Opinion No. ( 1991 )

The Honorable Jack McCoy State Representative 712 McNeal Street Malvern, AR 72104-4326

Dear Representative McCoy:

This is in response to your request for an opinion on the following question:

May the Department of Finance and Administration Revenue Division apply the sales and use tax to the amount paid for an extended warranty in connection with the purchase of a used car from a dealer?

It must be initially noted that effective May 1, 1991, the sale of any used car is subject to the sales or use tax. The exemption for used cars previously registered in Arkansas was repealed by Act 3 of 1991. See A.C.A. § 26-52-510(e) (Cum. Supp. 1991) (applicable to all motor vehicles purchased on or after November 3, 1989).

With regard, specifically, to warranties on motor vehicles, this matter is now addressed in the 1991 permanent regulations, promulgated by the Department of Finance and Administration for the proper enforcement of the sales and use tax laws (see A.C.A. §§ 26-52-105 and 26-53-104). Paragraph B.l.f. of these regulations states as follows:

Warranties: Sales or use tax is due on the gross receipts or proceeds received for an extended warranty on a new or used vehicle offered either by the manufacturer or the dealer. When the extended warranty is purchased at the time the new or used vehicle is sold, the price of the warranty is to be included in the total gross receipts or proceeds on which tax is collected at the time of registration. Effective May 1, 1991, used car dealers are no longer required to collect sales tax on extended warranties on used vehicles when the warranty is sold at the time the car is sold or prior to registration of the vehicle. Tax on used car warranties is to be paid by the purchaser to the Director at the time of registration. The dealer will be liable for sales tax on the warranty if the warranty is sold at the same time as the vehicle but is billed to the customer on a separate invoice. If the dealer or manufacturer sells a warranty on a new or used car after the car has been registered, the dealer or manufacturer must continue to collect sales tax on the warranty and local tax on these sales is calculated at the rate of the city and county in which the sale occurred.

Dept. of Finance Admin. 1991-3 Permanent Regulation (Sale ofMotor Vehicles, Trailers and Semitrailers) (May 20, 1991).

It thus appears that the answer to your question is, generally, "yes." The sale of a taxable service has occurred when the dealer sells the warranty. See generally Ragland v. Miller TraneService Agency, Inc., 274 Ark. 227, 623 S.W.2d 520 (1981). When a person purchases an extended warranty, he or she is prepaying taxable services.

The foregoing opinion which I hereby approve was prepared by Deputy Attorney General Elisabeth A. Walker.

Very truly yours,

WINSTON BRYANT Attorney General

WB/EAW/dwv