Warranty and Service Contract Compliance: A Refresher

There are times when a dealer wants to offer some assurance that a vehicle she is selling is, in fact, a good buy. A guarantee that the dealer will assist with vehicle repairs, at least for a few weeks or months after a sale, is often the incentive that will close a deal. Here are a few points to remember so that the assurance you offer is fully compliant with the law.
  • What is a warranty?
A warranty is an undertaking or a promise given in writing by a manufacturer or seller of a product to repair or replace merchandise if certain defects occur. There is no separate charge for a warranty.
  • What is a service contract?
A service contract is a product sold to car buyers that provides repairs that are not covered by a warranty. Service contracts are typically offered by third-party providers and sold through dealers.
  • What is a full warranty?
A full warranty offers a full refund of all funds paid, replacement of defective merchandise, or payment in full of all repairs. These are rare.
  • What is a limited warranty?
A limited warranty is any warranty that is not a full warranty. Limiting the duration of warranty coverage is the surest way to classify an assurance as a limited warranty.
  • Must I have a separate license to offer a warranty?
  • What do I have to cover with my warranty?
A dealer may tailor his/her warranty to meet their needs. A dealer may limit coverage to specific items, set a maximum dollar limit for repairs, set the warranty's duration, and many other things.
  • Do I have to charge sales tax for a warranty?
No, because there is no charge for a warranty.
  • Must I have a separate license to offer a service contract?
No, unless you are personally providing the services mentioned in the contract. If your dealership is also in the business of issuing service contracts, then you must be registered with the Texas Department of Licensing and Regulation (TDLR) and meet rigorous financial requirements involving cash deposits and/or insurance backing of the product.

This usually is not an issue because, as stated above, most service contracts are offered by third-party providers.
  • Do I have to charge sales tax for a service contract?
  • What documents do I need to offer a warranty or a service contract?
For both warranties and service contracts, you must note their availability on the Buyers Guide associated with the covered vehicle.


Acquire a “Limited Warranty” form that specifies the terms of your warranty. To ensure that the form meets the requirements of the federal Magnuson-Moss Act, purchase your forms from a reputable source like Burrell Printing Company, 800-531-5234.)


The third party who sells your service contracts will provide you with written coverage information to share with your customers.


By: Matthew
On: 07/13/2017 00:05:22
Do you need to collect sales tax when collecting a deductible for a limited warranty?
By: Amber Hackett Crosby
On: 07/17/2017 10:09:13
No, you need not collect sales tax on charges for extended warranties and service contracts. Chapter 152 of the Tax Code imposes tax on motor vehicle sales and says that tax is calculated on the total consideration paid. Section 152.002(b)(3) excludes from the definition of total consideration “the amount charged for labor or service rendered in installing, applying, remodeling or repairing the motor vehicle sold.” Further, Section 151.0101(a)(5)(C) excludes from the definition of a taxable service the repair, maintenance, and restoration of a motor vehicle. Based on Section 152.002, the total consideration subject to tax under Chapter 152 on the sale of a motor vehicle does not include charges for extended warranties and service contracts.

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