On July 15, 1996, the Arkansas Supreme Court ruled in State of Arkansas
v. Staton. Case No. 96-215, that the gross receipts from the sale of extended
Service contracts covering motor vehicles were not subject to sales tax. This
regulafion is-necessaiy in order to follow the ruling of the court. The
provisions of this regulation will become effective on October 1, 1996. In the
event that service contracts covering taxable services become subject to sales
tax, this regulation shall become void.
PART
I
: NEW REGULATION
A.
Taxation of Service
Contracts
1. The gross receipts
derived from the separate sale of service contracts or warranties are subject
to sales tax only if the following factors exist:
a. The contract includes the provision or
reimbursement of taxable services to be performed in the future;
b. The contract includes the provision or
reimbursement of any services that are to be performed in the future on a
regular basis, such as inspection or regular maintenance; and,
c. The contract covers a specified period of
time and the fee for each of the services to be performed is not separately
stated.
2. A taxable
contract would include a contract which for a single fee covered the repair,
regular maintenance or regular inspection of heating and cooling equipment,
electrical devices and appliances, computer equipment, boats, and motor
vehicles. Repairs and maintenance are taxable services. The contract is taxable
because the contract provides for regular maintenance or inspection of the
property. These services are certain to be performed in the future and the
entire consideration for the contract is taxable. If the contract separately
stated the charge for repairs and the charge for the routine services, then
only the fee for those separately stated taxable services would be
taxable.
3. A non-taxable contract
would include a contract which for a single fee covered only the repair or any
other contingent service of an item of tangible personal property. An extended
service contract or extended warranty covering a motor vehicle or other item of
property which only provided coverage for specified repairs would not be
taxable. Repairs are not regularly performed and are needed only when a
component of the item is broken. Because the services might never be performed,
the contract is not taxable.
B.
Taxation of Services Performed
Under Service Contracts
1. To the
extent that a person providing a taxable service receives gross receipts
directly from the customer or as payment under a non-taxable service contract,
those receipts are subject to sales tax. Any parts used in providing the
service are also subject to tax on the retail price.
Example A: Customer purchases an extended
service contract covering only stated repairs to his motor vehicle. Customer
does not pay sales tax on the consideration for the extended service contract.
Mechanic makes repairs of $1,500 to customer's transmission and the repairs and
parts used are covered under the extended service contract. The transmission
repairs and parts are taxable regardless of whether the customer pays the
mechanic or whether the mechanic receives payment under the extended service
contract.
Example B: Customer purchases a service
contract covering regular maintenance and repairs of his heating and cooling
system. Customer paid sales tax on the consideration for the contract. Any
additional payments received by the repair person for services or parts covered
by the contract are not subject to sales tax. Any deductible amount,
non-covered labor charges or parts are taxable.
Example C: Customer purchases a service
contract for $750 from XYZ for the repair of his computer which he aiso
purchased from XYZ. XYZ agrees to provide certain listed repairs and parts for
a period of 3 years with no additional cost to the customer. The service
contract is not taxable because it only provided for contingent repair
services. When XYZ provides the listed repairs and parts, there is no sales tax
due because XYZ does not receive any additional consideration as all future
parts and repairs were paid for by customer at the time the contract was
purchased.
2. Payments
received by a service provider from a product manufacturer based on the
manufacturer's warranty are not subject to tax. For example, a vehicle
manufacturer provides a warranty for a specified time covering certain vehicle
components. There is no separate charge to the customer for the warranty which
"runs" with the vehicle. Any parts and repair costs performed by a dealer which
are covered by the warranty are reimbursed by the manufacturer. These
manufacturer reimbursements are not taxable.
3. A repair facility may purchase parts used
in performing repairs exempt as purchases for resale. Any parts withdrawn from
inventory for use in performing repairs are not subject to tax as withdrawals
from stock. Tax will be collected on the repair parts and charges in accordance
with paragraph 1 and examples above.
PART II
: AMENDMENT TO GROSS RECEIPTS
REGULATIONS GR-12 AND GR-18
GR-12(B)
(f) is amended to read as follows:
"f.
Warranties: Effective immediately the sale of extended service contracts or
extended warranties which are non-taxable pursuant to Emergency Regulation
1996-4 are not subject to tax. Vehicle dealers are no longer required to
collect sales tax on sales of non-taxable warranties. Vehicle purchasers are no
longer required to pay sales tax on non-taxable warranties at the time of
registration. In the event that a vehicle dealer sells an extended
service contract which is deemed taxable pursuant to Emergency Regulation
1996-4, then the dealer must collect tax on the consideration for the contract
regardless of whether the contract is sold along with the vehicle or subsequent
to the sale of the vehicle."
GR-18 (F) is amended to read as follows:
"
F. See Emergency Regulation 1996-4."
FINDING OF IMMINENT PERIL AND STATEMENT OF REASONS
On July 15, 1996, the Arkansas Supreme Court ruled in State
of Arkansas v. Staton, Case No. 9 6-215, that the gross receipts
from the sale of extended service contracts covering motor vehicles were not
subject to sales tax. This regulation is necessary in order to follow the
ruling of the court and to implement the collection of-tax on taxable repair
services. The decision of the Arkansas Supreme Court substantially alters the
manner in which sales tax is applied to service contracts and repairs.
Accordingly, there exists an imminent peril to the welfare of the State of
Arkansas.
In order to ensure the understanding of and compliance with the
decision of the court, this emergency regulation as authorized by Ark. Code
Ann. § 26-15-204 is necessary. The provisions of this regulation will
become effective on October 1, 1996.
