When a customer damages a tire under a road hazard warranty and gets a credit toward a replacement tire, is the replacement tire taxable and can the original sales tax be refunded?

Plain-English summary

A tire dealer sells an optional nationwide "Road Hazard Warranty" alongside new tire purchases. If a covered tire blows out or gets punctured or damaged by a road hazard, the customer must buy a replacement tire, and the dealer then credits or refunds the amount of the original tire's purchase price (not including the labor charge for the original mounting/balancing). The credit can be applied at the dealer's own shop, carried as store credit, or paid out directly to the customer or another tire shop. The dealer asked two things: can the original sales tax be refunded when this warranty credit kicks in, and is the replacement tire itself taxable?

The Comptroller ruled no tax refund, and yes the replacement tire is taxable. The warranty payout is legally a separate transaction from the original sale — it's a payment under a warranty contract, not a trade-in and not a reversal of the original sale — so neither the dealer nor the customer gets back the sales tax already paid and remitted on the original tire. Separately, buying the replacement tire is a brand-new taxable sale in its own right, so the customer owes sales tax on the replacement tire's purchase price (and on any additional parts needed to mount it), though a separately stated labor charge for installation remains nontaxable, as always for tire mounting/balancing services.

What this means for you

Tire retailers and dealers selling extended/road-hazard warranties

A warranty credit is not a mechanism for undoing the tax already collected on the original sale — don't try to net the original tax against a warranty credit. Instead, treat the replacement tire purchase as a fresh, fully taxable sale (minus any separately stated labor), regardless of how the customer's credit gets applied (in-store, cash payment, or payment to another shop).

Warranty and extended-service-plan providers generally

The sale of the warranty contract itself is not subject to sales tax (per the cited 1988 Comptroller's Decision) — only the underlying product sales (the original tire, and later the replacement tire) are taxed. Keep the warranty-fee revenue conceptually and administratively separate from the taxable product sales it protects.

Accountants and tax professionals

The ruling reaffirms that separately stated labor for installing/mounting a component part of a motor vehicle (tires included) stays nontaxable under Rule 3.290(h) and (k), even when it's part of the same overall replacement transaction as a taxable parts sale — a useful confirmation for any motor-vehicle-repair invoicing analysis.

Common questions

Q: If a warranty pays for a replacement tire, does the customer get their original sales tax refunded?
A: No — the warranty credit is a separate transaction, not a reversal of the original sale, so no refund of the tax already paid and remitted on the original tire is due.

Q: Is the replacement tire itself taxed?
A: Yes — buying a replacement tire under warranty is a brand-new sale, taxable in full (minus any separately stated labor charge for mounting/balancing).

Q: Is the sale of the road hazard warranty itself taxed?
A: No — per prior Comptroller guidance, selling a warranty contract is not a taxable transaction; only the tire sales themselves are taxed.

Q: Can another tire dealer rely on this ruling for its own warranty program?
A: No. It's a private letter ruling binding on the Comptroller only for the taxpayer and facts submitted, and it cannot be relied on by any other taxpayer.

Citations and references

Statutes and decisions:

• Tex. Tax Code § 151.051 (Sales Tax Imposed); § 151.010 ("Taxable Item"); § 151.005 ("Sale" or "Purchase")
• Comptroller's Decision No. 22,712 (1988) (sale of a warranty contract not taxable)
• 34 Tex. Admin. Code Rule 3.290(h), (k) (Motor Vehicle Repair and Maintenance — separately stated labor nontaxable)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201807009L

Original ruling text

July 11, 2018

RE: Private Letter Ruling No. 2017010173

*, Taxpayer No. *

Dear ***:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[ ENDNOTE: 1] We are responding to your requests dated May 22, 2017 and Aug. 8, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You have requested guidance on the sales tax responsibilities of *** (Taxpayer) on the transfer of tires to Taxpayer’s customers in connection with damages covered by a Road Hazard Warranty (Warranty).

Facts Presented

The facts are based on information presented in your initial email, dated May 22, 2017, and additional documents you provided on Aug. 8, 2017, which included sample invoices and Taxpayer's nationwide Warranty.

Taxpayer is in the business of selling, balancing, and installing tires that are mounted on motor vehicles and trailers designed for highway use. When customers purchase tires, Taxpayer provides an invoice that separately states the charges for materials and for the labor to install and mount the tires.

Taxpayer sells an optional nationwide Warranty that is available for purchase in connection with the purchases a new tire. The Warranty provides that Taxpayer will credit or refund the purchase price of a tire should the customer blow out, puncture, or damage the tire due to a road hazard. Under the terms of the Warranty, the customer must purchase the replacement tire. Taxpayer will then provide the customer with a credit towards the purchase in the amount of the original purchase price of the tire under warranty. The original purchase price of the tire under warranty does not include labor charges for mounting and balancing the tire on the initial purchase of the tire.

A customer may receive the Warranty credit in one of several ways. The credit may be applied toward the cost of a replacement tire obtained at Taxpayer's shop; the customer may carry an in-store credit with Taxpayer toward a future purchase; Taxpayer may make a payment directly to a customer who, for example, has traveled outside the area and paid for the replacement tire directly to another vendor; or Taxpayer may make a payment directly to another tire shop.

Questions, Rulings, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question One: Can Taxpayer refund the sales tax a customer paid on the initial purchase of a tire under Warranty when the customer damages the tire, purchases and replaces the tire, and obtains a credit from Taxpayer?

Ruling One: No, a customer should not receive a refund of sales tax paid on the initial purchase of a tire when the tire is damaged and, under the Warranty, the customer receives a credit in the amount of the intial purchase price of the damaged tire.

Question Two: Is the sale of a replacement tire subject to sales tax when the damaged tire is covered by the Warranty?

Ruling Two: Yes, sales tax is due on the sale of a replacement tire. A separately stated charge for labor to repair or install a component part of a motor vehicle, including a tire, is not taxable.

Analysis:

Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “taxable item” includes tangible personal property, such as tires, and taxable services. Section 151.010 (“Taxable Item”).

The initial sale of the tire is subject to sales tax, unless an exemption applies. Section 151.005 (“Sale” or “Purchase”), in relevant part, defines a “sale” as, “a transfer of title or possession of tangible personal property” for consideration. The sale of a Warranty is not subject to sales tax. See Comptroller's Decision No. 22,712 (1988).

If the customer damages a tire that is under warranty, purchases a replacement tire, and then receives a credit from Taxpayer in the amount of the initial purchase price of a damaged tire, the payment of the credit is a transaction separate from the initial sale. The credit is a payment under warranty for a tire damaged by a road hazard. The credit is not the result of a trade in. Neither Taxpayer nor the customer is eligible for a refund of sales tax paid and remitted on Taxpayer’s initial purchase.

In addition, the customer owes sales tax on the purchase price of a replacement tire. In this case, a new sale has occurred. In addition, the customer will owe tax on any additional parts required to mount and install the replacement tire. See Rule 3.290(h), (k) (Motor Vehicle Repair and Maintenance; Accessories and Equipment Added to Motor Vehicles, Moveable Specialized Equipment). A separately stated charge for labor is not taxable.

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 2017010173.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.