When a fleet company's damaged tires are adjusted and replaced under a manufacturer's or dealer's warranty, and the tires were originally sold on open account, how is Texas sales tax figured on the replacement or credit?

Plain-English summary

This letter (two combined responses from Al Van Allen of the Comptroller's Tax Administration Division, dated October 11, 1994 and April 6, 1995) addresses a company — apparently a trucking or fleet operator — that buys tires on open account from authorized dealers of at least three major tire manufacturers. When a tire on one of its vehicles is damaged, the company replaces it immediately from its own spare-tire inventory (not from the dealer's stock). The damaged tire is later inspected by the dealer's representative, and if the dealer approves a warranty return, the company receives credit — but only for a brand the dealer carries, and the replacement doesn't have to match the original tire's brand, only its size.

The company's monthly billing from the dealer includes sales tax, but subsequent credit memos applying warranty adjustments do not include tax. The company asked how tax should be handled on these adjustments.

The Comptroller's answer turns on timing and mechanism:

• General warranty adjustment (October 1994 letter): Tire dealers and installers are treated as repairing motor vehicles under the (now-repealed) Rule 3.359. No tax is due on parts or labor furnished by the manufacturer to repair a vehicle under a manufacturer's warranty. When a customer returns a defective tire for adjustment, the dealer routinely credits the customer on a new tire, which reduces both the sales price and the tax due — and tax can be adjusted the same way, as long as tax was properly charged on the initial transaction.
• Refined answer for tires sold on open account (April 1995 letter): The Comptroller amended the October 1994 letter to clarify that the tax treatment depends on the synchronization of tire adjustments and purchases. Under Tax Code Section 151.007(c)(5), the sales price does not include the separately identified value of tangible personal property a seller takes in trade as consideration for a sale of a taxable item. So:
  • If a tire is traded in at the time of a tire purchase or replacement, that trade-in value reduces the taxable sale amount for that transaction.
  • If the company instead draws on previously accrued credits (i.e., credit built up from earlier warranty adjustments, applied later) to offset a purchase, that use of past credits does not qualify as a trade-in, and the total sales price of that later purchase is taxable.

An editorial alert on the letter notes that Rule 3.359 (cited in the 1994 response) has since been repealed, and readers should look to Rule 3.290 for current motor vehicle repair guidance.

What this means for you

Fleet operators and businesses that buy tires on open account

Whether a warranty tire adjustment reduces your taxable purchase price depends on exactly when the credit is applied. If the damaged tire is traded in and credited at the same time you buy or receive the replacement, that trade-in value reduces the taxable sales price under Section 151.007(c)(5). If you instead accumulate warranty credits and apply them to a later, separate purchase, that later purchase is fully taxable — the earlier credit does not carry forward as a tax-reducing trade-in.

Tire dealers and installers

When you credit a customer for a defective tire returned under a manufacturer's warranty and issue a new tire in the same transaction, both the sales price and the tax due can be reduced accordingly — provided tax was properly charged on the original sale. Installing and repairing tires is treated as motor vehicle repair, and no tax is due on parts or labor the manufacturer itself furnishes under its warranty.

Accountants and tax professionals

Track whether warranty credit memos are applied contemporaneously with a purchase (a true trade-in under Section 151.007(c)(5)) or are being used later against an unrelated purchase (not a trade-in, fully taxable). This distinction, not the existence of the warranty credit itself, determines whether tax is reduced. Also note the letter's own alert: the cited Rule 3.359 has been repealed; consult Rule 3.290 for current motor vehicle repair rules.

Common questions

Q: If a warranty-damaged tire is credited and replaced in the same transaction, is tax reduced?
A: Yes. Under Tax Code Section 151.007(c)(5), the separately identified trade-in value reduces the taxable sales price of that purchase or replacement.

Q: What if the company uses warranty credit accrued from an earlier adjustment to pay for a later, unrelated tire purchase?
A: That is not a trade-in. The full sales price of that later purchase remains taxable.

Q: Is tax due on parts or labor a manufacturer provides to repair a vehicle under its warranty?
A: No — the letter states no tax is due on parts or labor furnished by the manufacturer to repair a motor vehicle under a manufacturer's warranty.

Q: Does the replacement tire have to be the same brand as the damaged one?
A: No. Per the facts described, only the size must match; the brand can differ (e.g., a brand X tire can be replaced with brand X, Y, or Z), though the dealer's or manufacturer's credit is given only for the brand that dealer carries or makes.

Q: Is Rule 3.359, referenced in this letter, still in effect?
A: No. The letter carries an alert noting Rule 3.359 has been repealed; see Rule 3.290 for motor vehicle repair issues.

Citations and references

Statutes:

• Tex. Tax Code § 151.007(c)(5) (sales price excludes separately identified trade-in value)

Regulations (as referenced in the letter):

• 34 Tex. Admin. Code Rule 3.359 (cited in the original 1994 response; noted in the letter's alert as since repealed)
• 34 Tex. Admin. Code Rule 3.290 (current rule for motor vehicle repairs, per the letter's alert)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9504L1345B07

Original ruling text

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

April 6, 1995

Dear **:

Thank you for your recent letter. Your original letter is included by
reference. The additional facts you presented are restated with
response below.

• We are dealing with at least three major manufacturers of tires and
  their authorized dealers.

• When a tire is damaged on a vehicle, it is usually replaced with a
  tire out of our own inventory of spares. The replacement tire does not
  come from local dealer's inventory, as it would on a retail exchange of
  a passenger vehicle.

• When the damaged tire is replaced, the replacement is not necessarily
  of the same brand as the damaged tire. All that is required is that the
  replacement be of the same size. (i.e. a brand X can be replaced with a
  brand X, Y, or Z). Also, the spare that is placed on the truck can be a
  repaired, a recapped, or a new tire depending on the wheel position of
  the tire; steering, drive or trailer.

• The damaged tire is taken to our truck shop and stored in our tire
  warehouse until the dealer's representative can come by and inspect the
  tire. Only after the dealer's representative has inspected the tire and
  approved a warranty return does our company receive credit.

• The dealer's or manufacturers' credit is given only for the brand that
  they carry or make.

• The dealer may not necessarily have sold the tire to us. The dealer
  can also give a credit for a tire that was original equipment on a new
  truck as long as it is a brand that the dealer carries.

• We purchase sufficient new tires of style and size from each
  manufacturer to more than cover credits given in both units and dollar
  amount.

Response: I would like to amend my letter of October 11, 1994. The tax
treatment of tires sold on open account that are subsequently adjusted
and replaced will depend on the synchronization of tire adjustments and
purchases. Section 151.007 (c)(5) of the Texas Tax Code states that the
sales price or receipts does not include the separately identified value
of tangible personal property taken by a seller in trade as all or part
of the consideration for a sale of a taxable item. As a result, the
trade-in of a tire on a tire purchase or replacement at the time of the
purchase or replacement would reduce the taxable sale amount. A use of
past credits accrued would not qualify as a trade-in and the total sales
price would be taxable.

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

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

NOTE: Previous Accession Number 9504054L