Extended auto warranties must be charged the a 4.7% sales tax according to Section 59-12-103 of the Utah Code.
However, you may be exempt from the tax if the sale of the vehicle quifies for exemption under the exclusive use outside of Utah exemption, or the out of Utah exemption. We’ll talk more about this in a minute.
According to R865-19S-78 Services for Repair, Renovation, and Installation of Tangible Personal Property Pursuant to Utah Code Ann. Section 59-12-103,
Sales of extended warranty agreements or service plans are taxable, and tax must be collected at the time of the sale of the agreement. The payment is considered to be for future repair, which would be taxable. Repairs made under an extended warranty agreements or service plans are not taxable because the tax is considered as prepaid as a result of taxing the sale of the warranty or service plan when it was sold.
Extended warranties on items of tangible personal property that are converted to real property are not taxable.
What Does This Mean For Me?
The total cost of the warranty needs to be taxed up front and remitted with the rest of the sales tax.
For example, let’s say you’re selling a $20,000 dollar car with a $1,200 dollar warranty that is listed as a seperate line item on the final purchase document.
If you were selling the $20,000 dollar car with no warranty, you’d include $940 in the purchase for sales tax.
When you add in that $1,200 dollar warranty, you also have to pay 4.7% on that as well. In other words, you should charge an additional $56.40 in sales tax at the time of sale.
It’s a fairly simple law for a fairly simple question.
What Is Considered An Extended Warranty In Utah?
The technical term for an extended warranty is a “service contract”.
Wherever you see this, you can interchange it with extended warranty. It’s the same thing.
As defined under Utah Code 31A-6a-101:
“Service contract” means a contract or agreement to perform or reimburse for the repair or maintenance of goods or property, for their operational or structural failure due to a defect in materials, workmanship, normal wear and tear, power surge or interruption, or accidental damage from handling, with or without additional provision for incidental payment of indemnity under limited circumstances, including towing, providing a rental car, providing emergency road service, and covering food spoilage
In other words, an extended warranty is any agreement you sell your customer on where you promise to repair any parts of their car due to a defect in material workmanship, defects in materials, or other issues.
A service contract also covers any contract or agreement to cover or reimburse the buyer for any of the following services:
- the repair or replacement of tires, wheels, or both on a motor vehicle damaged as a result of coming into contact with a road hazard
- the removal of dents, dings, or creases on a motor vehicle that can be repaired using the process of paintless dent removal without affecting the existing paint finish and without replacing vehicle body panels, sanding, bonding, or painting
- the repair of chips or cracks in or the replacement of a motor vehicle windshield as a result of damage caused by a road hazard, that is primary to the coverage offered by the motor vehicle owner’s motor vehicle insurance policy
- the replacement of a motor vehicle key or key-fob if the key or key-fob becomes inoperable, lost, or stolen, except that the replacement of lost or stolen property is limited to only the replacement of a lost or stolen motor vehicle key or key-fob.
This definition does not include mechanical breakdown insurance, which is often considered to be the same thing as an extended warranty.
As defined under Utah Code 31A-6a-101, mechanical breakdown insurance is:
A policy, contract, or agreement issued by an insurance company that has complied with either Chapter 5, Domestic Stock and Mutual Insurance Corporations, or Chapter 14, Foreign Insurers, that undertakes to perform or provide repair or replacement service on goods or property, or indemnification for repair or replacement service, for the operational or structural failure of the goods or property due to a defect in materials, workmanship, or normal wear and tear
An extended warranty also is not a prepaid contract that only covers scheduled maintenance. For example, if you offer pre-paid oil changes, this would not be considered a warranty of any kind.
A service contract is intended to fix something that goes wrong.
You should apply a 4.7% sales tax to any vehicle service contract you sell in tandem with a vehicle.
A vehicle service contract is an agreement where you agree to fix defects or the repair or replace parts of the vehicle. This includes mechanical parts, but can also include tires, paint, dents, and key fobs.