Was an optional vehicle service contract included in automobile lease payments exempt from South Carolina sales and use tax under this PLR?

Plain-English summary

An anonymized vehicle lessor offered customers optional service contracts that made the administrator responsible for covered repairs. The contract price could be separately identified in monthly lease invoices, stated only in the lease agreement, or embedded in the gross capitalized cost with the underlying contract cost identified.

The Department concluded that the optional motor vehicle service contract was exempt under S.C. Code § 12-36-2120(53). The exemption applied whether the contract's sales price was separately stated—so long as it reasonably represented retail fair market value—or was allocated using a reasonable retail fair market value when not separately stated.

The vehicle lease and service contract were distinct tax components. The lease remained subject to the historical motor-vehicle maximum-tax rules, while the optional service contract received its own statutory exemption. A mandatory manufacturer's warranty was not separately sold and therefore was treated as part of the vehicle transaction rather than under the optional-contract tax provisions.

What this means for you

Vehicle lessors

An optional service contract embedded in lease economics did not lose its exemption merely because the monthly invoice did not break it out. The allocation still had to reflect reasonable retail fair market value.

Lease administrators

The described arrangement allowed customers to obtain repairs from authorized dealers, with the administrator paying the repair invoice and applicable tax. That administration structure was part of the facts supporting the ruling.

Customers buying a contract later

The ruling also covered an optional service contract purchased after lease signing and paid in full, because the statutory exemption applied to the contract itself.

Common questions

Q: Did the optional motor vehicle service contract qualify for exemption?
A: Yes, on the represented facts, under S.C. Code § 12-36-2120(53).

Q: Did the contract price have to appear on every monthly invoice?
A: No. It could be separately stated in the lease or determined by a reasonable retail fair market value allocation.

Q: Could an unreasonable stated amount control?
A: No. The ruling required the stated amount to reasonably represent retail fair market value; otherwise reasonable retail fair market value governed.

Q: Was a mandatory manufacturer's warranty treated the same way?
A: No. Because it was not separately sold, the ruling treated it as part of the tangible-property sale rather than an optional service-contract sale.

Q: Can another lessor rely on this PLR?
A: No. It applied only to the requesting taxpayers and the specific facts represented.

Citations and references

• S.C. Code § 12-36-2120(53) (motor vehicle extended service and warranty contract exemption)
• S.C. Code §§ 12-36-910(B)(6) and 12-36-1310(B)(6) (tax on optional warranty, maintenance, and similar contracts)
• S.C. Code § 12-36-2110(A) (historical motor vehicle maximum tax for qualifying leases)
• S.C. Code §§ 12-36-90, 12-36-100, and 12-36-130 (gross proceeds, lease as sale, and sales price)
• SC Revenue Ruling #06-9 (vehicle and extended-service-contract example quoted in the ruling)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR08-2.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P.O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #08-2

SUBJECT:

Automobile Leases and Vehicle Maintenance Contracts
(Sales and Use Tax)

REFERENCES: S. C. Code Ann. Section 12-36-910(A) (2000)
S. C. Code Ann. Section 12-36-1110 (Supp. 2007)
S. C. Code Ann. Section 12-36-2110(A) (Supp. 2007)
S. C. Code Ann. Section 12-36-2120(53) (2000)
AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #05-2

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific
taxpayer by the Department to apply principles of law to a specific set
of facts or a particular tax situation. It is the Department’s opinion
limited to the specific facts set forth, and is binding on agency
personnel only with respect to the person to whom it was issued and
only until superseded or modified by a change in statute, regulation,
court decision, or another Departmental advisory opinion, providing
the representations made in the request reflect an accurate statement of
the material facts and the transaction was carried out as proposed.

Question:
Is the sale of the optional vehicle service contract, as described in the “Facts’” exempt
from the sales and use tax under Code Section 12-36-2120(53)?
Conclusion:
The sale of the optional vehicle service contract, as described in the “Facts,’” is exempt
from the sales and use tax under Code Section 12-36-2120(53), whether the sales price of
the optional vehicle service contract is either separately stated in the lease agreement
(provided it reasonably represents the retail fair market value of the vehicle service
contract) or is accounted for based on its reasonable retail fair market value if the sales
price is not separately stated in the lease agreement.

1

Note: The imposition of the tax on the sale or renewal of a warranty, maintenance or
similar service contract under Code Section 12-36-910(B)(6) or Code Section 12-361310(B)(6) (use tax) does not apply to a mandatory warranty, maintenance or similar
service contract, such as a manufacturer’s warranty, since such a contract is not sold, but
is a part of the sale of the tangible personal property. It only applies to an optional
warranty, maintenance or similar service contract, whether or not sold in conjunction
with the tangible personal property (e.g., optional contracts sold by third parties, optional
contracts sold by manufacturers to extend the manufacturer’s warranty, optional contract
sold by the retailer of the tangible personal property).
Facts:
ABC is engaged in the business of leasing motor vehicle at retail in South Carolina and
many other states. ABC (“ABC”) contracts with XYZ (“XYZ”) to administer each of
these leases on behalf of ABC, including the collection of payments under the leases.
ABC and XYZ have jointly requested this private letter ruling concerning the application
of the sales and use tax to the portion of the lease contract that represents an optional
vehicle service contract (“service contract” or “vehicle service contract”) for the leased
vehicle.
The motor vehicle lease agreements compute the monthly lease payments for a lease
beginning with the “gross capitalized cost” of the vehicle, which is generally equal to (i)
the agreed-upon value of the vehicle, as equipped at the lease signing, plus (ii) the
agreed-upon value of any accessories or optional equipment to be added after the lease
signing, plus (iii) the cost of any service contract purchased by the customer for the
leased vehicle, plus (iv) the acquisition fee. The gross capitalized cost is then reduced by
the “capital cost reduction,” which is generally equal to any cash (or trade) down
payment made by the customer. Finally, the monthly lease payments are computed based
on the difference (amortized over the term of the lease) between the gross capitalized cost
of the vehicle, as adjusted above, and the residual value of the vehicle at the end of the
lease term, (such difference being referred to hereinafter as the “lease base amount”).
Each service contract generally provides that XYZ, rather than the customer, will be
responsible for any repairs that need to be made to the vehicle during the contract period.
The purchase of the service contract is optional. Under the service contract, the customer
may have the vehicle serviced at any authorized dealership, and not simply the dealership
that leased the vehicle to the customer. The dealership that performs the repairs will issue
an invoice for the repair charge to XYZ and XYZ will pay such charges, including any
applicable sales taxes, to the dealership.
A vehicle service contract will be handled in one of the following three scenarios:
Scenario #1: The lease agreement and each of the monthly lease payment invoices
sent to the customer separately state the portion of each lease payment that is
attributable to any vehicle service contract purchased at the time of the lease and
the portion that is attributable to anything other than the vehicle service contract
(e.g., the value of the lease vehicle and any add-on accessories or equipment and
the acquisition fee.
2

Scenario #2: The monthly lease payment invoices do not separately state the
portion of each lease payment that is attributable to the purchase of the vehicle
service contract; however, the lease agreement does separately state the vehicle
service contract amount.
Scenario #3: Neither the lease agreement nor any of the monthly lease payment
invoices separately states the portion of each lease payment that is attributable to
the purchase of the vehicle service contract. However, the lease agreement does
separately state the cost of the vehicle service contract and the cost of the vehicle
(as well as the cost of any add-on accessories or equipment, acquisition fee, etc)
used in computing the gross capitalized cost, which is in turn used to calculate the
monthly lease payment.
The customer may also elect to purchase a vehicle service contract after the lease signing.
In this event, the price paid for the vehicle service contract is not amortized as part of the
monthly lease payment; instead, the customer pays the entire cost of the vehicle service
contract at the time of purchase.
Discussion:
Code Section 12-36-910(A) imposes “a sales tax, equal to [six] percent of gross proceeds
of sales, upon every person engaged ... within this State in the business of selling tangible
personal property at retail.”
Code Section 12-36-90 defines the term “gross proceeds of sales” and reads, in part:
Gross proceeds of sales, or any similar term, means the value proceeding
or accruing from the sale, lease, or rental of tangible personal property.
(1) The term includes:

(b) the proceeds from the sale of tangible personal property without any
deduction for:
(i)

the cost of goods sold;

(ii)

the cost of materials, labor, or service;

(iii) interest paid;
(iv) losses;
(v) transportation costs;
(vi) manufacturers or importers excise taxes imposed by the United
States; or
3

(vii) any other expenses.
(2) The term does not include:
(a)

a cash discount allowed and taken on sales;

Code Section 12-36-1310(A) imposes the use tax at the rate of six percent of the sales
price of the property “on the storage, use, or other consumption in this State of tangible
personal property purchased at retail for storage, use, or other consumption in this State.”
Code Section 12-36-130 defines the term “sales price” and reads:
"Sales price" means the total amount for which tangible personal property
is sold, without any deduction for the cost of the property sold, the cost of
the materials used, labor or service cost, interest paid, losses, or any other
expenses.
(1) The term includes:
(a) any services or transportation costs that are a part of the sale,
whether paid in money or otherwise; and
(b) any manufacturers or importers excise tax imposed by the United
States.
(2) The term does not include:
(a) a cash discount allowed and taken on the sale;
(b) an amount charged for property, which is returned by the purchaser,
and the full amount is refunded in cash or by credit;
(c) the value allowed for secondhand property transferred to the vendor
in partial payment; and
(d) the amount of any tax imposed by the United States with respect to
retail sales, whether imposed upon the retailer or consumer, except for
manufacturers or importers excise taxes.
Code Section 12-36-100 defines the terms “sale” and “purchase” to include a rental or
lease of tangible personal property.

4

Code Section 12-36-2110(A) establishes a maximum tax for motor vehicle (and certain
other items) and states in part
(A) The maximum tax imposed by this chapter is three hundred dollars for
each sale made after June 30, 1984, or lease executed after August 31,
1985, of each:

(2) motor vehicle;

In the case of a lease, the total tax rate required by law applies on each
payment until the total tax paid equals three hundred dollars. Nothing in
this section prohibits a taxpayer from paying the total tax due at the time
of execution of the lease, or with any payment under the lease. To qualify
for the tax limitation provided by this section, a lease must be in writing
and specifically state the term of, and remain in force for, a period in
excess of ninety continuous days.
Based on the above, the sale or lease of a motor vehicle is subject to the sales and use tax;
however, the maximum tax due on the sale of a motor vehicle is $300.00 and the
maximum tax due on the lease of a motor vehicle is $300.00 provided the lease is in
writing and specifically states a term of, and remain in force for, a period in excess of
ninety continuous days.
Effective for sales or renewals on or after October 1, 2005, Code Sections 12-36910(B)(6) and 12-36-1310(B)(6) impose the sales and use tax on the:
gross proceeds accruing or proceeding from the sale or renewal of
warranty, maintenance, or similar service contracts for tangible personal
property, whether or not such contracts are purchased in conjunction with
the sale of tangible personal property.
Code Section 12-36-60 defines the term “tangible personal property” to mean:
personal property which may be seen, weighed, measured, felt, touched, or
which is in any other manner perceptible to the senses. It also includes
services and intangibles, including communications, laundry and related
services, furnishing of accommodations and sales of electricity, the sale or
use of which is subject to tax under this chapter and does not include
stocks, notes, bonds, mortgages, or other evidences of debt. Tangible
personal property does not include the transmission of computer database
information by a cooperative service when the database information has
been assembled by and for the exclusive use of the members of the
cooperative service. (Emphasis added.)

5

As such, a charge for the sale or renewal of a warranty, maintenance, or similar service
contract for tangible personal property is subject to the sales and use tax, whether or not
such contract was purchased in conjunction with the sale of the tangible personal
property. In addition, since warranty, maintenance and similar service contracts are
subject to the sales and use tax, sales or renewals of warranty, maintenance and similar
service contracts are considered sales of tangible personal property for purposes of the
sales and use tax.
Code Section 12-36-2120 exempts from the tax:

(53) motor vehicle extended service contracts and motor vehicle extended
warranty contracts.

Based on the above, the sale or renewal of a warranty, maintenance or similar service
contract is subject to the sales and use tax. However, the sale or renewal of a motor
vehicle extended service contract or a motor vehicle extended warranty contract is
exempt from the sales and use tax.
In SC Revenue Ruling #06-9, the Department provided the following example with
respect to the application of the sales and use tax to the sale of a motor vehicle and an
automobile service contract:
The sale of a motor vehicle for $20,000.00 is subject to the tax; however,
the tax due is limited to $300.00 under the maximum tax provisions under
Code Section 12-36-2110. If the retailer sold the purchaser an extended
warranty contract for the motor vehicle for an additional $1,000.00, the
sales price ($1,000.00) of the extended service contract is exempt from the
tax under Code Section 12-36-2120(53). The total tax due on the motor
vehicle and the extended service contract would therefore be $300.00
($300.00 tax on the motor vehicle and $0.00 on the extended service
contract since it is exempt under Code Section 12-36-2120(53)).
Finally, the issue arises as to the application of the sales and use tax to the sale of a motor
vehicle and an automobile service contract if the charge for the automobile service
contract is not separately stated in the invoice or agreement provided to the customer.
The terms “gross proceeds of sales” and “sales price,” as cited above, are the basis for
calculating the sales tax and the use tax. These terms include all charges associated with
the sale at retail; however, the General Assembly has enacted two distinct impositions
with respect to the issue at hand. One imposition applies to sales of “typical” tangible
personal property and the other imposition applies to sales of warranty, maintenance and
similar service contracts.

6

Based on the above, when a retailer sells an optional warranty, maintenance or similar
service contract in conjunction with the sale or lease at retail of tangible personal
property, then the tax imposed under Code Section 12-36-910(A) (sales tax) or Code
Section 12-36-1310(A) (use tax) applies to the sale of the tangible personal property and
the tax imposed under Code Section 12-36-910(B)(6) or Code Section 12-36-1310(B)(6)
(use tax) applies to the sale of the warranty, maintenance or similar service contract.
The imposition of the tax under Code Section 12-36-910(B)(6) or Code Section 12-361310(B)(6) (use tax) does not apply to mandatory warranties, maintenance or similar
service contracts, such as a manufacturer’s warranty, since such contracts are not sold,
but are a part of the sale of the tangible personal property. It only applies to optional
warranty, maintenance or similar service contracts, whether or not sold in conjunction
with the tangible personal property (e.g., optional contracts sold by third parties, optional
contracts sold by manufacturers to extend the manufacturer’s warranty, optional contract
sold by the retailer of the tangible personal property).
The amount upon which the tax is calculated on an optional warranty, maintenance or
similar service contract sold in conjunction with the tangible personal property is the
amount listed in the sales contract for the warranty, maintenance or similar service
contract or the retail fair market value of the warranty, maintenance or similar service
contract if the amount for the warranty, maintenance or similar service contract is not
listed in the sales contract or if the amount listed in the sales contract does not reasonably
represent the retail fair market value of the warranty, maintenance or similar service
contract.
Based on the above, whether the sale price of the vehicle service contract is either
separately stated in the lease agreement (provided it reasonably represents the retail fair
market value of the vehicle service contract) or is accounted for based on its reasonable
retail fair market value, the sales price (including the service contract’s reasonable retail
fair market value if the sales price is not separately stated in the lease) of the optional
motor vehicle service contracts is exempt from the sales and use tax under Code Section
12-36-2120(53).
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Ray N. Stevens
Ray N. Stevens
, 2008
July 18
Columbia, South Carolina

7