Was a used-car dealer the retailer or consumer of parts furnished under a manufacturer's optional power-train warranty?

Plain-English summary

Used-car dealers sold optional 50,000-mile power-train warranties on behalf of the manufacturer and remitted the initial $25 premiums to it. When a customer made a claim, the customer paid the dealer $25; the dealer repaired the car and billed the manufacturer for separately stated parts and labor plus a 25% markup, less the customer's payment.

California said the dealer was selling the parts pursuant to obligations owed to the manufacturer and customer, much like an independent repair shop billing an insurer. The dealer therefore was the retailer—not the consumer—of the parts.

Sales tax applied to the dealer's parts charge to the manufacturer, including the 25% markup attributable to those parts. The initial optional-warranty premium was not part of the dealer's taxable gross receipts because the dealer remitted it to the manufacturer.

Common questions

Was the dealer the consumer of the warranty parts?

No. It was the retailer.

What amount was taxable?

The selling price of the parts billed to the manufacturer, including the parts-related 25% markup.

Was the customer's initial $25 warranty premium taxable to the dealer?

No, because the dealer sold the warranty for the manufacturer and paid the premium over to it.

Citations and references

• California optional-warranty treatment — the memorandum applied retailer treatment to the dealer's separately invoiced parts under the three-party arrangement

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/490-0620.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

--- --- District – District Principal Auditor

From:

Tax Counsel (GAT) - Headquarters

Subject:

[Car Manufacturer]
P. O. Box XXX
--- ---, CA XXXXX

490.0620

Date:

November 30, 1966

SZ -- XX XXXXXX

This is in reply to your letter of October 11, 1966, regarding ours of September 30, 1966, to [auto dealer] concerning the new [car brand] warranties. As indicated in that letter, it was our opinion that, on the basis of the facts submitted, [B], the [car brand] dealer, was the consumer of parts furnished under the 50,000 mile power train warranties. This was based on our understanding that the warranties were optional, were sold by the dealers directly to the customers, and that all expenses incurred by the dealers for parts and labor would be covered by the $25 initial and $25 deductible payments made by the purchasers of such warranties. It is now our understanding that the foregoing is not a correct description of the relationships of all of the parties involved. We understand that each warranty transaction involves three parties, the [car manufacturer], the local dealer, and the customer. It appears that each dealer sells the warranties in much the same manner as an insurance agent sells regular insurance policies for his employer, remitting the $25 premiums to the [car manufacturer]. When a customer makes a claim on the dealer for service under the warranty, he pays the dealer
$25. The dealer, in turn, does the work, making out a regular invoice for parts plus labor plus 25 per cent markup and submits this to the [car manufacturer] which, in turn, pays the dealer the invoiced amount less the $25 deductible which the customer paid when he asserted his claim for service. Under the foregoing circumstances, it appears to us that when the dealer furnishes parts and labor under such warranties and submits the invoice to the [car manufacturer] for payment, he is actually selling the parts and furnishing that labor pursuant to his contractual obligation to the [car manufacturer], as well as to the customer, just as an independent automobile repairman furnishes parts and labor to an insured and his automobile insurance company.

--- --- District – District
Principal Auditor
(SZ -- XX XXXXXX)

-2-

November 30, 1966
490.0620

In view of the foregoing, it is our opinion that dealers furnishing parts and labor under such warranties are retailers of the parts and not the consumers thereof. Accordingly, the tax is applicable to their charges to [car manufacturer] for parts made pursuant to the 50,000 mile power train warranties. These charges would include the 25 per cent markup attributable to the parts. Inasmuch as the warranties are optional, the initial $25 payment therefore is not part of the dealer’s taxable gross receipts.

GAT:mm
cc:

Out-of-State – District Administrator
--- – Subdistrict Administrator