DIRECTIVE


Subject: Warranties
Tax: Sales and Use Tax
Law: G.S. 105-164.4 and G.S. 105-164.6
Issued By: Sales and Use Tax Division
Date: December 23, 1999
Number: SD-99-3

This Directive sets out the application of sales and use tax to tangible personal property used to fulfill warranty obligations. The Directive restates the current tax treatment of tangible personal property used to fulfill a manufacturer's warranty. The Directive changes the tax treatment of tangible personal property used to fulfill a dealer's warranty. The Directive clarifies the tax treatment of tangible personal property used to fulfill an after-warranty agreement. The Directive becomes effective February 1, 2000.

Manufacturer's Warranty
A manufacturer's warranty is an explicit warranty the manufacturer of an item extends to the purchaser of the item as part of the purchase price of the item. If the item is defective, the warranty allows the purchaser to return the item and receive either a replacement for the defective item or the repair of the defective item.

The application of sales and use tax to the cost of the replacement item or to the cost of any parts used to repair the defective item depends on whether the manufacturer charges the purchaser for the replacement item or the repair parts. If the manufacturer charges the purchaser for the replacement item or the repair parts, sales or use tax is due on the amount paid for the replacement item or repair parts. If the manufacturer does not charge the purchaser for the replacement item or the repair parts, no tax is due on the cost of the replacement item or on the cost of repair parts. This applies when the manufacturer makes the repairs and when the manufacturer contracts with a dealer or another person to make the repairs on behalf of the manufacturer.

A small, fixed deductible fee a manufacturer charges a purchaser who receives a replacement item or the repair of a defective item is not considered a charge for the replacement item or the parts used to repair the defective item. This fee is unrelated to the cost of the replacement item or repair part and is a service fee that is not subject to sales or use tax.

Dealer's Warranty
A dealer's warranty is an explicit warranty the seller of an item extends to the purchaser of the item as part of the purchase price of the item. If the item is defective, the warranty allows the purchaser to return the item and receive either a replacement for the defective item or the repair of the defective item. This type of warranty normally occurs when there is no manufacturer's warranty.

The same principles that apply to a manufacturer's warranty apply to a dealer's warranty. Thus, the application of sales and use tax to the cost of the replacement item or to the cost of any parts used to repair the defective item depends on whether the dealer charges the purchaser for the replacement item or the repair parts. If the dealer charges the purchaser for the replacement item or the repair parts, sales or use tax is due on the amount paid for the replacement item or repair parts. If the dealer does not charge the purchaser for the replacement item or the repair parts, no tax is due on the cost of the replacement item or on the cost of repair parts.

After-Warranty Adjustment
An after-warranty adjustment is an arrangement between a customer, a dealer, and a manufacturer. Under the arrangement, the dealer and the manufacturer agree to replace or repair an item that is of the type made by the manufacturer and sold by the dealer for a percentage of the amount they would charge in the absence of the arrangement. The arrangement can apply to charges for labor as well as for parts and materials.

If a replacement is made under the arrangement, the dealer supplies the replacement from the dealer's inventory. If a repair is made under the arrangement, the dealer supplies the parts from its inventory and performs the required labor needed to accomplish the repair. The manufacturer then reimburses the dealer for the agreed-upon portion of the total charges, and the dealer absorbs the remaining unpaid amounts the dealer incurred. For either a replacement or repair, the dealer uses tangible personal property withdrawn from its inventory and is liable for sales or use tax on the dealer's cost of the property used.

Questions If you have questions about this Directive, you may call the Office Services Division, Taxpayer Assistance Section, of the North Carolina Department of Revenue at (919) 733-3661. You may also write to the Division at P.O. Box 25000, Raleigh, N.C. 27640.