Conflicts between Colorado State and Home-Rule Cities Result in Audit Assessments
Across the country, a common issue in determining the taxability of Extended Warranties and Maintenance Agreements is whether or not such service contracts are optional or mandatory. If they are included in the purchase price or are otherwise required as part of the purchase, they are generally considered as taxable.
As every automobile dealer in Lakewood Colorado recently found out upon audit, home-rule cities in Colorado can and do differ from Colorado State on taxing extended warranty and maintenance agreements. Taxability among home-rule cities also commonly differs from one another and not just regarding vehicles.
Common Problems
Retailer often look to the State to determine what is or isn’t taxable, but that doesn’t work in Colorado. Colorado State and state-collected jurisdictions do not tax optional agreements, but Lakewood and some other home-rule cities do. See the State’s Sales Tax FYI 70 Warranties and Maintenance Agreements
Is tax to be charged when the agreement is purchased or when invoked? On parts only? On the total cost of services or on a percentage basis? Where will it be taxed?
In Colorado, tax on vehicles is assessed based upon where the vehicle is registered, generally your home address. If you buy the vehicle in a separate city or county your county DMV will charge your residence city and/or county’s use tax when you license it.
This is an advantage to some purchasers who live in cities with no applicable use tax, but what if they buy an extended warranty or maintenance agreement? What city’s tax rate will be charged on a service agreement if you live in one city but buy a car in another city?
CAUTION: Dealers in cities such as Lakewood will charge you their city’s tax on it even if there’s no applicable tax where you live and register the vehicle! Sourcing does not follow where the vehicle will be titled.
Impact on Many Retailers
It seems you can hardly buy a computer, phone or other hand-held electronic device or even a cheap tool without being offered an extended warranty. Retailers offering such service agreements should be sure they are properly complying with the various home-rule cities’ tax laws to avoid costly audits. It’s easier to tax an item up front that to pay tax, interest and penalties upon audit with little chance of recovering the tax from your customers.
Insurance vs. Warranty
Insurance policies aren’t taxed, but distinguishing between an extended warranty or maintenance agreement and an insurance product can be very difficult for retailers and auditors alike. One key point to focus on is the transfer of the risk of loss. Another issue is that of defects or quality problems vs. accidents. These lines are often blurred with various offerings today.
What Can I Do?
If you are vendor offering service agreements, read the fine print and give the matter close attention. That’s what the auditors have been advised to do!
But I Am A Purchaser, Not A Vendor
If you are a purchaser, be aware that vendors often miss taxing service agreements properly. It then falls to you to self-assess and remit use tax when applicable. Individuals have the same responsibility as businesses.
The information in this tax tip addresses issues in general and is limited in scope. Any potential results discussed may vary and circumstances may warrant more or less favorable outcomes.
It’s best to be proactive and to identify and resolve issues before an auditor contacts you. Voluntary Disclosure Agreements are no longer available once you’ve been contacted.
Remedies are often available when you’ve discovered obligations before auditors contact you. Anonymous Voluntary Disclosure is one option. Even if you are already under audit, we can often help. See our Audit Case Studies.
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* This tip is intended to provide general information only and is not to be considered as a substitute for professional advice.