Were separately stated refrigeration-compressor warranty-insurance charges taxable?

Plain-English summary

A refrigeration-compressor company separately charged customers for warranty insurance.

California said a required warranty charge was part of the property's selling price and taxable. If the customer could freely choose whether to buy the insurance, the optional charge was excluded from taxable receipts.

The warranty type also controlled repair parts. Parts furnished under a mandatory warranty carried no additional sales or use tax because the buyer was treated as purchasing them with the original sale. Under an optional parts warranty, the provider was the consumer of the parts it supplied.

Common questions

Was separate statement enough to make the warranty charge nontaxable?

No. A mandatory charge remained taxable.

Was an optional warranty charge part of the selling price?

No.

Who consumed parts under the optional warranty?

The retailer or provider furnishing those parts under the optional coverage.

Citations and references

• Historical California Ruling 67 — cited for repair parts furnished under mandatory and optional warranties

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/490-0580.pdf

Original ruling text

490.0580

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

December 13, 1963

F--- R--- Company
XXXX --- ----- XX, --Attention:

Mr. W. F. S---

Cert U-XXXX

Gentlemen:
This is in response to your letter of November 14 regarding the application of tax to separately stated charges for warranty insurance on refrigeration compressors. The taxability of such charges depends on whether the insurance is mandatory or optional. If the customer is required to pay the additional amount, it is considered a part of the selling price of the property and hence includible in the measure of tax. However, if the customer merely has the option of obtaining insurance, the charge is not considered a part of the selling price and may be excluded from taxable receipts. We also wish to call your attention to the tax effect of supplying repair parts under a warranty. Neither sales nor use tax applies to repair parts furnished pursuant to a mandatory warranty because the buyer is determined to have paid for the repair parts at the time of the original sale (see ruling 67, copy enclosed). Where the buyer may either purchase or not purchase the warranty by which the seller agrees to supply repair parts, the retailer is considered to be a consumer of the parts furnished to the buyer. If we can be of further assistance, do not hesitate to contact our office again. Very truly yours,

E. H. Stetson
Tax Counsel
FH:spg
Enc.
cc:
Out-of-State – District Administrator
New York