98-020
Response
March 20,1998
REQUEST
LETTER
March
3, 1998
Re: Definition of Tax
charged/collected
Ms.
Rees:
We
are in need of your expert analysis. We are a company in XXXXX that programs
software for automotive dealerships, specifically lease contracts. A
discrepancy in interpretation of Utah legislation has turned up with lenders in
Utah.
I
have enclosed pages I printed from your web site to help you understand the
problem. Some lease lenders want the sales tax on service contracts or extended
warranties collected up front.
Other
lease lenders want the premium and the tax collected in the payment. We need an
interpretation of the word "charged". In a lease situation, can the
sales tax on service contracts
or
extended warranties be "charged" and collected in the payment? -or- does the law mean the tax can be
"charged" and must be collected up front?
Please
feel free to call me and discuss specific situations if you need to. I need an
answer to this
dilemma
as quickly as possible. We have several customers in Utah that must concur with
state
law
as well as with lender requirements. Thank you for your help.
Sincerely,
NAME
March
20, 1998
NAME
ADDRESS
CITY,
STATE ZIP
RE
- Collecting sales tax on leased
automobiles’ extended warranties and service contracts
Dear
NAME,
We received your request for information
concerning the sales tax applied on extended warranties and service contracts
for leased automobiles. Specifically,
you ask if the sales tax on these warranties and service contracts is due at
the time the vehicle is leased or later when the monthly lease payments are
made.
Utah Admin. Code R865-19S-78(D)(1)
states that “[s]ales of extended warranty agreements or service plans are
taxable, and tax must be collected at the time of the sale of the
agreement.” Thus, when the sale of an extended
warranty or service contract accompanies the sale of a vehicle, sales tax is
due both on the total purchase price of the automobile and the extended
warranty or service contract. The total
sales tax is due either when the vehicle is registered or when the monthly or
quarterly sales tax return is filed.
When an automobile is leased,
however, there may be a different result.
As the vehicle is not purchased, sales tax is not due on the entire
price of the car at the time the lease is signed. Instead, sales tax is due on each lease payment that is due. Whether or not sales tax is similarly
collected on an extended warranty or service contract purchased at the time of
the lease depends upon the terms of the lease agreement.
As an example, consider a vehicle
that is leased for three years at $300 per month. The structure of the lease agreement indicates that this monthly
payment represents both the lease of the vehicle and the payment for an
extended warranty. In addition, the
lease agreement does not require the lessee to pay a down payment. Under this lease, the lessee does not pay
for the extended warranty at the time the lease is signed, but in each periodic
lease payment. Thus, sales tax on an
extended warranty which is included in a lease payment is not due until each
monthly payment is made. In this case,
sales tax should be collected each month on the total lease and extended
warranty payment of $300 and is due when the payment is due or paid, whichever
comes first.
On the other hand, a lease agreement
that does require a down payment may be treated differently. How the agreement apportions out the down
payment determines if sales tax on the extended warranty is due at the time the
lease is signed. Where a lease calls
for a down payment of $830 and specifically apportions it out as representing
$800 for an extended warranty and $30 for licensing fees, the $800 extended
warranty is considered paid for at the time the lease is signed. Accordingly, sales tax on the $800 amount
should also be collected when the lease is signed. No sales tax would be due on the $30 licensing fee because this
fee is tax exempt.
Lastly, should the lease require a
down payment of $1000 yet not provide how the down payment is apportioned, it
is assumed that the entire $1000 represents a taxable transaction. In this instance, sales tax should be
collected on the entire amount.
Please contact us if you have any
other questions.
For
the Commission,
Joe
B. Pacheco,
Commissioner
^^