Extended Warranties Are Taxable When They Are Not Separate From Repairs

Tuesday, December 16th, 2014

Yellow mining trucks.

The Wyoming State Board of Equalization ruled that warranty contracts are taxable when the costs of the services provided under the contract are not separate and distinct from the cost of the contract.

The taxpayer was a mining company that contracted with a maintenance company to repair and maintain a fleet of mining trucks. The taxpayer made monthly payments based on the number of hours each truck was used each month. Any repairs or replacements not covered by the contract were paid for separately by the taxpayer. The taxpayer applied for a refund of tax paid on the costs of the contract, but the Department of Revenue denied the refund.

In Wyoming, repair labor and materials are taxable. A warranty is an agreement that states that the product provided is free of defects or will be repaired or replaced free of charge if the product fails. An extended warranty is an additional warranty that covers repair costs or a period not covered by the standard warranty. The sale of an extended warranty, service, and maintenance contract ("extended warranty") is not taxable only if (1) the contract is sold separately from the property it covers and (2) the cost of the contract is separate and distinguishable from the cost of repairs to the property.

The contract in this case failed the second part of the extended warranty test. The taxpayer paid for the contract based on the cost of the repair services provided. The taxpayer did not buy the contract and then receive free repairs. Because the costs were not separate and distinguishable, the contract was taxable.


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