Was an extended warranty for repairs to a residential heating and air-conditioning system subject to Texas sales tax?

Plain-English summary

The requester sold central heating and air-conditioning systems to residential customers and also sold an extended warranty purchased from another company. The warranty covered repair labor and parts. The requester's business performed covered repairs and billed the warrantor.

The Comptroller said the sale of an extended warranty for residential real-property repair was not taxable. The original warrantor was responsible for sales and use tax on parts incorporated into the realty. The requester's business, treated as a third-party warrantor in this arrangement, owed tax on supplies, materials, and equipment used in the repair but not incorporated into the realty.

Labor to repair residential real property was not taxable. The letter pointed to Rule 3.292(e)(2)(E) and (b) as a guide and compared the nontaxable residential-repair labor to labor repairing aircraft, motor vehicles, and commercial vessels.

What this means for you

The customer-facing warranty charge and residential repair labor were nontaxable under the letter, but that did not eliminate tax within the repair chain. The warrantor and repair provider still had tax responsibilities for parts and other consumed inputs.

The allocation depended on whether an item became part of the real property and on whether the business acted as the original or a third-party warrantor.

Common questions

Was the extended residential repair warranty taxable? No.

Was the repair labor taxable? No, because it was labor to repair residential real property.

Who paid tax on parts incorporated into the realty? The original warrantor, according to the letter.

What did the third-party warrantor pay tax on? Supplies, materials, and equipment used in the repair but not incorporated into the realty.

Citations and references

• 34 Tex. Admin. Code Rule 3.292(e)(2)(E) and (b) — repair guidance cited by the letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9108L1124B10

Original ruling text

August 2, 1991

Dear ****:

Thank you for your recent letter regarding the taxability of an
extended warranty for residential real property repair.

You stated in your letter that your firm sells central heating and
air conditioning systems to residential customers and also offers
an extended warranty at an additional cost. The contracts are
purchased from another company. The warranty covers labor and
parts necessary for repairs. Under the contract provisions, your
business performs any required repairs and then bills the
warrantor for your charges to do the repair.

The sale of an extended warranty for residential real property
repair is not taxable. The original warrantor is responsible for
all sales and use tax applicable to parts which become part of the
realty being repaired. *** in this situation is a "third
party" warrantor and owes tax on all supplies, materials and
equipment used to perform the repair, but are not actually
incorporated into the realty. Labor charged for repair to
residential real property is not taxable.

The enclosed Rule 3.292 on repair of tangible personal property
may be used as a guide to the taxability of an extended warranty
for real property repair (refer to sections (e)(2)(E) and (b)).
The similarity is that labor to repair residential real property
is not taxable, just as the labor to repair an aircraft, motor
vehicle or commercial vessel is not taxable.

This opinion is based on the facts presented. If there are
additional or different facts, the opinion may change.

If you have any questions or need more information, you may call
me toll free at 1-800-531-5441, extension 5-0330. The regular
number is 512/463-4600, or write Tax Administration Division.

Sincerely,

Bettie U. Peterson
Tax Administration Division