If a retailer refunds an extended warranty charge, must it also refund the sales tax collected on it?

Plain-English summary

A retailer asked how Kansas sales tax applies when an extended warranty is cancelled and its charge is refunded.

Extended warranty charges are taxable. The Department quoted K.A.R. 92-19-62(b): "Each charge made by a retailer separate and apart from the selling price of the tangible personal property for an optional warranty, extended warranty, service contract, maintenance contract and other similar instruments is subject to sales tax. . . ." So sales tax is collected on such a charge when the warranty is sold.

Refund the charge, refund the tax. The Department advised: "since the retailer refunded the charge for the extended warranty, by submitting a check to the finance company to reduce the principal amount, the corresponding state and local sales tax(es) . . . that was collected on said warranty should likewise be refunded."

Bottom line: an extended warranty charge is taxable when sold, but when it is refunded on cancellation, the state and local sales tax collected on that charge should be refunded too — the tax follows the refunded charge back to the customer.

What this means for you

Tax the warranty when you sell it

A separately stated charge for an optional or extended warranty, service contract, or maintenance contract is subject to Kansas sales tax under K.A.R. 92-19-62(b). Collect the tax on that charge at sale.

Reverse the tax when you reverse the charge

If the warranty is cancelled and you refund the charge — including by paying down a finance company's loan principal — refund the state and local sales tax you collected on it as well. The tax should not remain collected on a charge that has been returned.

Keep the paperwork consistent

Document the refund of both the warranty charge and its tax (and how it flowed — for instance, a check to the finance company). Consistent records support the corresponding adjustment on your sales tax reporting.

Common questions

Q: Is an extended warranty charge subject to Kansas sales tax?
A: Yes. K.A.R. 92-19-62(b) makes a separately stated charge for an optional/extended warranty, service contract, or maintenance contract "subject to sales tax."

Q: If I refund the warranty charge, do I refund the tax?
A: Yes. Because the retailer "refunded the charge for the extended warranty," the "state and local sales tax(es) . . . collected on said warranty should likewise be refunded."

Q: Does it matter that the refund went to a finance company?
A: No. Here the refund was made "by submitting a check to the finance company to reduce the principal amount," and the Department still said the corresponding sales tax should be refunded.

Citations and references

• K.A.R. 92-19-62(b) — makes a retailer's separately stated charge for an optional/extended warranty, service contract, or maintenance contract subject to sales tax; the basis for both taxing the warranty at sale and refunding the tax when the charge is refunded.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-156

Original ruling text

Private Letter Ruling

Body:

Office of Policy and Research

July 19, 1999

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RE: TTTTTTTT

Dear Ms. TTTTTTTTT:

We wish to acknowledge receipt of your letter dated July 14, 1999, regarding the application of Kansas Retailers’ Sales tax.

K.A.R. 92-19-62(b) states in part: “Each charge made by a retailer separate and apart from the selling price of the tangible personal property for an optional warranty, extended warranty, service contract, maintenance contract and other similar instruments is subject to sales tax. . .”

Please be advised that since the retailer refunded the charge for the extended warranty, by submitting a check to the finance company to reduce the principal amount, the corresponding state and local sales tax(es) for that was collected on said warranty should likewise be refunded.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling. If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 08/03/1999 Date Modified: 10/11/2001

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