charge to the customer. The dealer is then reimbursed by the factory for the cost. Generally, this reimbursement takes the form of a credit against the dealer’s open-parts account, rather than the form of cash. All parts are originally acquired from the factory ex tax for resale purposes. You are correct in concluding that the dealer is not liable for any additional sales tax under these circumstances. Where replacement parts are furnished pursuant to the guaranty provisions of a contract of sale, the buyer is regarded as having purchased the parts at the time of the original sale. Accordingly, the sales tax paid by the retailer on gross receipts from the original sale include any sales tax which might be attributable to the value of the replacement parts. You are also correct in concluding that the described transactions would not give rise to any use tax liability. The use tax does not apply to the storage, use or other consumption of property, the gross receipts from the sale of which are required to be included in the measure of the sales tax. If replacement parts are furnished to a consumer pursuant to the guaranty provisions of a contract of sale, the parts themselves are regarded as being “sold” at the time the contract is made. Since the gross receipts from the sale (which includes the replacement parts) are required to be included in the measure of the sales tax, no further tax is due when the replacement parts are furnished to the customer. Very truly yours,

E. H. Stetson
Tax Counsel
cc:

Mr. Harry L Say
--- – Subdistrict Administrator