Are separately stated electronics extended warranties, repair service fees, and enrollment in a device-upgrade program subject to Georgia sales tax?

Plain-English summary

The taxpayer sold consumer electronics with a manufacturer's warranty and offered an optional, separately priced extended warranty covering support, repairs, replacement, and limited accidental damage. It also offered a free upgrade program to customers who financed a new device for 24 months, bought the extended warranty, activated service, and met other conditions. The invoice separately stated the full device price and warranty price.

The Department ruled:

• Extended warranty contract: not taxable because it was an optional service and its charge was separately stated.
• Repair under the warranty: a non-itemized service fee covering parts and labor was taxable in full.
• Upgrade-program enrollment: not taxable. The program combined two distinct, separately billed products -- a taxable device and nontaxable warranty -- without selling additional tangible property or creating a taxable bundle.
• Replacement/new upgrade device: taxable when purchased through the upgrade option.

The extended warranty remained a separate contract: ending the installment loan or program did not automatically cancel it.

What this means for you

Electronics sellers

Separately state the warranty from the device. The Department's nontaxable-service treatment depended on the optional warranty having its own invoice charge.

Repair and service departments

Invoice detail changes the repair result. The ruling taxed the entire non-itemized service fee because it covered both parts and labor without separate prices.

Upgrade and financing programs

Requiring a warranty for program eligibility did not by itself create a taxable bundle. Separate billing, distinct cancellation rules, and the absence of additional tangible property supported the nontaxable enrollment result.

Common questions

Q: Is the separately stated extended warranty taxable?

A: No. The Department treated the optional contract as a nontaxable repair and maintenance service.

Q: Is a service fee for an accidental-damage repair taxable?

A: Yes when the charge does not separately state materials and labor; the ruling taxes the full fee.

Q: Is enrollment in the upgrade program taxable?

A: No. Enrollment was free and transferred no additional tangible personal property beyond the separately billed device.

Q: Does requiring the warranty make the device and warranty one taxable bundle?

A: No on these facts. They were separately stated, remained distinct, and had separate cancellation mechanics.

Q: Is the new device obtained through an upgrade taxable?

A: Yes. The ruling says the price of the new device is subject to sales tax.

Q: Can another manufacturer rely on this ruling?

A: No. It is limited to the requesting taxpayer's warranty, invoices, repair fees, financing, and program terms.

Citations and references

Authorities:

• O.C.G.A. § 48-8-30(a) -- sales and use tax imposition
• Ga. Comp. R. & Regs. r. 560-12-1-.14(7)(h)(i) -- extended warranties
• Ga. Comp. R. & Regs. r. 560-12-2-.78 -- repair charges
• Ga. Comp. R. & Regs. r. 560-12-2-.09(6)(d) -- warranty principles cited by analogy

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2017-05

Original ruling text

Georgia Letter Ruling: LR SUT-2017-05
Dated: February 23, 2017
Topic: Maintenance Plan
This letter is in response to your request for guidance on the application of Georgia sales and use tax to sales of
extended warranties by [Redacted] (“Taxpayer”).
Facts Presented by Taxpayer
Taxpayer designs, manufactures, and markets consumer electronics, including mobile devices. The devices are
available for purchase directly from Taxpayer or from an authorized retailer. Device prices vary from $[Redacted] to
$[Redacted] based on model and storage. Each device comes with one year of hardware repair coverage and up to
ninety days of complementary technical support through Taxpayer’s manufacturer’s warranty.
An Extended Warranty (“Extended Warranty”) can be purchased separately for $[Redacted]. It extends the warranty
coverage on the applicable device to two years from the original purchase date. The Extended Warranty applies to the
device, battery, and included earbuds and accessories. Coverage under the Extended Warranty entitles the purchaser
to direct access to experts for technical support and troubleshooting, mail-in repair, carry-in repair to a retail store or
authorized provider, and express replacement service. It provides repair and replacement coverage, both parts and
labor, from Taxpayer-authorized technicians for up to two incidents of accidental damage coverage, although each
incident is subject to a service fee plus applicable tax.
Recently, Taxpayer began an Upgrade Program. The Upgrade Program is designed for customers who want the newest
model device every year. To enroll in the Upgrade Program, a customer must do the following:
 Have a valid U.S.-issued personal credit card;
 Apply for and enter a 24-month installment loan (“Installment Loan”) for the full retail price of a new, eligible
device (“Financed Device”);
 Purchase the Extended Warranty applicable to the Financed Device (the cost of the Extended Warranty is
added to the principal amount of the Installment Loan); and
 Activate the Financed Device on a wireless service plan with an eligible carrier under the carrier’s terms.
A customer may purchase a Financed Device and an applicable Extended Warranty in separate transactions, but that
customer would not be eligible for enrollment in the Upgrade Program. If the Financed Device and the Extended
Warranty are purchased together, enrollment in the Upgrade Program is free and automatic upon meeting the eligibility
requirements. Enrollment in the Upgrade Program is not listed on the customer invoice, which states the cost of the
Financed Device at its full price and separately states the cost of the Extended Warranty at its full price.
Under the terms of the Upgrade Program, the customer is responsible for paying for all applicable taxes and fees with
the first installment payment. If the Installment Loan is terminated, either the customer or the lender must separately
cancel the Extended Warranty.
Upgrade Program participants have the option (“Upgrade Option”) to trade a Financed Device for a new eligible
device. The Financed Device, upon the exercise of the Upgrade Option, is accepted as repayment for the amount due
on the Installment Loan. The exercise of the Upgrade Option to purchase a new device is subject to the following
conditions:






The Upgrade Option must be exercised prior to the expiration date of the Installment Loan;
The customer must have paid the equivalent of at least twelve installment payments under the Installment
Loan plus any taxes and fees at the time of enrollment;
The Extended Warranty contract must have been continuously maintained with the Financed Device;
The original Financed Device must be turned in and in good condition; and
The customer must enroll in a new Upgrade Program which includes a new Installment Loan on the new
Financed Device as well as a new Extended Warranty.

If a customer wants an upgrade but the Financed Device is in poor condition, the customer must use the Extended
Warranty to repair the Financed Device, with applicable charges and taxes assessed to the customer.

LR SUT-2017-05
February 23, 2017
Page 2 of 3
Issues
1.

Are Taxpayer’s sales of Extended Warranty contracts subject to Georgia sales and use tax?

2.

If not, is a customer’s enrollment in the Upgrade Program, which requires the purchase of an Extended
Warranty, subject to Georgia sales and use tax?

Analysis
Georgia levies and imposes a tax (subject to certain specific exemptions) on the retail purchase, retail sale, storage,
use, or consumption of tangible personal property and on certain services. 1
Extended Warranty
Typically, an extended warranty is a contract to provide repairs or maintenance, not tangible personal property. Thus,
the execution of an extended warranty agreement is not subject to tax, provided that the charge for the warranty is
itemized on the dealer’s invoice.2 However, when a repair is performed under an optional extended warranty and the
invoice for the repair work does not state separately the price of the materials used, the tax will apply to the total
charge for materials and labor.3
Here, the Extended Warranty is an optional service that a customer may purchase. The cost of the Extended Warranty
is in addition to the purchase price of a device. Regardless of whether a customer elects to participate in the Upgrade
Program, the charge for the Extended Warranty is separately stated on the customer’s invoice. Based on Taxpayer’s
billing practices and the nature of the agreement at issue, sales of Extended Warranty contracts are not subject to sales
and use tax. Since Taxpayer charges customers a non-itemized fee to perform repairs under the Extended Warranty,
the repair fee is taxable.
Upgrade Program
Enrollment in the Upgrade Program consists of distinct components, including the purchase of a taxable Financed
Device and the purchase of a nontaxable Extended Warranty. The products are billed separately, and cancellation of
the Upgrade Program does not automatically cancel the Extended Warranty. If enrolled in the Upgrade Program, a
customer receives a promise that a Financed Device in good condition will be accepted back by Taxpayer in
satisfaction for the remaining balance of the Installment Loan. The Upgrade Program does not have purchase
requirements. If a customer chooses to exercise the Upgrade Option, the price of the new device is subject to sales
tax. The billing method, cancellation requirements, and upgrade conditions demonstrate that the Upgrade Program is
a combination of distinct transactions rather than a sale of tangible personal property.
Rulings
1.

Taxpayer’s sales of Extended Warranty Contracts are sales of a service and consequently not subject to Georgia
sales and use tax. However, if a repair is provided under the Extended Warranty, the non-itemized service fee
charged by Taxpayer is subject to the tax.

2.

Enrollment in the Upgrade Program is not subject to sales and use tax. This Program is a combination of two
distinct products in which Taxpayer does not sell any additional tangible personal property. Provided the device
and Extended Warranty are separately stated on the invoice, enrollment in the Upgrade Program does not alter
the taxability of each individual component or create a bundled transaction.

1

O.C.G.A. §§ 48-8-1 and 48-8-30(a).
Ga. Comp. R. & Regs. r. 560-12-1-.14(7)(h)(i); see Ga. Comp. R. & Regs. r. 560-12-2-.09(6)(d) (while this regulation
is applicable to motor vehicles, the principles regarding extended warranties provide insight into the general tax
treatment of warranties and the associated repairs).
3
Ga. Comp. R. & Regs. r. 560-12-2-.78.
2

LR SUT-2017-05
February 23, 2017
Page 3 of 3
The opinions expressed in this ruling are based upon the information contained in your request and limited to the
specific transactions, facts, circumstances, and taxpayer in question. Should the circumstances regarding the
transactions change or differ materially from those represented, this ruling may become invalid. Subsequent statutory
or administrative rule changes or judicial interpretations of the statutes or rules upon which this ruling is based may
subject similar future transactions to different tax treatment than that expressed in this ruling.