SALT Report 3084 – The California State Board of Equalization released a publication that discusses the taxability of warranties and maintenance agreements. The publication explains how sales and use tax applies to sales of mandatory and optional warranties; maintenance agreements; service plans; and to repairs covered by these types agreements.
A mandatory warranty or maintenance agreement is a contract that comes with a product and is included in the total selling price. Under a mandatory warranty, the customer does not have the option to purchase the product without the warranty. Therefore, if the product that is sold is taxable, the mandatory warranty is also taxable.
Although this type of warranty is usually included in the price of the item sold, the retailer may show it as a separate charge on the customer’s invoice. In this case, the separate charge would still be taxable, so long as the item sold is taxable.
An optional warranty or maintenance agreement is a contract that the customer may choose to purchase for a separately stated, additional charge. In this situation, separate charges for optional warranties are not taxable.
Optional Software Maintenance Agreements
A separate charge for an optional software maintenance agreement is 50% taxable if the retailer provides the purchaser with any physical products, such as software updates on a CD, during the term of the agreement. However, if the retailer does not transfer any physical software updates or other tangible personal property to the customer during the period covered by the maintenance agreement, charges for the agreement are not taxable.
The publication also discusses the taxability of deductibles, how to report warranty sales and transactions on a sales and use tax return, and provides a chart that illustrates how tax applies to charges for parts and repairs made under warranty.
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