Were marine mechanical-breakdown policies taxable when sold for pleasure boats, and did the answer change for large vessels used exclusively in commerce?

Plain-English summary

Rule 3.292 treated extended warranties, service contracts, and service policies for repairing tangible personal property as taxable. Rule 3.355 excluded qualifying insurance premiums and other insurance compensation subject to the Texas Insurance Code.

The Comptroller's initial review did not find marine mechanical-breakdown premiums subject to the Insurance Code's gross-premium taxes. It therefore treated the described policies as taxable service policies when sold for sport-fishing boats or other pleasure vessels.

The policies were not taxable when sold for vessels of at least eight tons fresh-water displacement used exclusively for commercial purposes.

What this means for you

Calling a product insurance did not settle its sales-tax treatment. The letter examined whether the premium fell within the insurance-tax exclusion and then applied a separate exemption for qualifying large commercial vessels.

Common questions

Were policies for pleasure boats taxable? Yes.

Were policies for qualifying commercial vessels taxable? No.

What vessel threshold did the letter state? At least eight tons fresh-water displacement and exclusive commercial use.

Citations and references

• 34 Tex. Admin. Code Rule 3.292(a)(2) and (e)(2)(A) — service-contract definitions and taxability
• 34 Tex. Admin. Code Rule 3.355(c)(1) and (e) — insurance-service exclusions

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9108L1130B05

Original ruling text

August 29, 1991

Dear *****:

Thank you for your letter of July 18, 1991, concerning the taxability
of marine mechanical breakdown policies.

Section (e)(2)(A) of Rule 3.292 concerning repairing tangible personal
property states that tax is due on the sale of an extended warranty,
service contract or service policy for the repair or maintenance of
tangible personal property. An extended warranty or service contract
is defined in section (a)(2) of the rule.

Section (c)(1) of Rule 3.355 - Insurance Services excludes from the
imposition of the tax sales of insurance coverage for which a premium is
paid or sales commissions are paid to insurance agents. Section (e) of
this rule excludes from the tax insurance premiums and any other fees
or compensation subject to taxation under the Texas Insurance Code.

Our initial review of the Texas Insurance Code does not indicate that
marine mechanical breakdown insurance "premiums" are subject to the
gross premiums taxes under that code. We found information regarding
various types of insurance that are subject to the gross premium taxes
including, but not limited to, casualty insurance, life and health
insurance, and fire and marine insurance; however, no references were
found regarding marine mechanical breakdown policies.

We must conclude that sales and use tax is due under Rule 3.292(e)(2)
(a) when marine mechanical breakdown policies are sold for sports fishing
boats or any other vessels used for pleasure. Marine mechanical
breakdown policies are not taxable when they are sold for vessels of
eight or more tons fresh-water displacement that are used exclusively
for commercial purposes.

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

You may call toll free 1-800-252-5555 if you have any questions or need
more information. You may write to Tax Administration Division,
Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division