How Are Service Warranties Taxed?

First, let’s look at FDOR’s definition of a service warranty which also goes by the name of maintenance contract: ‘Any contract or agreement that indemnifies the holder of the contract or agreement for the cost of maintaining, repairing, or replacing tangible personal property.’

Service warranties are taxable, but they are not taxed when it covers an item that is not subject to tax. For example:

Taxable: A service warranty for a car is taxable since cars are taxable.

Not taxable: A service warranty for a hearing aid is not taxable since hearing aids are not taxable.

When a service or replacement is made under a warranty, the payment made by the service warranty issuer to the person making the repairs is not subject to tax. However, any payments made by anyone else besides the service warranty issuer are taxable. For example:

A customer comes to you for repairs to his car. The total charge for the repair is $3,000.00. The taxpayer will be using his service warranty to cover the repairs but has a deductible of $1,000.00. The $1,000.00 paid by the customer is taxable; the remaining $2,000.00 paid by the service warranty issuer is not taxable.

You can read more about service warranties here under 12A-1.105, F.A.C.

Get it? Got it? Good! Cheers!