006.05.97 Ark. Code R. 001

Current through Register Vol. 49, No. 10, October, 2024

Rule 006.05.97-001 - Gross Receipts Regulations (GR-9.2, GR-12 and GR-18)

On July 15, 1996, the Arkansas Supreme Court ruled in State of Arkansas StdfonCase No. 96-215, that the gross receipts from the sale of extended service contfacts covefing motor vehicles were not subject to sales tax. These regulations are necessary in order to-follawjhe ruling of the court. The provisions of an emergency regulation containing identical terms became effective on October 1, 1996. In the event that service contracts covering taxable services become subject to sales tax, these regulations shall become void.

PART I : NEW REGULATION - GR-9.2

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 winch 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 winch 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 also 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 and GR-9.2 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 and GR-9.2, 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 and GR-9.2."

006.05.97 Ark. Code R. 001

1/31/1997