Were maintenance agreements sold at a Virginia dealership taxable when the vehicle was immediately removed, titled, and registered in another state?

Plain-English summary

Virginia ruled that optional warranty and maintenance agreements sold at a Virginia used-car dealership remained subject to retail sales tax even when the buyer immediately removed the vehicle and titled it in another state. The vehicle tax and the retail tax on the agreement were separate taxes.

Because the agreement sale occurred at the Virginia dealership, Virginia was the situs. A contract covering both parts and labor was taxable on half its total charge. Covered parts were not taxed again when installed, whether the repair occurred inside or outside Virginia.

Common questions

Did the out-of-state vehicle registration exempt the agreement? No.

How much of a parts-and-labor contract was taxable? One-half of the total charge under the cited statute.

Citations and references

• Va. Code §§ 58.1-2404, 58.1-609.1 2, and 58.1-609.5 1
• 23 VAC 10-210-2070 B 1

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-152

Original ruling text

August 8, 2018

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of your client (the “Taxpayer”), in which you request a ruling on the application of the Virginia retail sales and use tax to maintenance contracts sold with vehicles that are purchased in Virginia, but licensed and registered in a state other than Virginia. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer is a used motor vehicle dealer in Virginia and is registered with the Department for the collection and remittance of the Virginia retail sales and use tax. In connection with the sale of used vehicles, the Taxpayer offers for sale to its customers various extended warranties and service and maintenance contracts and agreements (the “agreements”). The agreements are optional and are separately stated on the invoices to the Taxpayer’s customers. The Taxpayer states that it collects and remits the Virginia retail sales and use tax on 50% of the sales price of the agreements sold to customers from its Virginia locations.

Occasionally, the Taxpayer sells a motor vehicle and agreements covering the motor vehicle from one of its Virginia locations to a nonresident customer. Following the sale, the motor vehicle is immediately removed from Virginia to the nonresident’s state of residence where the vehicle is titled and registered. The Taxpayer states that in these instances, it has been collecting and remitting the Virginia retail sales and use tax on 50% of the sales price of the agreements. The Taxpayer requests a ruling regarding the application of the Virginia retail sales and use tax to the sale of agreements to nonresident customers. The Taxpayer maintains that in this instance, because the motor vehicles sold to nonresident customers are not subject to the motor vehicle sales and use tax, the sale of agreements in connection with these vehicles is likewise not subject to the retail sales and use tax.

RULING

Virginia Code § 58.1-2404 provides that the motor vehicle sales and use tax is not “levied or collected under this chapter upon the sale or use of a motor vehicle for which no certificate of title is required by this Commonwealth.” Accordingly, motor vehicles sold to the Taxpayer’s customers that are not titled and registered in Virginia are not subject to the motor vehicle sales and use tax.

Virginia Code § 58.1-609.1 2 states that the retail sales and use tax does not apply to “motor vehicles, trailers, semitrailers, mobile homes and travel trailers,” whether sold inside or outside the state. However, there is no exemption for maintenance and warranty agreements sold with motor vehicles, whether the motor vehicles are titled and registered in or outside Virginia. In accordance with Virginia Code § 58.1-609.5 1, “maintenance contracts, the terms of which provide for both repair or replacement parts and repair labor, shall be subject to tax upon one-half of the total charge for such contracts only.”

In order to determine whether the retail sales and use tax applies to the sale of agreements sold in connection with vehicles not titled and registered in Virginia, the situs of the sale must be evaluated. Title 23 of the Virginia Administrative Code 10-210-2070 B 1 provides that:

Sales by dealers located in Virginia are generally subject to the sales tax and sourced to the city or county of the place of business of the dealer collecting the tax, without regard to the city or county of possible use by the purchaser. The sale of tangible personal property at the place of the seller is sourced to that place of business, even if the goods are ultimately delivered to the purchaser at another location.

In accordance with the regulation, the situs of sale for the agreements is the Taxpayer’s Virginia locations, where the actual sale is made. Accordingly, the sale of the agreements by the Taxpayer are subject to the sales tax, without regard to where the Taxpayer’s customer will use the agreement. The motor vehicle sales and use tax and the retail sales and use tax are separate and distinct taxes. The application of the motor vehicle sales and use tax on the sale of vehicles by the Taxpayer has no bearing on the application of the retail sales and use tax on the sale of the agreements by the Taxpayer.

You further request guidance regarding the application of the tax on the sale of the agreement depending upon where the repairs are performed. While the motor vehicles covered by the agreements will be titled and registered outside of Virginia, warranty work covered under the agreement may occur at any authorized dealer, either inside or outside Virginia. Due to the fact that parts only or parts and labor agreements are taxed at the time of purchase, any parts provided and covered under the warranty work would not be taxed at the time of installation.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions about this response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/828.P