Were monthly charges for a repair plan covering an existing connected residential water heater subject to South Carolina sales tax?

Plain-English summary

The South Carolina Department of Revenue ruled that monthly charges for the described residential water-heater repair plan were not subject to sales and use tax. The plan covered an existing electric or gas heater connected to the home, including repair or replacement for normal wear and tear up to an annual limit.

South Carolina taxed sales and renewals of warranty, maintenance, and similar contracts for tangible personal property. The Department concluded that a connected water heater incorporated into the home was instead a real-property fixture when the contract was sold or renewed.

Because the contract covered real property rather than tangible personal property, its monthly fee fell outside the service-contract tax provision applied in the ruling.

What this means for you

Home-service plan providers

Identify what property the contract covers at the time of sale or renewal. A plan for a fixture may be treated differently from a plan covering movable appliances or other tangible personal property.

Utilities and billing companies

The result did not turn on the utility collecting the monthly charge, keeping an administrative fee, or using a third-party administrator. The covered property's fixture status controlled.

Tax professionals

Fixture classification is factual. The ruling referenced attachment, the item's character, the annexing parties' intent, and their relationship.

Common questions

Q: Why was the repair-plan fee not taxable?
A: The plan covered a water heater that had become part of the home and was therefore real property, not tangible personal property.

Q: Are all appliance warranties nontaxable?
A: No. The ruling said warranty and maintenance contracts for tangible personal property were taxable; this plan differed because of fixture status.

Q: Did replacement coverage change the answer?
A: No on the stated facts. The program's repair-and-replacement coverage still related to the existing connected real-property fixture.

Q: Can another provider rely on this PLR?
A: No. It binds the Department only for the requesting taxpayer and facts presented.

Citations and references

• S.C. Code §§ 12-36-910(B) and 12-36-1310(B) (warranty, maintenance, and similar contracts for tangible personal property)
• S.C. Code § 12-36-60 (tangible personal property definition)
• City of North Charleston v. Claxton, 431 S.E.2d 610 (S.C. 1993) (fixture criteria)
• Paris Mountain Water Co. v. Woodside, 133 S.C. 383, 131 S.E. 37 (1925) (intended permanence of an annexed article)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR09-1.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 #09-1

SUBJECT:

Residential Water Heater Repair Program
(Sales and Use Tax)

REFERENCES: S. C. Code Ann. Section 12-36-910 (2000, Supp. 2007)
S. C. Code Ann. Section 12-36-1310 (2000, Supp. 2007)
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:
Are the monthly charges by XYZ Company (d/b/a ABC) to residential customers for its
repair program for existing, connected water heaters subject to the sales and use tax?
Conclusion:
The monthly charges by XYZ Company (d/b/a ABC) to residential customers for its
repair program for existing, connected water heaters are not subject to the sales and use
tax since the sales tax is only imposed on sales or renewals of warranty, maintenance, or
similar service contracts for tangible personal property and the water heaters in question
are real property at the time of the sales or renewals of the warranty contracts.
Facts:
XYZ Company, d/b/a/ ABC, (“ABC”) is a public utility corporation that will be offering
its residential customers in South Carolina the opportunity to participate in a Water
Heater Repair Program (“the program”).

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The program will cover the repair and replacement of a customer’s existing, connected
electric or gas water heater due to normal wear and tear, up to an annual maximum of
$750.00. The retail cost of the program to customers will be $4.99 per month per water
heater. There will be no deductibles for repairs or service calls; however, the cost of any
repairs completed that exceed the annual maximum of $750.00 will be the responsibility
of the customer and will be due at the time the service is rendered.
There is a 30–day waiting period from the day a customer enrolls in the program before a
customer is eligible for repair services. Once a customer makes the first monthly
payment, the customer is enrolled and the 30-day waiting period begins. The term of the
program begins at the end of the 30-day waiting period when the customer is eligible for
covered repairs and remains in effect provided there is not a failure of the customer to
make a monthly payment. A term is defined as a month in length. If a customer moves,
the program is not transferable to the customer’s new residence and the customer must
enroll in the program at the new residence.
ABC has contracted with a third party to administer the program (“Administrator”). The
contract with the Administrator also gives the Administrator the right to market and sell
agreements under the program to ABC’s customers, and customer agreements under the
program will be the exclusive property of the Administrator. The customer agreements
will be written between the customers and a subcontractor of the Administrator.
Customers will call a toll-free number owned by the Administrator to request service.
Service will be performed by a subcontractor of the Administrator; however, ABC’s vans
(with ABC’s logo) will be used and technicians will carry identification badges with
ABC’s name.
Under the terms of ABC’s contract with the Administrator, ABC will bill customers for
the monthly fees on their electric bills and remit the monthly fees, less an administrative
fee or commission, to the Administrator. All work completed will be covered from the
Administrator’s portion of the monthly fee. ABC will not be billed by the Administrator
for labor or the purchase of parts used in the performance of the warranty work.
Discussion:
Effective for sales or renewals on or after October 1, 2005, Code Sections 12-36-910(B)
and 12-36-1310(B) 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.

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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.)
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.
Based on the above, if the water heaters are tangible personal property, then the charges
for the warranty contracts are subject to the tax (unless otherwise exempt under the law).
If the water heaters are real property, then the charges for the warranty contracts are not
subject to the tax.
For additional guidance in this matter, we refer to City of North Charleston v. Claxton,
431 S.E.2d 610 (S.C. 1993). While that case dealt with the value of property in a
condemnation proceeding, it also addressed the issue of real (fixtures) versus personal
property.
Quoting from that case:
Criteria for determining whether an item remains personalty or becomes a
fixture when affixed to realty includes: (1) the mode of attachment; (2) the
character of the structure of the article; (3) the intent of the parties making
the annexation; and, (4) the relationship of the parties. Creative Displays,
272 S.C. at 72, 248 S.E.2d at 918.
The Court, in Claxton, referenced Rebel Manufacturing and Marketing Corporation 54
B.R. 674 (Bkrtcy. D.S.C. 1985). In that case, a bank argued that the sale of a mobile
home was subject to a mortgage on the realty because it was a fixture [real property]. The
mobile home was underpinned, anchored, and connected to sewerage, water and electric
lines. Also, the home had a screened porch attached and was adjacent to several large
trees.

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In ruling for the bank, the Court reasoned:
The various substantial structures and trees surrounding the mobile home
would be severely damaged, if not destroyed, should the mobile home be
removed.

It seems clear that the debtor's positioning the mobile home among the
trees, and adding the construction [the porch] warrants the inference that
the intent of the debtor was for the mobile home to become a part of the
realty.
Paris Mountain Water Company v. Woodside 133 S.C. 383, 131 S.E. 37 (1925), a South
Carolina State Supreme Court case, was concerned with whether water pipes placed in
lands belonging to others were to be taxed as realty or personalty. The Court, in holding
that the pipe was to be taxed as realty, stated:
In the requirement of an intention to make the article annexed a permanent
accession to the land, the expression of permanent does not, it seems,
imply that the annexation must be intended to be perpetual, but rather that
the article shall appear to be intended to remain where fastened until worn
out, until the purpose to which the realty is devoted has been
accomplished, or until the article is superseded by another article more
suitable for the purpose.
Based on the above, water heaters that become a part of a home are real property. As
such, the monthly charges by XYZ Company (d/b/a ABC) to residential customers for its
repair program for existing, connected water heaters are not subject to the sales and use
tax since the sales tax is only imposed on sales or renewals of warranty, maintenance, or
similar service contracts for tangible personal property and the water heaters in question
are real property at the time of the sales or renewals of the warranty contracts.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Ray N. Stevens
Ray N. Stevens, Director
February 24
, 2009
Columbia, South Carolina

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