Is a manufacturer's post-warranty travel-expense charge, travel extension contract, and extended service contract for repairing equipment taxable in Texas, and does bringing replacement parts into Texas under a warranty or service contract create a use tax liability?

Plain-English summary

This letter responds to ABC, Inc., a Nebraska-based manufacturer of scientific laboratory instruments and wastewater monitoring equipment that is licensed to collect and remit Texas sales tax. ABC asked about the taxability of several charges tied to its newly designed SFX 3560 Extractor System.

Every Extractor System comes with a one-year limited warranty covering both parts and labor, bundled into the unit's sale price (not billed separately) — so if the system itself is taxable, the bundled warranty is too. An ABC technician provides on-site repair service at no separate charge for the first 90 days. After that, travel-related expenses (meals, lodging) for on-site service are billed to the customer, either individually as a lump-sum "On-Site Expenses" line item, or — if the customer buys a separate "Travel Extension Agreement" — under that contract instead. ABC also offers a "Service Contract" providing an additional year of parts, labor, and on-site service once the original warranty expires.

The Comptroller ruled:

• "On-Site Expenses" (individual travel-related charges billed after 90 days) are taxable. Repair, remodeling, maintenance, or restoration of tangible personal property is a taxable service, and the taxable sales price includes materials, labor, profit, overhead, and expenses like meals, travel, and taxes paid in providing that service. Tex. Tax Code Sec. 151.007(a)(2) and (a)(4) do not allow a deduction for expenses or transportation costs incident to performing a taxable service (citing Rule 3.292(b)(1)).
• The "Travel Extension Contract" is taxable, under Rule 3.292(e)(2)(A) and (e)(2)(D), which address collecting tax on service contracts.
• Parts covered by the warranty may be purchased tax-free by ABC, and bringing them into Texas does not create a use tax liability, because ABC can give an exemption or resale certificate for parts used to perform repair or maintenance services covered by a manufacturer's warranty or service contract (Rule 3.292(e)(1)(B) and (e)(2)(B)).
• The "Service Contract" (covering parts, labor, and travel-related expenses for the additional year) is taxable, under Rule 3.292(e)(2).
• Parts covered by the Service Contract may likewise be purchased tax-free by ABC, with no use tax liability from bringing them into Texas, using a resale certificate under Rule 3.292(e)(2)(B).

The Comptroller noted the ruling is based on the facts submitted and that other, similar facts could yield different results.

What this means for you

Equipment manufacturers offering warranties and service contracts

If you bundle a parts-and-labor warranty into your equipment's sale price, the warranty rides along with the taxability of the equipment sale itself. But once you start billing customers separately — whether for individual post-warranty travel expenses, a travel extension contract, or an extended service contract covering parts/labor/travel — those separate charges are themselves taxable as charges for a taxable repair service. You cannot deduct your own expenses (meals, lodging, transportation) from the taxable price just because they're itemized as a distinct cost.

Manufacturers bringing replacement parts into Texas

Parts you bring into Texas solely to perform repairs covered under a warranty or a service contract can be purchased tax-free (via a resale or exemption certificate), and doing so does not create a separate use tax liability for you, even though the labor and travel charges around those repairs are taxable to the customer.

Accountants and tax professionals

Distinguish between the underlying tangible personal property (the equipment/parts) and the taxable repair service. Travel-related costs, whether billed individually or wrapped into a service or travel-extension contract, are part of the taxable sales price for repair services and cannot be carved out as nontaxable expense reimbursements under Tex. Tax Code Sec. 151.007(a)(2) and (a)(4).

Common questions

Q: Is a lump-sum "On-Site Expenses" charge for post-warranty travel (meals, lodging) taxable in Texas?
A: Yes. It's part of the taxable sales price for a taxable repair service, and Texas law doesn't allow deducting expenses or transportation costs incident to that service.

Q: If a customer buys a separate "Travel Extension Contract" to cover travel expenses instead of being billed individually, is that taxable?
A: Yes, under Rule 3.292(e)(2)(A) and (e)(2)(D) governing tax on service contracts.

Q: Does bringing warranty-covered replacement parts into Texas create a use tax liability for the manufacturer?
A: No. Those parts may be purchased tax-free by the manufacturer using a resale or exemption certificate, so no use tax liability is incurred.

Q: Is a separately billed "Service Contract" covering an additional year of parts, labor, and travel-related expenses taxable?
A: Yes, under Rule 3.292(e)(2).

Q: Do parts used under that Service Contract also avoid use tax?
A: Yes — the same resale-certificate treatment applies as it does to warranty parts, under Rule 3.292(e)(2)(B).

Citations and references

Statutes:

• Tex. Tax Code Sec. 151.007(a)(2)
• Tex. Tax Code Sec. 151.007(a)(4)

Regulations:

• 34 Tex. Admin. Code Rule 3.292 (subsections (b)(1), (e)(1)(B), (e)(2), (e)(2)(A), (e)(2)(B), (e)(2)(D))

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9505L1348C03

Original ruling text

May 11, 1995

Dear *****:

Thank you for your May 5, 1995, letter concerning taxability of charges
relating to a service agreement ABC will be introducing on one of its
products.

Situation: ABC, Inc., is a Nebraska-based corporation which
manufactures scientific laboratory instruments and wastewater monitoring
equipment. You are licensed to collect and remit sales tax in Texas.
This inquiry is relating to one newly-designed scientific laboratory
ABC began manufacturing known as the SFX 3560 Extractor System. A
one-year limited warranty covering both parts and labor is automatically
attached to the sale of each Extractor System. This warranty is not a
separate line item on the invoice, but is billed into the line item cost
of the system. Therefore, if the purchase of the extractor system is
taxable, the warranty is also taxable. On-site repair service is
provided by an ABC technician in the first 90 days. After 90 days,
however, each travel-related expense is billed to the customer. In
response to billable on-site travel-related expenses, ABC created a
Travel Extension Agreement whereby the customer can purchase a contract
covering travel-related expenses for the remainder of the warranty
period. Therefore, your first set of questions arises:

Questions:

1) If the Travel Extension is not purchased, are individual
travel-related expenses (meals and lodgings) taxable when billed to
a customer in the state of Texas? These items will be billed under one
lump-sum line item termed "On-Site Expenses."

Response: The charge for "On-Site Expenses" is taxable. The repair,
remodeling, maintenance, or restoration of tangible personal property is
a taxable service. The sales price subject to tax includes materials,
labor, profit, overhead, and expenses (meals, travel, taxes paid, etc.)
related to providing a taxable service. Texas Tax Code Sec. 151.007(a)(2)
and (a)(4) does not allow a deduction for the cost of expenses or
transportation incident to the performance of a taxable service. Please
review subsection (b)(1) of enclosed Rule 3.292 regarding collecting
tax on the entire charge.

2) The Travel Extension Contract covers travel-related expenses only.
It will be billed as a separate line termed "Travel Extension Contract."
Is this item taxable in Texas?

Response: The charge for "Travel Extension Contract" is taxable. See
subsections (e)(2)(A) and (e)(2)(D) of Rule 3.292 regarding collecting
tax on service contracts.

3) Parts covered under warranty are obviously not billable to the
customer. However, does bringing parts into Texas create a use tax
liability in Texas?

Response: The parts covered under warranty may be purchased tax free by
ABC and no use tax liability is incurred. See subsections (e)(1)(B)
and (e)(2)(B) of Rule 3.292 regarding giving an exemption or resale
certificate for parts used in performing repair or maintenance services
covered by manufacturer's warranty or service contracts.

Situation: ABC is also offering a Service Contract for the 3560
Extractor System. This contract provides the customer with an
additional one year's parts and labor and on-site service upon
expiration of their normal one year warranty. This contract will be
billed as a separate line item termed "Service Contract." Given these
circumstances:

Questions:

4) Would the charge for this Service Contract covering parts, labor,
and travel-related expenses be taxable in Texas?

Response: The charge for "Service Contract" is taxable. See subsection
(e)(2) of Rule 3.292.

5) Again, does bringing repair parts into Texas under the Service
Contract create a use tax liability for ABC?

Response: The parts covered under the Service Contract may be purchased
tax free by ABC and no use tax liability is incurred. See subsection
(e)(2)(B) of Rule 3.292 regarding giving a resale certificate for parts
used in performing repair or maintenance services covered by the service
contract.

This opinion is 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. 5-0030. The direct
line is 512/475-0030. You may also write to Tax Administration,
Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Administration Division

NOTE: Previous Accession Number 9505104L