Was the full price of a vehicle roadside-assistance membership taxable when it bundled a mechanical-breakdown warranty with nontaxable benefits?

Plain-English summary

The motor-vehicle dealer had to collect Tennessee sales tax on the full charge for the roadside-assistance membership. The agreement included a mechanical-breakdown benefit that paid or reimbursed covered vehicle-repair costs, less a deductible. The Department treated that benefit as a taxable warranty or service contract.

The membership also included roadside help, collision-related travel reimbursement, limited ambulance and legal-expense reimbursement, trip routing, and an automobile-theft reward. The ruling acknowledged that some of those benefits were not taxable services.

But the agreement charged one undivided price. Because it did not separate the taxable warranty benefit from the nontaxable benefits, the entire membership charge was taxable. The Department also observed that the mechanical-breakdown coverage appeared to be the plan's principal benefit.

What this means for you

Automobile dealers

Selling a vehicle-service warranty inside a broader roadside membership did not prevent tax when the customer paid one combined charge.

Roadside-assistance and warranty providers

The ruling turned on both the substance of the mechanical-breakdown coverage and the absence of separately stated charges. Merely adding nontaxable benefits did not make the bundle nontaxable.

Accountants and tax professionals

Identify every benefit in a membership agreement and determine whether the contract separately prices taxable and nontaxable components. This ruling applied the law in effect in 1996, so current-law treatment should be checked independently.

Common questions

Q: Why was the mechanical-breakdown benefit taxable? A: It promised payment or reimbursement for covered automobile repairs, so the Department treated it as a warranty or service contract for tangible personal property.

Q: Were all of the plan's benefits taxable by themselves? A: No. The ruling said the agreement included some nontaxable services.

Q: Why was the entire price taxed?
A: The agreement did not separate the charge for the taxable warranty benefit from charges for the nontaxable benefits.

Q: Did the importance of the warranty matter?
A: The Department noted that the mechanical-breakdown benefit appeared to be the principal membership benefit.

Q: Can another dealer rely on this ruling?
A: No. It binds the Department only for the addressed taxpayer and facts.

Citations and references

• Tenn. Code Ann. § 67-6-205 — tax on the gross charge for taxable services, as cited in the ruling.
• Tenn. Code Ann. § 67-6-102 — charges for warranty or service contracts covering repair or maintenance of tangible personal property, subsection (ix) as cited in the ruling.

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/96-06.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #96-06
WARNING

Letter rulings are binding on the Department only with respect to the individual taxpayer being addressed in the ruling. This presentation of the ruling in a redacted form is informational only. Rulings are made in response to particular facts presented and are not intended necessarily as statements of Department policy.

SUBJECT
The application of the sales tax to the sale of a [VEHICLE EMERGENCY ROADSIDE ASSISTANCE PLAN]. SCOPE This letter ruling is an interpretation and application of the tax law as it relates to a specific set of existing facts furnished to the department by the taxpayer. The rulings herein are binding upon the department, and are applicable only to the individual taxpayer being addressed. This letter ruling may be revoked or modified by the commissioner at any time. Such revocation of modification shall be effective retroactively unless the following conditions are met, in which case the revocation shall be prospective only: (A) The taxpayer must not have misstated or omitted material facts involved in the transaction; (B) Facts that develop later must not be materially different from the facts upon which the ruling was based; (C) The applicable law must not have been changed or amended; (D) The ruling must have been issued originally with respect to a prospective or proposed transaction; and (E) The taxpayer directly involved must have acted in good faith in relying upon the ruling and a retroactive revocation of the ruling must inure to his detriment. FACTS The taxpayer is a motor vehicle dealer. In conjunction with his sale of motor vehicles he sells memberships in the [VEHICLE EMERGENCY ROADSIDE ASSISTANCE

PLAN]. Attached and incorporated by reference in this ruling request is a copy of the
[VEHICLE EMERGENCY ROADSIDE ASSISTANCE PLAN] purchaser application and membership agreement. As provided in the membership agreement, the [VEHICLE EMERGENCY ROADSIDE ASSISTANCE PLAN] provides the following benefits: A. Emergency Roadside Assistance - Provides the following benefits, subject to a $50 per occurrence cap: towing of a disabled vehicle, jump start if battery failure occurs, flat tire assistance (installation of spare only), gasoline or other fluid delivery service (does not cover cost of fluid), extrication from snow, mud or sand, lock-out assistance (vehicle entry only). This benefit does not cover cost of parts or repairs except as specifically described. B. Emergency Travel Expense Reimbursement - In the event of a accidental disabling of a covered vehicle through collision this benefit may provide reimbursement of the costs of transportation, meals, lodging, and rental of an automobile. C. Ambulance Assistance Reimbursement - Reimbursement of the cost of an ambulance up to $50. D. Custom Trip Routing Service - Member can request Trip Routing package. Package will contain routings, information and maps. E. Legal Defense Reimbursement - Provides limited reimbursement of legal expenses. F. $1000 award for information leading to arrest and conviction of anyone stealing member’s automobile. G. Mechanical Breakdown Benefit - This benefit will pay the reasonable cost of repair or reimbursement of the cost of repair by a qualified repair facility, less a deductible. The standard plan covers the engine, transmission, front wheel drive, drive axle, radiator fan motor, front suspension, steering, fuel pump, air conditioner, brakes, and some specifically listed electrical components. This benefit is administered by the [NAME OF COMPANY].

QUESTION
Whether the sale of the [VEHICLE EMERGENCY ROADSIDE ASSISTANCE PLAN] is subject to sales tax.

RULING
The sale of the [VEHICLE EMERGENCY ROADSIDE ASSISTANCE PLAN] is subject to sales tax.

ANALYSIS
T.C.A. Section 67-6-205 imposes “a tax at the rate of six percent (6%) of the gross charge for all services taxable under this chapter.” T.C.A. Section 67-6-102 defines the terms "retail sale," "sale at retail" and "retail sales price" include the following: (ix) Charges for warranty or service contracts warranting the repair or maintenance of tangible personal property; provided, that any repairs to the extent covered by the contract shall not also be subject to tax; Under the provisions of the membership agreement, the Mechanical Breakdown Benefit is clearly a warranty or service contract warranting the repair or maintenance of the member’s automobile. Therefore the charge for the membership agreement will be subject to sales tax. Although the agreement as a whole includes certain benefits which are not sales taxable services, the agreement does not separate charges for taxable services from charges for nontaxable services. The entire charge is therefore subject to sales tax. It should be noted that in the context of the agreement, the Mechanical Breakdown Benefit appears to be the principal benefit conferred by the purchase of a membership in the [VEHICLE EMERGENCY ROADSIDE ASSISTANCE PLAN].

Steven Thomas
Senior Tax Counsel

APPROVED: Ruth E. Johnson

DATE: 2-5-96