Warranties and Maintenance Agreements (Publication 119)

Many retailers sell warranties or maintenance agreements along with products such as cars, computers, and home electronic equipment. This publication explains how sales and use tax applies when you sell a warranty or maintenance agreement (sometimes called a "service plan") or when you make a repair covered by such an agreement.

Does sales tax apply when I sell a warranty?

It may. Generally, warranties are divided into two basic types—mandatory warranties and optional warranties. To determine how tax applies, you first need to know the warranty type: mandatory or optional.

Mandatory warranties

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, your customer does not have the option to purchase the product without the warranty. Examples include standard manufacturers' warranties that come with new vehicles, computers, electronic devices, appliances, and auto repair shops' parts-and-labor warranties on repairs.

If your sale of the product is taxable, the mandatory warranty is also taxable. The warranty is usually included in the price of the item sold, but you may show it as a separate charge on your invoice. If you do, that separate charge is taxable (provided the sale of the associated item is taxable).

Example: Your electronics store sells a new computer to a consumer for $1,500. The price includes a one-year parts-and-labor warranty backed by the manufacturer. Your full $1,500 charge is taxable.

Optional warranties

An optional warranty or maintenance agreement is a contract your customer may choose to purchase for an additional charge. If your customer can buy the product without buying the warranty from you, the warranty is optional. Separate charges for optional warranties are generally not taxable (exception: see Optional software maintenance agreements below). Examples of optional warranties include an extended repair warranty for a computer or electronic device, an extended mileage warranty for a car, and a service plan for a refrigerator.

Example: Your car dealership sells a used car for $10,500. You offer the customer the option to buy an extended, 18-month warranty for an additional $500. The customer can buy the car without the warranty. If the customer buys the car and the optional warranty, tax would apply to the $10,500 charge for the car but not to the $500 charge for the warranty.

Optional software maintenance agreements

A separate charge for an optional software maintenance agreement is 50 percent taxable if you provide the purchaser with any physical products during the term of the agreement (for example, your customer will receive software updates on CD). If you do not transfer any physical software updates or other tangible personal property to your customer during the maintenance agreement period, charges for the agreement are not taxable (for example, customers will download software updates from a website and no CDs or other tangible media containing the update are sent). For more information, see Regulation 1502, Computers, Programs, and Data Processing.

Note: This publication summarizes the law and applicable regulations in effect when the publication was written, as noted above. However, changes in the law or in regulations may have occurred since that time. If there is a conflict between the text in this publication and the law, the decision will be based on the law and not on this publication.

Revision July 2018