taxability of warranty repairs
As a vendor, it is your job to collect sales taxes according to state laws. This can seem a bit confusing for a service like warranty repairs that is sold and delivered at different times. If your business handles repairs in multiple states, these transactions can be even more confusing because of nexus rules. Fortunately, the sales tax laws for warranty repairs are relatively consistent.
Sales taxes for warranty repairs
The time to collect sales taxes is when you sell a warranty repair contract to a customer. Later, when the customer comes in for a repair covered under the warranty, you don’t charge sales taxes. However, if the customer must pay a deductible as part of the contract, you need to charge sales taxes on the deductible.
If you don’t handle the repairs yourself but pass them off to a third-party, the third-party should charge you sales taxes on the repair. Since you’re reselling the repair to the customer, you’ll get a sales tax exemption on this transaction.
Determining your nexus for warranty repairs
Generally, you need to collect sales taxes in any state where your company has nexus, which is a connection or tie to the area. In the past, this meant having a physical location in a state. Today, this definition has been expanded quite a bit.
Regarding warranty repairs, most states consider just the act of providing warranty repairs within that state as enough to create nexus. This means that you generally need to collect and file sales taxes for every single state that your company provides warranty repairs in.
A few states have exceptions to the standard nexus rules for warranty repairs. In Arizona, your repairs only create a nexus if you have an employee in the state for more than two days. In California, you don’t create nexus if you hire an independent third party to handle your repairs in the state.
Utah considers your business to have nexus if you “regularly perform repairs” in the state. Since this is open to interpretation, you may want to contact the Utah Department of Revenue to see if your repair activity is enough to create nexus.
Besides these few exceptions, your business has a nexus anywhere it performs warranty repairs. Be sure to register your business with those states and collect appropriate sales taxes on all qualifying transactions so your business stays in compliance with state law.
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