Did a bona fide replacement vehicle supplied under Louisiana's lemon law or a manufacturer's warranty trigger sales tax?

Plain-English summary

An equal-value vehicle substituted as a bona fide warranty or Louisiana lemon-law replacement did not trigger a new sales-tax transaction. The Department treated the substitution as part of the original sale rather than a return of the first vehicle and a new sale to the customer.

Customer payments for depreciation, a better replacement vehicle, or added options were different: those amounts were taxable as new or separate sales. A manufacturer's payment to the dealer for processing the substitution was not a taxable service.

The replacement arrangement

A redacted automotive corporation distributed passenger vehicles through authorized dealers. Its retail vehicles carried time-or-mileage manufacturer warranties and were subject to implied-warranty requirements.

Louisiana's lemon law supplied remedies when a manufacturer, agent, or authorized dealer failed to conform a vehicle to an express warranty by repairing a defect or condition that substantially impaired the vehicle's use and value. The remedies described included a new replacement vehicle or return of the vehicle for a full purchase-price refund.

Equal-value bona fide replacements were not taxed again

The ruling acknowledged that Louisiana law contained no specific exemption for the substitution. It nevertheless viewed a manufacturer-warranty replacement for a defective original vehicle as part of the original sales transaction.

As long as the substitute vehicle had the value of the original and was a bona fide replacement under the warranty or lemon law, the Department would not treat the exchange as a taxable return and sale to the original customer.

It did not matter whether the dealer supplied the replacement from inventory and received payment from the manufacturer or the manufacturer sent the vehicle to the dealer for customer pickup.

Additional customer payments were taxable

If use of the original vehicle required the customer to pay an additional amount for depreciation, that payment was taxable as a new transaction.

If the customer upgraded the replacement vehicle or bought options that were not part of the original sale, the upgrade or option price was a separate taxable sale.

Dealer processing compensation was not a taxable service

The dealer's work facilitating the substitution, when compensated by the manufacturer, was not a taxable service under La. R.S. 47:301(14).

Required documentation

The Department did not prescribe one mandatory replacement form. Documentation instead had to show that warranty or lemon-law causes required the dealer or manufacturer to accept the first vehicle and substitute the second.

The record could be prepared by the dealer or manufacturer, had to identify both vehicles and their vehicle identification numbers, and had to be signed by the authorizing dealer or manufacturer representative and notarized.

The Department of Motor Vehicles could require additional records and would still charge applicable title, license, and registration fees on the replacement vehicle, even though the Revenue Department did not treat the substitution as a sales-tax transaction.

What this means for you

Manufacturers and dealers

Document that the exchange is a required bona fide warranty replacement and that the substitute is equal in value. Separate any depreciation, upgrade, or option charge.

Vehicle customers

The replacement itself was not taxed again under these facts, but extra value purchased in the exchange remained taxable.

Warranty administrators

Keep VIN-specific, signed, notarized records and coordinate separately with motor-vehicle title and registration requirements.

Common questions

Q: Was an equal-value lemon-law replacement taxable?

A: No, under the ruling's specific facts.

Q: Was a customer depreciation payment taxable?

A: Yes.

Q: Were upgraded equipment and extra options taxable?

A: Yes, on the added cost to the purchaser.

Q: Was the manufacturer's dealer-processing payment taxable?

A: No. The ruling said the dealer's facilitation service was not taxable under La. R.S. 47:301(14).

Q: Were DMV fees eliminated?

A: No. Title, license, and registration fees still applied.

Citations and references

• La. R.S. 47:301(14) — taxable-services definition applied to dealer processing
• Louisiana motor-vehicle warranty or “lemon” law — replacement and refund remedies described in the ruling; no section number appears in the published text
• LAC 61:III.101(C) — PLR authority, nonprecedential status, and taxpayer-specific reliance limits

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA PLR 07-015

Original ruling text

Private Letter Ruling No. 07-015
Redacted Version
Sales Tax
What is the applicability of sales or use tax to a replacement vehicle under the Louisiana
“lemon” law or through manufacturer’s warranty?
December 4, 2007
Facts
An automotive corporation is a distributor of passenger motor vehicles in the United States. It
sells vehicles to authorized dealers who sell the vehicles to retail customers. The vehicles sold at
retail are covered by a manufacturer’s warranty for specific time periods or mileage, whichever
comes first. The vehicles are also subject to certain state and federal requirements regarding
implied warranties. Louisiana’s lemon law provides for certain remedies if the manufacturer, its
agents or authorized dealers do not conform the vehicle to an express warranty by repairing or
correcting any defect or condition that substantially impairs the use and value of the motor
vehicle to the consumer. Those remedies include replacement of the vehicle with a new vehicle,
or accept the return of the vehicle from the consumer and refund the full purchase price.
Ruling Requested
Is sales or use tax applicable to a replacement vehicle provided to a retail customer pursuant to
Louisiana’s lemon law or the manufacturer’s express warranty?
Is sales tax applicable to an upgrade in quality of vehicle or to options not part of the original
sale?
Is sales tax applicable to any fees paid by the manufacturer or distributor to the dealer for
processing the replacement?
What documentation is necessary to show that the vehicle is a “replacement” by manufacturer’s
warranty or Louisiana’s lemon law?
Legal Analysis
For sales and use tax purposes, the replacement activity made under a manufacturer’s warranty
due to defect in the originally sold vehicle may be considered part of the original sales
transaction, not a separate transaction. There is no specific exemption in Louisiana law allowing
617 North Third Street
Baton Rouge, Louisiana 70802
225-219-2700 ‚ 225-219-2708 Fax
www.revenue.louisiana.gov

Redacted Private Letter Ruling 07-015
December 4, 2007
Page 2

sales taxes to not be paid on this activity. However, the Department will not consider a
substitution under these circumstances a “return” and “sale” to the original customer. As long as
the substitute vehicle is the value of the original and the substitution is a bona fide replacement
under the warranty or Louisiana lemon law, the replacement does not trigger taxation. However,
if the original vehicle has been used to the extent that an additional sum is due by the
purchaser to the dealer or manufacturer for depreciation of the asset, then that sum is
taxable as a new transaction. Additionally, if the purchaser upgrades the vehicle in the
replacement, then the cost of the upgrade or additional purchased options are a separate
sales transaction and sales tax is due on the cost to the purchaser. It is inconsequential for
sales tax purposes whether the replacement vehicle is drawn from the dealer’s inventory with the
manufacturer making payment to the dealer or is sent by the manufacturer to the dealer for pickup by the customer.
The service provided by the dealer and compensated for by the manufacturer in facilitating the
substitution of vehicle is not a taxable service under R.S. 47:301(14).
The Department will not at this time establish a specific document that must be used to show that
a replacement vehicle has been provided to a customer under the manufacturer’s warranty or the
Louisiana lemon law statute. However, documentation must show that the vehicle substitution is
one triggered by causes sufficient to require the dealer or manufacturer to accept the first vehicle
back and substitute the second in fulfillment of warranty requirements. It may be prepared by
either the dealer or the manufacturer and identify the two vehicles and their vehicle identification
numbers. The documentation must be signed by the representative of the dealer or manufacturer
who authorizes the substitution and notarized. In addition to this, the Department of Motor
Vehicles (“DMV”) will require certain information for documentation and recordkeeping
purposes. Although the Department does not recognize the substitution as a ‘transaction’, the
DMV will charge appropriate title, license and registration fees on the substitute vehicle.
I trust that this has been of assistance to you. You may telephone me if you have additional
questions at 225-219-2780.
Sincerely,
Cynthia Bridges

By: Johnette L. Martin

A Private Letter Ruling (PLR) is issued under the authority of LAC 61:III.101(C). A PLR provides guidance to a
specific taxpayer at the taxpayer’s request. It is a written statement issued to apply principles of law to a specific set
of facts or a particular tax situation and is limited to the matters specifically addressed. A PLR does not have the
force and effect of law and may not be used or cited as precedent. A PLR is binding on the Department only as to
the taxpayer making the request and only if the facts provided with the request were truthful and complete and the
transaction was carried out as proposed. The Department’s position concerning the particular tax situation
addressed remains in effect for the requesting taxpayer until a subsequent declaratory ruling, rule, court case, or
statute supersedes it.