Tax Type
Retail Sales and Use Tax
Description
Maintenance Contracts or Warranty Plans are taxable.
Topic
Collection of Tax
Taxable Transactions
Taxability of Persons and Transactions
Date Issued
06-18-2013
June 18, 2013
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer), for the audit period April 2007 through February 2010. I apologize for the delay in responding to your request.
FACTS
The Taxpayer is a retailer of beauty supply products. The Taxpayer sells extended protection plan contracts to their customers who desire the protection of a warranty when purchasing products from the Taxpayer. The Department's audit held the protection plans taxable.
The Taxpayer disagrees stating that the protection plans are not warranties or services in connection with the sale of tangible personal property as implied by the auditor. The Taxpayer contends that the ultimate benefit of the plan is a gift card, which is a full refund benefit of funds including any sales tax that was charged. The Taxpayer also states that the customer is not entitled to any replacement of the product originally purchased. The Taxpayer also states that the protection plan should not be considered a service but rather an administrative fee that is not related to the sale of tangible personal property. The Taxpayer seeks an abatement of the sales tax at issue and a refund of assessment amounts previously paid.
DETERMINATION
Services
Virginia Code § 58.1-603 imposes the sales tax upon the gross sales price of tangible personal property sold at retail or distributed in Virginia. Virginia Code § 58.1-604 imposes the use tax on the cost price of tangible personal property used or consumed in Virginia. Pursuant to Va. Code § 58.1-602, sales price means "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale . . . without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.” [Emphasis added.] Unless specifically exempt by law, any services provided in connection with the sale of tangible personal property are subject to taxation.
For any part of the sales price to be exempted from the tax, the service or expense must be expressly stated in an exemption or exclusion statute. The only exclusions and exemptions from the sales price of a taxable article of tangible personal property are those listed in Va. Code § 58.1-602 under the definition of sales price (e.g., cash discounts allowed and taken, certain finance charges related to credit extended on conditional sale contracts, etc.) and in Va. Code § 58.1-609.5 which lists various service exemptions, such as separately stated transportation charges and separately charged installation or repair labor charges. Based on a review of the exemption statutes and the exclusions from sales price and cost price, there are no specific exemptions or exclusions in the law that allow charges for extended protection plans to be exempted or excluded from the sales tax when such charges are part of the sale of tangible personal property.
Provided the buyer has opted to purchase services that are furnished in connection with the sale of tangible personal property, such services are deemed sold in connection with such property and are subject to taxation in the same manner as the tangible items transferred, unless the service charge as previously stated is specifically exempted from the tax. It has been the long-standing policy of the Department to tax all services and expenses (whether optional or required) provided in connection with the retail sale of tangible personal property, unless a statutory exemption or exclusion applies. In Public Document 01-95 (8/6/01), the Tax Commissioner ruled that packaging and handling charges were not part of the exclusions from sales price by either statute or administrative code cite and were provided in connection with the sale of tangible personal property. Such charges were therefore subject to taxation. To such an extent, the purchase of the extended protection plan is also a purchase in connection with the sale of tangible personal property and is properly subject to the tax.
Maintenance Contracts or Warranty Plans
The Taxpayer contends that the extended protection plan offered is dissimilar from maintenance contracts or warranty plans as provided in Title 23 of the Virginia Administrative Code 10-210-910, in that the Taxpayer's protection plan does not provide for a replacement or repair of the product. I agree that the extended protection plan is dissimilar to the maintenance contracts or warranty plans addressed in the Department's regulation. Customers entering into maintenance contracts or warranty plans are usually provided an entitlement to tangible personal property free of charge as a part of the services rendered. In this instance, the customer is presented with a gift card, which is an entitlement to an intangible, the right to extend the Taxpayer's refund policy to allow the customer a future purchase of a replacement or another like or entirely dissimilar item to the one that was initially purchased. The future purchase is subject to the retail sales and use tax as an entirely separate and distinct transaction.
Fees
Lastly, the Taxpayer suggests that the charge for the extended protection plan is more in the line of an administrative fee rather than a service. As previously stated, pursuant to the definition of "sales price" in Va. Code § 58.1-602, the total amount charged for tangible personal property sold inclusive of any service costs or expenses whatsoever is subject to taxation. Administrative fees are basic elements of recouping the costs of performance in a retail business. In this instance, the protection plan, while an optional charge to the customer, is an integral part of the sale of tangible personal property and is of no value without the sale of such tangible personal property. Accordingly, a reclassification of the extended protection plan as an administrative fee does not change the taxable status of the sales transaction.
The balance of the Department's assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the updated bill is paid within 30 days from the date indicated on the bill statement.
The Code of Virginia sections, regulation and public document cited are available online in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov. If you have any questions regarding this matter, please contact ***** of the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5152892061.Q
Rulings of the Tax Commissioner