Does a tire dealer owe sales tax on the sales price and does a warranty credit for a returned defective tire reduce the tax due, when tires are sold on open account and later adjusted under a manufacturer's warranty?

Plain-English summary

A tire dealer wrote to the Comptroller's office about how to handle sales tax when tires sold on open account are later adjusted and replaced under a manufacturer's warranty. The dealer's monthly billing included sales tax, but the credit memos it later applied against those bills — for tires returned and adjusted under warranty — did not include any offsetting sales tax.

The Comptroller explained that selling and installing tires is treated as repairing a motor vehicle. No tax is due on parts or labor that a manufacturer furnishes to repair a vehicle under a manufacturer's warranty, a rule that at the time was addressed by Rule 3.359 (since repealed; motor vehicle repair issues are now addressed by Rule 3.290). When a customer returns a defective tire for a warranty adjustment, the dealer routinely credits the customer toward a new tire, which reduces both the sales price and the tax due on it. The Comptroller found no reason to treat the tax differently: tax may be adjusted in the same manner as the tire's price, provided tax was properly charged on the original transaction.

What this means for you

Tire dealers and auto repair shops

If you sell tires on open account and later issue warranty credit memos for defective tires, you can reduce the sales tax on the credit memo in the same proportion as the reduction in the tire's price — as long as you charged tax correctly on the original sale. You do not need to charge tax separately on parts or labor a manufacturer provides under its own warranty, since selling and installing tires is treated as motor vehicle repair.

Accountants and tax professionals

Note the ALERT at the top of this letter: the rule it discusses, Rule 3.359, has since been repealed, and motor vehicle repair questions are now governed by Rule 3.290. Use this letter for its underlying reasoning about warranty credits and tax adjustments, but confirm current treatment against Rule 3.290 and any more recent guidance before relying on it.

Common questions

Q: Is tax due on parts or labor a manufacturer provides under a warranty to repair a vehicle?
A: No. Selling and installing tires is treated as motor vehicle repair, and no tax is due on parts or labor furnished by the manufacturer to repair a vehicle under a manufacturer's warranty.

Q: If a customer returns a defective tire and gets a credit toward a new tire, does the sales tax also get adjusted?
A: Yes. The credit reduces both the sales price and the tax due in the same manner, as long as tax was properly charged on the initial transaction.

Q: Is the rule this letter relies on still in effect?
A: No. The letter itself flags that Rule 3.359 has been repealed; issues relating to motor vehicle repairs are now addressed under Rule 3.290.

Citations and references

• 34 Tex. Admin. Code Rule 3.359 (cited in the letter as governing motor vehicle repair; repealed)
• 34 Tex. Admin. Code Rule 3.290 (cited in the letter's ALERT header as the current rule for motor vehicle repairs)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9410685L

Original ruling text

ALERT: The cited rule, Rule 3.359 has been repealed. See Rule 3.290 for issues relating to Motor Vehicle repairs.

October 11, 1994

Dear **

Thank you for your recent letter regarding the tax treatment of tires sold on open account that are subsequently adjusted and replaced Under a

manufacturer's warranty. You mentioned that your monthly billing includes sales tax while subsequent credit memos that you apply to the monthly bills do not include sales tax as part of the total.

I'd like to preface my response with the following comments. Folks that sell and install tires are considered to be repairing motor vehicles.

This function is included in the enclosed Rule 3.359. No tax is due on parts or labor furnished by the manufacturer to repair a motor vehicle under a manufacturer's warranty.

When an individual returns a defective tire to the dealer for adjustment, the dealer routinely gives the customer credit on a new tire thus

reducing both the sales price and the amount of tax due. This should be no different. Tax may be adjusted in the same manner as the tire if tax is properly charged on the initial transaction.

This Opinion is rendered based on the facts you submitted. Other facts, though similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct line is 512/463-4680. You may also write to Tax Administration,

Comptroller of Public Accounts.

Sincerely,

Al Van Allen

Tax Administration Division