How is Kansas sales tax handled when a third party performs repairs for a retailer under a warranty or service contract?

Plain-English summary

The question was how Kansas sales tax applies when a retailer sells a warranty, maintenance, or service contract but has a third party actually perform the repairs. The Department quoted K.A.R. 92-19-62(d).

If a retailer doesn't perform the repair services under such a contract but has a third party do them, the third party's gross receipts from that retailer are not subject to sales tax. To document this, the third party secures an exemption certificate from the retailer stating: (1) the service was performed pursuant to a warranty, maintenance, or service contract; (2) the retailer collected sales tax from the consumer on the total selling price of the contract; and (3) the retailer's sales tax registration number.

Two clarifications: if the retailer collects a deductible (or similar charge) from the consumer, the retailer must include that amount in its taxable gross receipts, even though the third party performs the work. And because the taxpayer charges Kansas sales tax when it sells extended warranty contracts, it is not obligated to pay Kansas sales tax to a third party when that third party provides repair parts and labor under a warranty contract.

What this means for you

If you buy or sell warranties and use third-party repairers in Kansas, the tax attaches to the contract sale, not the back-end repair.

• Tax the contract up front. The retailer collects sales tax on the selling price of the warranty/maintenance/service contract when it's sold.
• Third-party repairs for the retailer are exempt. With a proper exemption certificate, the third party doesn't charge the retailer tax on repairs done under the contract.
• Keep the three-part certificate. It must state the contract basis, that the retailer taxed the contract's selling price, and the retailer's registration number.
• Deductibles are taxable. A deductible the retailer collects from the customer goes into the retailer's taxable gross receipts.

Common questions

Does a third party charge the retailer sales tax for warranty repairs?
No, with a proper exemption certificate. Under K.A.R. 92-19-62(d), the third party's receipts from the retailer for repairs done under the contract aren't taxed.

What must the exemption certificate say?
That the work was under a warranty/maintenance/service contract, that the retailer collected sales tax on the contract's total selling price, and the retailer's sales tax registration number.

Is a customer deductible taxable?
Yes. A deductible the retailer collects from the consumer is included in the retailer's taxable gross receipts.

Can other retailers rely on this ruling?
Not directly. A private letter ruling binds the Department only for the requesting taxpayer and stated facts; treat it as guidance.

Citations and references

• K.A.R. 92-19-62(d) — quoted for the rule that a third party's repair receipts from a retailer under a warranty/maintenance/service contract aren't taxed (with a three-part exemption certificate), and that a consumer deductible the retailer collects is part of the retailer's taxable gross receipts. The ruling cites no numbered K.S.A. statute.

Source

• Original ruling (DOCX): https://www.ksrevenue.gov/pildocs/rulings/P-1999-51.docx
• Kansas Policy Information Library: https://www.ksrevenue.gov/prpil.html

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

March 3, 1999

TTTTTTTTTTTT
TTTTTTTTTTTT
TTTTTTTTTTTT

Dear Mr. TTTTT:

We wish to acknowledge receipt of your letter dated December 9, 1998, regarding the application of Kansas Retailers’ Sales tax.

K.A.R. 92-19-62(d) states in part: "If a retailer does not perform repair services under a warranty, maintenance or service contract, but instead has a third party perform the repairs, the third party’s gross receipts received from that retailer are not subject to sales tax. The third party shall secure an exemption certificate from the retailer which states:

(1) that the service performed by the third party was pursuant to a warranty, maintenance or service contract;
(2) that the retailer collected from the consumer sales tax on the total selling price of the warranty, maintenance or service contract; and
(3) the retailer’s sales tax registration number."

However, if a retailer has collected a deductible or similar charge from the consumer, the retailer shall include the amount in the retailer’s taxable gross receipts, even though a third party may actually perform the service under the warranty, maintenance or service contract. Additionally, since TTTTTTTTTTTTTTTT charges Kansas sales tax on the sale of extended warranty contracts, they would not be obligated to pay Kansas sales tax to a third party, when the third party provides repair parts and labor under a respective warranty contract.

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: 03/09/1999 Date Modified: 10/11/2001

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