How did California tax an optional $35 second-year television service policy and the parts used under it?

Plain-English summary

A television dealer planned a $35 second-year service policy that would begin after the customer had used the set for one year. Customers could buy the television with or without the policy, and the dealer might also solicit it months after the original sale.

California treated the optional policy as a separate service contract, not part of the television's taxable sale price. The dealer did not report the $35 policy charge as taxable gross receipts.

The dealer was the consumer of parts used to perform the optional coverage and had to buy them tax paid or report their cost as self-consumed merchandise. The opposite framework applied to a mandatory warranty: its charge joined taxable gross receipts, while qualifying parts could be bought for resale.

Common questions

Was the optional $35 policy charge taxable?

No.

Who consumed the covered repair parts?

The dealer providing the optional service.

Would a mandatory warranty have the same treatment?

No. Its charge would be taxable as part of the television sale.

Citations and references

• Cal. Rev. & Tax. Code § 6012 — gross-receipts definition cited for services that are part of a property sale
• Historical California Ruling 67 — mandatory-warranty repair-parts treatment contrasted in the source

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/490-0680.pdf

Original ruling text

490.0680

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

May 21, 1954

K--- A--XXXX - XXXX --- --- Boulevard
--- ---, California
Attention:

Mr. W--- T. K---

Account No. H-XXXXX

Gentlemen:
This is in answer to your letter of April 28 addressed to Mr. Gregory of our district office which has been referred to me for reply. We understand that you intend to sell a television service policy to your customers which will be a second-year policy. In other words, we understand that this second-year policy will not be operative until the customer has used the set for one year. We further assume that this is an optional warranty, meaning that the customer may acquire the set either with or without purchasing this second-year warranty. We understand that you may also have reference to a situation where the set may have been sold months previous to the time when the second-year warranty is solicited. We also assume that no television antenna is furnished and installed in connection with these secondyear warranties. In the case of such optional warranties, even where sold along with the set, we do not regard the sales tax as applying to a separate charge for the warranty. This is based on the theory that the charge represents a charge for a separate service contract and not a charge constituting a part of the sale price of the television set. You are regarded as the consumer of parts used in performing this independent service. Accordingly, you should purchase such parts on a tax-paid basis or report the cost of them as self-consumed merchandise upon Line 2 of your own sales and use tax return. In other words, you do not report the $35.00 as taxable gross receipts but merely report the cost to you of any parts which you use in performing such optional warranties. We wish to point out that section 6012 of the California Sales and Use Tax Law defines as taxable gross receipts the total sale price including labor or service cost or any other expense and any services that are a part of the sale of personal property. It is for this reason that where a retailer sells a television set together with a mandatory warranty, that is, where the customer cannot acquire the set unless he also pays for a warranty, the charge for the warranty is regarded as part of the retailer’s taxable gross receipts. In this latter instance of mandatory warranties, the retailer may purchase parts used to fulfill such warranties on a tax-free basis since he is regarded as a reseller of

K--- A---

-2-

May 21, 1954
490.0680

parts which he uses in fulfilling mandatory warranties (Sales and Use Tax Ruling 67, copy enclosed). As already indicated, however, you are not to be governed by the paragraph immediately preceding, but by the third paragraph of this letter, since we understand that optional warranties are involved. Very truly yours,

W. W. Mangels
Assistant Counsel

WWM:ja
cc:
Sacramento – Auditing (RRG)