What is Publication 119 and why should I care about it?

When Dan Presser bought a NordicTrack treadmill for home workouts recently, he wanted to make sure it would work. So he agreed to pay for an optional insurance policy from the company to cover the equipment.

Little did he know it wasn’t the only “upsell” NordicTrack would pull that day.

Presser’s story is a reminder to always, always, always read the fine print and to monitor your bill.

His new policy provided coverage by National Product Care Company and was administered by Universal Technical Service (UTS). After a year, the insurance company mailed Presser a renewal offer for $177 for one year. He accepted the offer and renewed the coverage using his credit card with the plan’s special code number. But the insurance company charged his card $193.

When Presser contacted the insurance company to find out why he was charged $16 more than he had authorized, he learned that the charge included sales tax.

Warranty coverage is often a strong selling point with big-ticket items, such as cars, computers and appliances. Although many consumers like Presser factor the cost and extensiveness of the warranties into their purchase decisions, they may be unpleasantly surprised to learn that they are being charged extra for sales tax on the warranties.

Presser turned to our forum to ask us: Can sales tax be charged on insurance premiums and warranties? And could he get a refund for the additional charge?

The answer is: It depends on where you live and what type of warranty you have. Is the warranty a mandatory warranty or an optional extended warranty?

Related story:   Good news: U.S. trains may get safer

Presser lives in California, where the applicable rules about warranty taxability can be found in Publication 119. In California, mandatory warranties are subject to sales tax, but optional extended warranties are not:

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).

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.

Presser notified the insurance company that under California law his renewal payment was not subject to sales tax. But he wanted more than that. He wanted the company to send him a letter acknowledging that it had wrongly charged other California customers sales tax, and that it would reimburse these charges also.

Related story:   Oh no, my Honda is about to explode? *

Each state has its own laws regarding sales taxability of insurance and warranties. In some states, such as Virginia, these are not subject to sales tax, but in others, such as the state of Washington, extended warranties on retail sales are taxable.

Also, some states, such as Missouri, do not legally obligate companies that improperly collect sales tax to refund it to those customers who have paid the tax on a nontaxable purchase.

United Technical Services agreed to refund the overcharge of $16 to Presser. We don’t know if Presser will ever receive the letter he requested or if the company will issue reimbursements to any other improperly charged customers.

But we can warn our readers who purchase insurance or warranties for big-ticket items: Check your state’s laws concerning sales taxability of warranties before you pay the tax. You may not owe tax on insurance or warranties, but you may find yourself on a treadmill of your own trying to recover sales tax if the company is not legally required to return it to you.

Jennifer Finger

Jennifer is the founder of KeenReader, an Internet-based freelance editing operation, as well as a certified public accountant. She is a senior writer for Elliott.org. Read more of Jennifer's articles here.

%d bloggers like this:
Get smart. Sign up for the newsletter.