A car dealer sells an optional product that pays a future down payment toward a replacement vehicle if the buyer's car is totaled. Is that product taxable — and is the down payment it later funds taxable?
Plain-English summary
Car dealers sell an optional "Product" alongside a vehicle. If the buyer's car is a constructive total loss within a set period (and other conditions are met), the company behind the Product (the "Obligor") pays a fixed dollar Benefit — but only as a down payment to a dealership toward a replacement vehicle, and generally only at the same dealership. The money never goes to the buyer directly, and the benefit isn't transferable. The dealers asked: (1) is the sale of this Product taxable, and (2) where does it go on the paperwork?
The Commission gave a two-part answer that's worth separating carefully:
1. Selling the Product is NOT taxable. Buying the Product (the contract) when you buy the first car is simply not one of the transactions Utah taxes under § 59-12-103(1). The Commission also specifically held the Product is not a "service plan." That matters: under Utah Admin. Code R865-19S-78, a "service plan" (extended warranty / prepaid arrangement for future taxable repairs) is taxed up front. Because this Product pays a down payment toward a new vehicle rather than prepaying repairs, it's not a service plan and isn't taxed at the point of sale. (The Commission also declined to decide whether it's an insurance "service contract" under Title 31A — that's the Insurance Department's call, not the Sales Tax Act's.)
2. The down payment the Product later funds IS part of the replacement vehicle's taxable price. When the Obligor pays that Benefit to a dealership as a down payment on the replacement car, Utah treats it as third-party consideration that counts toward the vehicle's purchase price. Under § 59-12-102(104)(b)(iv), money a seller receives from someone other than the buyer is included in the taxable purchase price when it's (A) tied to a price reduction/discount on the sale, (B) the seller must pass it through to the buyer, (C) the amount is fixed and determinable at the time of sale, and (D) it's identified as a third-party reduction on documentation the buyer presents. The Commission walked through each element and found them all met. So Utah sales tax applies to the full purchase price of the replacement vehicle, including the third-party down payment, if that vehicle is purchased in Utah.
On the paperwork question, the Commission agreed the Product sale may be reported on Line 4 of the Retail Installment Contract.
The throughline: a payment doesn't escape sales tax just because it comes from a third party instead of the buyer. If it's effectively buying down the price of a taxable item, it's in the taxable base.
What this means for you
Auto dealers and F&I offices
Two different transactions, two different answers. Selling an add-on product that funds a future replacement-vehicle down payment is generally not a taxable sale by itself. But when you apply that benefit as a down payment on the replacement car, do not subtract it from the taxable price — the customer owes Utah sales tax on the full price of the replacement vehicle, third-party down payment included. Build that into how you calculate tax on replacement-vehicle deals.
The "service plan" line is the trap
If your add-on prepays future taxable repairs (an extended warranty / service plan under R865-19S-78), it is taxable when you sell it. This Product avoided that only because it funds a new-vehicle down payment, not repairs. Classify each F&I product by what it actually pays for — the label ("membership," "service contract") doesn't control; the Commission looks at the underlying nature (see PLR 16-005).
Anyone dealing with rebates, coupons, or manufacturer incentives
This is the general Utah rule for third-party payments: a rebate, incentive, or coupon funded by someone other than the buyer is part of the taxable purchase price when the four § 59-12-102(104)(b)(iv) conditions are met (tied to a price reduction, passed through to the buyer, fixed at sale, and identified as a third-party reduction on the buyer's documentation). "Someone else paid part of it" is not a reason to leave it out of the tax base.
Accountants and tax professionals
The ruling is a clean application of § 59-12-102(104)(b)(iv) and a reminder that the Sales and Use Tax Act is interpreted independently of the Insurance Code — the Commission expressly refused to decide the Title 31A "service contract" question. Note the R865-19S-78 service-plan contrast: had the Product prepaid taxable repairs, it would have been taxable at first sale.
Common questions
Q: We sell a product that pays a down payment if the customer's car is totaled. Do we charge sales tax when we sell it?
A: In this ruling, no — that sale isn't a transaction Utah taxes, and it isn't a "service plan." But the answer depends on what the product actually pays for; a product that prepays future taxable repairs would be a taxable service plan.
Q: When the benefit pays a down payment on the replacement car, can we reduce the taxable price by that amount?
A: No. The third-party down payment is part of the replacement vehicle's taxable purchase price under § 59-12-102(104)(b)(iv). Utah sales tax applies to the full price, including that payment, if the vehicle is bought in Utah.
Q: Why is a payment from a third party taxable to the buyer?
A: Because it functions as a price reduction the seller passes through to the buyer. Utah's "purchase price" definition specifically pulls in consideration the seller receives from someone other than the buyer when it's tied to a discount, fixed at sale, and identified as a third-party reduction on the buyer's documentation.
Q: Is this product "insurance" or a "service contract"?
A: The Commission didn't decide that — those are Insurance Code (Title 31A) questions for the Insurance Department. This ruling only addresses Utah sales and use tax.
Q: Can my dealership rely on this ruling?
A: No. A Utah private letter ruling binds the Commission only for the taxpayer and facts it was issued to. The reasoning is instructive, but your product's terms may lead to a different result.
Citations and references
Statutes and rule:
- Utah Code § 59-12-103(1)(a) — tax on retail sales of tangible personal property made within the state
- Utah Code § 59-12-102(104) — "purchase price" / "sales price" definition
- Utah Code § 59-12-102(104)(b)(iv) — third-party consideration tied to a price reduction is included in the purchase price (four conditions)
- Utah Admin. Code R865-19S-78 — "service plan" (extended warranty / prepaid repairs) is taxable when sold; the Product was held not to be one
- Utah Code § 31A-6a-101 — Insurance Code "service contract" (referenced but expressly not interpreted)
Related Utah ruling cited: PLR 16-005 (look beyond the label to the underlying nature of a "membership"/product).
Source
- Landing page: https://tax.utah.gov/commission/rulings/
- Original PDF: https://files.tax.utah.gov/tax/commission/ruling/19-001.pdf
Original ruling text
FINAL PRIVATE LETTER RULING
REQUEST LETTER
[The Request Letter has been removed.]
RESPONSE LETTER
PLR 19-001
November 12, 2020
NAME-1
President
COMPANY-2
ADDRESS
CITY, STATE - ZIPCODE
NAME-1:
This letter is in response to your request for a private letter ruling for your client,
COMPANY (“Company”) and their lending partner, LENDING PARTNER (“Lending Partner”),
concerning sales of PRODUCT (“Product”). Your clients are seeking this ruling on behalf of
vehicle dealers (“Dealer(s)”). You have asked the following questions:
1. Whether the Dealers’ sales of the Product are subject to Utah sales and use
taxes.
2. Where on the vehicle sales contract should the sales of the Product be reported.
This private letter ruling concludes the following:
1. The Dealers’ sales of the Product are not subject to Utah sales and use taxes.
2. On the vehicle sales contract, dealers’ sales of the Product may be reported on Line 4
of the Retail Installment Contract.
3. In accordance with § 59-12-103(1)(a), Utah sales and use taxes are imposed on any
down payment paid as a benefit of the Product, to a dealership for a purchaser’s
purchase in Utah of a replacement vehicle. That down payment is part of the taxable
“purchase price” of that replacement vehicle.
1
Page 2
I. Facts
The facts are based on the following items you provided: your private letter ruling request
letter and a copy of the contract (“Contract”) that a purchaser (“Purchaser”) receives from a Dealer
when s/he purchases the Product. A Dealer may sell the optional Product to a Purchaser at the
time the Purchaser purchases a vehicle (“first vehicle”). When the Dealer sells the Product, the
Dealer provides the Contract to the Purchaser.1 The Contract is between the Customer and the
“Obligor,” which is not in the business of selling vehicles. The Product provides that the Purchaser
will receive a benefit (“Benefit”) if s/he experiences a constructive total loss of the first vehicle
within a limited time period and other terms and conditions are met. The Benefit is a dollar
amount, up to a maximum benefit amount, that the Obligor will pay directly to a dealership as a
down payment for a replacement vehicle for the Purchaser if the Purchaser claims the Benefit and
purchases that replacement vehicle in accordance with the Product’s terms and conditions. To
receive the Benefit, a purchaser generally must purchase the replacement vehicle from the same
dealership from which s/he purchased the first vehicle.2 The Benefit will only be paid to a
dealership as a down payment on the replacement vehicle; the Benefit amount will not be paid
directly to the Purchaser or any other organization. The Contract provides that the Benefit is not
transferable.
II. Applicable Law
Utah Code Annotated § 59-12-103(1) imposes tax on certain transactions, stating the
following in part:
A tax is imposed on the purchaser as provided in this part on the purchase price or
sales price for amounts paid or charged for the following transactions:
(a) retail sales of tangible personal property made within the state;
....
Section 59-12-102 provides definitions that apply to the Sales and Use Tax Act. Subsection
59-12-102(104) defines “purchase price” and “sales price” as follows in part:
(a) "Purchase price" and "sales price" mean the total amount of consideration:
(i) valued in money; and
(ii) for which tangible personal property, a product transferred electronically,
or services are:
(A) sold;
1
You described the Product as a membership. However, that term is not used in the Contract to describe the
Product. Whether the Product is a membership does not change the conclusions of this private letter ruling; the
taxability of a membership depends on the taxability of its underlying items. See page 14 of Private Letter Ruling
16-005, currently available at https://tax.utah.gov/commission/ruling/16-005.pdf (“[T]he Commission “look[s]
beyond that label [attached to a product] to examine the underlying nature of the transaction.” What the Utah customer
is actually purchasing with a MEMBERSHIP are the benefits [of the membership].”).
2
However, if that dealership is out of business or located more than a specific distance from the Purchaser, an
administrator acting on behalf of the Obligor can designate another dealership from which the Purchaser may purchase
the replacement vehicle and the Purchaser may still obtain the Benefit.
2
Page 3
(B) leased; or
(C) rented.
(b) "Purchase price" and "sales price" include:
....
(iv) consideration a seller receives from a person other than the purchaser if:
(A) (I) the seller actually receives consideration from a person other than
the purchaser; and
(II) the consideration described in Subsection (104)(b)(iv)(A)(I) is
directly related to a price reduction or discount on the sale;
(B) the seller has an obligation to pass the price reduction or discount
through to the purchaser;
(C) the amount of the consideration attributable to the sale is fixed and
determinable by the seller at the time of the sale to the purchaser; and
(D) (I) . . . ;
(II) . . . ; or
(III) the price reduction or discount is identified as a third party price
reduction or discount on the:
(Aa) invoice the purchaser receives; or
(Bb) certificate, coupon, or other documentation the purchaser
presents.
....
III. Analysis
This Analysis Section includes the following subsections:
A. The down payment that the Obligor pays to the dealership for the Purchaser’s
purchase of the replacement vehicle is part of the taxable purchase price of that
vehicle.
B. Utah sales and use taxes are not imposed on the sale of the Product when the
Purchaser purchases the first vehicle.
C. The sale of the Product to the Purchaser may be reported on Line 4 of the Retail
Installment Contract for the sale of first vehicle.
D. The Product is not a “service plan” for Utah sales tax purposes. Furthermore, this
private letter ruling makes no determination about the Product for purposes found
in other areas of the Utah Code.
A. The down payment that the Obligor pays to the dealership for the Purchaser’s
purchase of the replacement vehicle is part of the taxable purchase price of
that vehicle.
3
Page 4
Based on the facts presented and on the explanation below, the dollar amount that the
Obligor pays directly to a dealership as a down payment for the purchase of a replacement vehicle
is part of the purchase price of the replacement vehicle under § 59-12-102(104)(b)(iv). Subsection
59-12-102(104)(b) states in part the following:
"Purchase price" and "sales price" include:
....
(iv) consideration a seller receives from a person other than the purchaser if:
(A) (I) the seller actually receives consideration from a person other than the
purchaser; and
(II) the consideration described in Subsection (104)(b)(iv)(A)(I) is
directly related to a price reduction or discount on the sale;
(B) the seller has an obligation to pass the price reduction or discount through
to the purchaser;
(C) the amount of the consideration attributable to the sale is fixed and
determinable by the seller at the time of the sale to the purchaser; and
(D) (I) . . . ;
(II) . . . ; or
(III) the price reduction or discount is identified as a third party price
reduction or discount on the:
(Aa) invoice the purchaser receives; or
(Bb) certificate, coupon, or other documentation the purchaser
presents.
Subsection 59-12-102(104)(b)(iv)(A)(I) states, “[T]he seller actually receives consideration from
a person other than the purchaser.” The “seller,” who is the dealership, “receives consideration,”
which is the dollar amount from the Obligor who is “a person other than the purchaser” of the
replacement vehicle. This subsection is met.
Subsection 59-12-102(104)(b)(iv)(A)(II) states, “[T]he consideration described in
Subsection (104)(b)(iv)(A)(I) is directly related to a price reduction or discount on the sale.” The
consideration paid by the Obligor to the dealership is “directly related to the price reduction or
discount on the sale”; specifically, the consideration equals the down payment for the purchase of
the replacement vehicle. This subsection is met.
Subsection 59-12-102(104)(b)(iv)(B) states, “[T]he seller has an obligation to pass the
price reduction or discount through to the purchaser.” The dealership “has an obligation to pass
[the down payment] through to the purchaser.” This subsection is met.
Subsection 59-12-102(104)(b)(iv)(C) states, “[T]he amount of the consideration
attributable to the sale is fixed and determinable by the seller at the time of the sale to the
purchaser.” The “amount the [down payment] is fixed and determinable by the [dealership] at the
time of the sale [of the replacement vehicle] to the purchaser.” This subsection is met.
Subsection 59-12-102(104)(b)(iv)(D)(III) states, “[T]he price reduction or discount is
identified as a third party price reduction or discount on the: (Aa) invoice the purchaser receives;
4
Page 5
or (Bb) certificate, coupon, or other documentation the purchaser presents.” The down payment
is identified as a third party price reduction or discount on the . . . document the purchaser presents
[to the dealership].” The Purchaser will be required to present documentation to the dealership
showing that the down payment will be paid by the Obligor before the dealership will credit the
down payment from the total amount owing for the replacement vehicle. This subsection is met.
Because the above subsections of § 59-12-102(104)(b)(iv) are met, the purchase price of
the replacement vehicle includes the down payment the dealership receives from the Obligor.
Thus, in accordance with § 59-12-103(1)(a), sales and use taxes are imposed on the full purchase
price of the replacement vehicle, including the down payment amount, if the purchase of the
replacement vehicle is made within Utah.
B. Utah sales and use taxes are not imposed on the sale of the Product when the
Purchaser purchases the first vehicle.
Sales and use taxes are not imposed on the Purchaser’s purchase of the Contract from the
Dealer that sells the Purchaser the first vehicle. The purchase of the Contract is not one of the
transactions listed in § 59-12-103(1), upon which sales and use taxes are imposed.
C. The sale of the Product to the Purchaser may be reported on Line 4 of the
Retail Installment Contract for the sale of first vehicle.
You have asserted that the sale of the Product to the consumer is nontaxable for sales tax
purposes. We agree with that position. You asserted that the sale of the Product to the Purchaser
should be reported on Line 4 of the Retail Installment Contract. We agree with that position as
well.
D. The Product is not a “service plan” for Utah sales tax purposes. Furthermore,
this private letter ruling makes no determination about the Product for
purposes found in other areas of the Utah Code.
You mentioned that some dealers viewed the Product as being akin to a “service contact,”
which is defined in Utah Code Ann. § 31A-6a-101. This private letter ruling does not address
whether the Product is a service contract for purposes of the Utah Insurance Code. For purposes
of the Utah Sales and Use Tax Act, Utah Administrative Code R865-19S-78 defines “service plan”
as including an extended warranty agreement or other prepaid arrangement. The purchase price
of a service plan for future taxable repairs is subject to sales and use taxes. This private letter
ruling does not find the Product to be a “service plan.” If the Product had been a service plan, sales
and use taxes would have been imposed on the Purchaser’s purchase of the Product from the
Dealer. As explained previously in this private letter ruling, sales and use taxes are not imposed
on the Purchaser’s purchase of the Product, and sales and use taxes are imposed on any later down
payment paid by the Obligator to the dealership selling the replacement vehicle; the down payment
is part of the taxable purchase price of the replacement vehicle if that vehicle is purchased in Utah.
5
Page 6
You quoted and analyzed part of the Utah Code, Title 31A, Insurance Code, in your request
letter. This private letter ruling does not interpret any Utah Code section outside of those located
in the Utah Sales and Use Tax Act, found in Utah Code, Title 59, Chapter 12. Other government
entities, such as the Insurance Department, interpret and administer other areas of the Utah Code.
IV. Conclusion
This private letter ruling concludes the following:
1. The Dealers’ sales of the Product are not subject to Utah sales and use taxes.
2. On the vehicle sales contract, dealers’ sales of the Product may be reported on Line 4
of the Retail Installment Contract.
3. In accordance with § 59-12-103(1)(a), Utah sales and use taxes are imposed on any
down payment paid by the Obligor to a dealership for a Purchaser’s purchase in Utah
of a replacement vehicle. That down payment is part of the “purchase price” of that
replacement vehicle.
The Tax Commission’s conclusions are based on the facts as you described them and the
Utah law currently in effect. Should the facts be different or if the law were to change, a different
conclusion may be warranted. If you feel we have misunderstood the facts as you have presented
them, you have additional facts that may be relevant, or you have any other questions, please feel
free to contact the Commission.
Additionally, you may also appeal the private letter ruling in the following two ways.
First, you may file a petition for declaratory order, which would serve to challenge
the Commission's interpretation of statutory language or authority under a statute. This petition
must be in written form, and submitted within thirty (30) days after the date of this private letter
ruling. You may submit your petition by any of the means given below. Failure to submit your
petition within the 30-day time frame could forfeit your appeal rights and will be deemed a
failure to exhaust your administrative remedies. Declaratory orders are discussed in Utah
Administrative Code R861-1A-34 C.2., available online at [WEB ADDRESS REMOVED], and in
Utah Administrative Code R861-1A-31, available online at [WEB ADDRESS REMOVED]. [THE
UTAH ADMINISTRATIVE CODE IS CURRENTLY AVAILABLE AT
https://adminrules.utah.gov.]
Second, you may file a petition for redetermination of agency action if your private letter
ruling leads to an audit assessment, a denial of a claim, or some other agency action at a division
level. This petition must be written and may use form TC-738, available online
at http://tax.utah.gov/forms/current/tc-738.pdf. Your petition must be submitted by any of the
means given below, within thirty (30) days, generally, of the date of the notice of agency action
that describes the agency action you are challenging.
6
Page 7
You may access general information about Tax Commission Appeals online
at http://tax.utah.gov/commission-office/appeals. You may file an appeal through any of the
means provided below:
• Best way—by email: [email protected]
• By mail: Tax Appeals
USTC
210 North 1950 West
Salt Lake City, UT 84134
• By fax: 801-297-3919
For the Commission,
Lawrence C. Walters
Commissioner
LCW/aln
19-001
7