How much of a $100 deductible under a mandatory new-car warranty was taxable?

Plain-English summary

A new-vehicle warranty was included in the car's purchase price. Its later major-component coverage required the customer to pay a $100 deductible.

California said parts furnished entirely under the mandatory warranty were already treated as sold and taxed when the vehicle was originally sold, so no additional tax applied to those parts. But repair work covered by the customer's deductible was supplied for additional consideration rather than solely under the original warranty.

The taxable amount was the portion of the $100 deductible attributable to parts, allocated using the repair's parts-to-labor ratio. The source described this as the Board's statewide interpretation since at least 1981.

Common questions

Was the entire $100 deductible taxable?

Tax was applied according to the ratio of parts to labor, so the parts portion was taxable.

Were all parts used in the warranty repair taxed again?

No. Parts furnished under the mandatory warranty beyond the deductible were treated as already sold and taxed with the original vehicle.

Why did the deductible change the answer?

The letter treated the deductible payment as additional consideration for the repair work rather than part of the protection purchased with the car.

Citations and references

• Cal. Code Regs., tit. 18, reg. 1655(c)(2) — replacement parts and materials furnished under a mandatory warranty
• Cal. Code Regs., tit. 18, reg. 1546 — ordinary repair transactions, used by the letter's deductible comparison

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/490-0510-200.pdf

Original ruling text

490.0510.200

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-3723

May 15, 1990

Mr. M--- D. B--C--- A---, Inc.
--- --- ---, Suite XXX
XXX --- -----, CA XXXXX
Dear Mr. B---:
On April 24, 1990, we discussed application of the California sales tax to deductible charges made under mandatory warranty agreements. We understand that new vehicles are sold with warranties which may typically provide as follows: A)

First 12 months or 12,000 miles, no deductible, complete coverage, and

B)

Three years and up to 50,000 miles, major component coverage subject to a $100 deductible. It is this warranty that is in question. Note that the customer does not pay for this warranty coverage, it is included in the purchase price.

As you are aware, under our Regulation 1655, “Returns, Defects and Replacements,” subdivision (c)(2), a sale of tangible personal property includes the furnishing, pursuant to the guaranty provisions of the contract of sale, or mandatory warranty, of replacement parts or materials. The sale of the replacement parts and materials to the seller furnishing them thereunder is a sale for resale and not taxable. To the extent that parts are furnished pursuant to a mandatory warranty, they are regarded as having been sold and taxed at the time the goods in question were originally sold. No additional tax is due.

Mr. M--- D. B---

-2-

May 15, 1990
490.0510.200

We have reviewed our files and have found that since at least 1981 it has been our position that to the extent repair work is performed which is subject to a deductible, the parts which are furnished are not considered to be furnished pursuant to the mandatory warranty, but are considered to be furnished in exchange for the deductible amount paid by the customer. Tax is applied to the deductible, in accordance with the ration of parts to labor. This interpretation has been applied on a statewide basis. This is not a new or revised interpretation of California law. We cannot ascertain to what extent actual notice may have been given to new car dealers, but our records indicate that major automobile manufacturers, including
[A], were advised of our interpretation.
It seems to us, looking at the matter afresh, that this earlier interpretation is correct. Suppose that the work required to be done does not exceed the deductible. It would seem that there would be no reason to tax such a service for fee transaction any differently than any other repair transaction under our Regulation 1546. To the extent that parts and labor are furnished for an additional consideration, the parts and labor are not furnished pursuant to the original purchased protection. Our apology for the delay in our response. Very truly yours,

Gary J. Jugum
Assistant Chief Counsel

GJJ:sr
See proposed Reg. 1655 for further clarification.
7/28/00