Seattle Rule5-133 Warranties and Maintenance Agreements

(1) Definitions. For the purposes of this rule, thefollowing terms will apply:

(a) Warranties. Warranties, sometimes referred to asguaranties, are agreements which call for the replacement or repair of apurchased product with no additional charge for parts and/or labor if theproduct is found to be defective or ceases to operate as designed during aspecified warranty period.

(b) Warrantor. The warrantor is the person obligated,as specified in the warranty agreement, to perform labor and/or providematerials to the owner of the purchased product to which the warranty agreementrelates. In most cases the warrantor is the manufacturer.

(c) Maintenance agreements. Maintenance agreements sometimesreferred to as service contracts, are agreements which require the specificperformance of repairing, cleaning, altering, or improving of tangible personalproperty on a regular or irregular basis to ensure its continued satisfactoryoperation.

(2) Business License Tax.

(a) Manufacturer's warranties included in the retailselling price of the product being sold.

(i) When a manufacturer's warranty is included in theretail selling price of the property sold and no additional charge is made, thevalue of the warranty is a part of the selling price. The value of the warrantyis included in the "gross proceeds of sale" of the article sold and reportedunder the appropriate classification  (e.g. retail sales and retail services orwholesaling).

(ii) When a repair is made by the warrantor under amanufacturer's warranty, the value of the labor and/or parts provided are notsubject to the business license tax.

(iii) When a person other than the warrantor makes arepair for the warrantor, the person making the repair is making a wholesalesale of the repair service to the warrantor. The person doing the repair isliable for business license tax under the wholesaling classification on thevalue of the parts and labor provided.

(b) Non-manufacturer's warranties and manufacturer'swarranties not included in the retail selling price of the article being sold.

(i) When a warranty is sold for a charge separatelystated on the invoice from the charge of the product, e.g., a warrantyextending the manufacturer's warranty, the charge is reported under the retailsales and retail services classification of the business license tax.

(ii) When a repair is made by the warrantor under awarranty that was separately stated on the invoice from the charge for theproduct, the value of the labor and or parts provided are not subject tobusiness license tax.

(iii) When a person other than the warrantor makes arepair for the warrantor, the person making the repair is making a wholesalesale of the repair service to the warrantor. The person making the repair isliable for business license tax under the wholesaling tax classificationprovided the warrantor provides the person making the repair with a resellerpermit.

(c) Maintenance agreements. Maintenance agreements(service contracts) require the periodic specific performance of inspecting,cleaning, physical servicing, altering, and/or improving of tangible personalproperty. Charges for maintenance agreements are retail sales, subject toretailing business license tax. Maintenance agreements or service contractsconcerning non-tangible personal property, such as custom software, or itemsnot included in the definition of a retail sale, should be reported under theservice classification. Additional guidance on maintenance agreements forsoftware is included in Rule 5-500 "Computer Software."

(d) Amounts received as a commission or otherconsideration for selling a warranty or maintenance agreement of a third-partywarrantor or provider are generally subject to business license tax under theservice and other activities classification.

(e) In the event a warrantor purchases an insurancepolicy to cover their obligations under the warranty, amounts received by thewarrantor under the insurance policy are insurance claim reimbursements thatare not subject to business license tax.

(3) Additional service - deductible. If services areprovided in addition to any warranty or maintenance agreement, such servicesare subject to retailing business license tax. This includes so-called"deductible" amounts not covered by a warranty or maintenanceagreement.

(4) Mixed agreements. If an agreement containswarranty provisions but also requires the actual specific performance ofinspection, cleaning, servicing, altering, or improving the property on aregular or irregular basis, without regard to the operating condition of theproperty, such agreements are fully taxable as maintenance agreements.

(5) Examples:

(a) An automobile dealer sells a vehicle to a customerfor selling price of $15,000 cash and the selling price includes a manufacturer'slimited warranty for 5 years or 50,000 miles. The owner of the vehicle has $600($200 parts and $400 labor) warranty work, paying no deductible, performed bythe dealer who is not the manufacturer-warrantor. The $15,000 selling price isreported under the retailing business license tax classification. The $600repair is reported under the wholesaling business license tax classification.

(b) The automobile dealer in example (a) also sellsits own extended warranty to the customer for $200. The dealer insures itselfwith an insurance carrier and under the terms of the policy, claims are paid onthe retail value of the repairs. In addition to the repairs in example (a), thecustomer has the dealer complete $500 of repairs under the dealer's extendedwarranty. The customer paid the $100 deductible and the dealer received $400from his insurance carrier. In completing the repair, the dealer installedparts from its inventory which had a cost to the dealer of $150 andsubcontracted part of the repair to an electrical shop which charged the dealer$200. The tax liability to the dealer and the subcontractor are as follows:

(i) The dealer reports the $200 sale of the warrantyunder the retail sales and retail services classification of business licensetax.

(ii) The $100 deductible received by the dealer is aretail sale subject to retailing business license tax.

(iii) The $400 received by the dealer from theinsurance company is a nontaxable insurance claim reimbursement.

(iv) The subcontractor is making a wholesale sale tothe dealer, if the dealer provides the subcontractor with a copy of itsreseller permit.

DIRECTOR'S CERTIFICATION

I, Glen M. Lee, Finance Director of the City ofSeattle, do hereby certify

under penalty of perjury of law, that the within andforegoing is a true and

correct copy as adopted by the City of Seattle,Department of Finance and

Administrative Services.

     DATED this ______ day of July 2016.

                              CITY OF SEATTLE,

                              a Washingtonmunicipality

                         By:     ____________________________________

                                Glen M. Lee,Finance Director

                                Department ofFinance and Administrative Services

Effectivedate: July 14, 2016