How did California tax an optional second-year appliance service-protection contract and the parts supplied under it?

Plain-English summary

An appliance seller offered separately priced second-year service-protection contracts covering labor and replacement of defective parts at no charge. The contracts were optional and cancellable by either party.

California excluded the contract charge from taxable gross receipts from the original appliance sale because the plan was an optional labor-and-parts warranty.

The provider was not treated as selling the replacement parts to the customer. It was the consumer of those parts and supplies and owed tax measured by its purchase price, including use tax if it bought them without paying tax.

Common questions

Was the optional contract charge taxable as part of the appliance sale?

No.

Did that make the replacement parts tax-free to the provider?

No. The provider was the consumer of the parts.

What if the provider bought parts ex tax?

It had to report use tax measured by its cost.

Citations and references

• California optional-warranty treatment — excluded the separate plan charge and treated the provider as consumer of repair parts

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/490-0700.pdf

Original ruling text

490.0700

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

May 10, 1960

G--- A--- Company
XXX --- Street
--- ---, California
Attention:

B-XXXXX

Mr. C--- O. H--General Manager

Gentlemen:
In your letter of May 4 you inquired about application of sales tax to your receipts from sales of a “Service Protection Contract”, and application of use tax to replacement parts furnished thereunder. Concerning the contract, you state: 1.

It is not a mandatory contract and is a Second Year Warranty.

2.

Parts furnished under the contract are to replace defective parts only and at no charge to the customer.

3.

The contract may be cancelled at any time by either party.

Your charges for such Second Year Contracts are as follows: Standard Refrigerators Combination Refrigerators Freezers Ranges Dishwashers Disposalls Automatic Washers Washer-Dryer Combinations Dryers

$ 6.75
8.85
8.85
10.95
20.55
6.75
23.95
44.20
15.00

Inasmuch as each such “Service Protection Contract” is actually an optional labor and parts warranty, the charge for such contract does not constitute taxable gross receipts.

G--- A--- Company
Account B-XXXXX

-2-

May 10, 1960
490.0700

Since the charge for the warranty does not constitute part of the gross receipts from the original sale of the appliance, you are not considered to be the seller of the parts and supplies which you furnish under the contract. However, you are considered to be the consumer of such parts and supplies and are subject to tax measured by your purchase price of such parts and supplies. If you do not purchase such parts and supplies tax paid, you should report your cost thereof as subject to use tax. Very truly yours,

George A. Trigueros
Assistant Counsel

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San Francisco - Administrator