Tax Type
Retail Sales and Use Tax
Description
Services; Parts for warranty repairs; Maintenance contracts and warranties
Topic
Taxability of Persons and Transactions
Date Issued
09-24-1996
September 24, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
The Department of Taxation has reviewed your request for correction of the retail sales and use tax audit assessment of your client,******** (the "Taxpayer"). We apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a licensed sales and service agent for a large air conditioning, refrigeration, and heating equipment manufacturer (the "Manufacturer"). An audit for the period of November 1987 through October 1990 resulted in the assessment of tax on parts furnished under both manufacturer warranties and extended warranties purchased by customers. The warranty transactions were an agreement between the Manufacturer and the purchaser of the equipment, not the Taxpayer. The manufacturer warranties were included in the cost price of equipment at the time of sale and the extended warranties were sold to the customer at an additional charge. The sales tax was charged on both the sales price of the equipment at the time of sale, and also on the sale of the extended warranties.
The auditor assessed the tax on the cost price of all parts provided under the warranty plans because such parts were incorporated into real property and lost their identity as tangible personal property when installed by the Taxpayer. The auditor assessed the Taxpayer as being the using and consuming contractor with respect to parts incorporated into real property. The Taxpayer takes the position that; i) the replacement parts are exempt from the tax in accordance with Virginia Regulation (VR) 630-10-1; ii) the replacement parts are tangible personal property prior to installation; and iii) the Taxpayer is not the user or consumer of the replacement parts under warranty.
DETERMINATION
During the period of audit in question, VR 630-10-62.1 provided that the tax was applicable to warranty plans when such plans provide for the provision of repair parts only or repair parts and labor (the 1994 General Assembly enacted legislation, effective January 1, 1996, which taxes parts and labor contracts at 50% of their total cost). As provided in your letter, the Manufacturer correctly charged and collected the sales tax on the sales of all equipment which included manufacturers' warranties and also on all extended warranties which included parts.
The Taxpayer withdraws replacement parts from its inventory, when available, and the Manufacturer issues a credit to the Taxpayer of equal value. If the Taxpayer does not have the replacement part in inventory, the Manufacturer provides the part to the Taxpayer at no charge. VR 630-10-1 provides that when a replacement article of tangible personal property is provided to the consumer under a warranty agreement at no additional charge, there is no taxable event. As the transactions in question constitute an exchange of tangible personal property under warranty between the manufacturer and the customer at no additional charge, there is no taxable event.
The issue in the present case is whether the tax application for replacement parts furnished under a taxable warranty plan is altered upon installation into real property. VR 630-10-27 provides that a contractor with respect to real property is the user and consumer of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts. The intent of VR 630-10-27 is to ensure all tangible personal property incorporated into realty is properly taxed. In the present case, all property installed by the Taxpayer is properly taxed under the manufacturers warranty, or under the extended warranty, at the time of sale. The fact that the Taxpayer simply installs repair parts as a service agent for the Manufacturer would not subject such parts to further taxation.
A representative from our ****** District Office will contact the Taxpayer to make the necessary revisions and issue the appropriate refund to the Taxpayer. If you should have any questions, please contact **** Office of Tax Policy, at*********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6935K
Rulings of the Tax Commissioner