Was an extended warranty or service contract taxable when sold for a motorcycle, dirt bike, or ATV?

Plain-English summary

The Texas Deputy Comptroller distinguished motorcycles designed for highway use from dirt bikes, all-terrain vehicles, and other motorcycles not designed for highway use.

A warranty or service contract covering repair of a highway motorcycle was not taxable because labor to repair a motor vehicle was not taxable under the historical treatment described.

A contract covering a dirt bike, ATV, or other non-highway vehicle was taxable because both labor and materials to repair that tangible personal property were taxable.

STAR's subject includes the word "deductible," but the ruling body does not discuss or decide any deductible issue.

What this means for you

Motorcycle and powersports dealers

The historical tax result turned on whether the motorcycle was designed for operation on public highways.

Service-contract sellers and accountants

Classify the covered vehicle before applying the letter's contract treatment. Do not use its quoted 1997 rates as current rates.

Common questions

Q: Was a service contract for a highway motorcycle taxable?

A: No, under the treatment described in the letter.

Q: Was a service contract for a dirt bike or ATV taxable?

A: Yes.

Q: Did the body decide how a deductible was taxed?

A: No.

Citations and references

• The letter said two administrative rules were enclosed but did not identify them by number in the published body.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9703205L

Original ruling text

March 14, 1997

Dear **:

Thank you for the opportunity to address the taxability of an extended motor
vehicle warranty or service contracts. Because of the way the Texas tax law is
written, this is not a simple, one-step answer.

Motorcycles meet the definition of a taxable item under one of two tax laws.
Motorcycles designed for use on the public highway meet the Tax Code's
definition of a motor vehicle. Motorcycles that are not designed for highway
use, such as "dirt bikes" and all-terrain vehicles, do not meet the definition
of a motor vehicle and are taxed as most other tangible personal property.

Charges for labor to repair motor vehicles, including many motorcycles, are not
subject to tax. Therefore the sale of the extended warranty or service
contract that provides for the repair of a motor vehicle (that is designed to
be operated on the public highway) is not taxable.

Charges for both labor and materials to repair other tangible personal property
("dirt bikes" and other all-terrain vehicles) are subject to tax. The sale of
the extended warranty or service contract that provides for the repair is
taxable.

The bottom line is the warranty or service contract is not taxable if it is
sold for the repair of a motorcycle designed for use on the public highway;
otherwise, it is taxable. The state sales tax rate is 6 1/4 percent. Local
sales tax may also be due up to an additional 2 percent.

I have enclosed copies of two administrative rules that provide additional
information. If you have any questions, please contact Curt Swenson of the Tax
Policy Division. Curt can be reached at 1-800-531-5441, extension 3-4684.
Please do not hesitate to contact me if I can be of further assistance.

Sincerely,

Billy C. Hamilton
Deputy Comptroller