Warranties, Recalls, and Service Contracts

Optional maintenance contracts provide prepaid coverage for maintaining a vehicle. These contracts include taxable items and nontaxable repair labor for one price. Examples include:

• Oil changes
• Tire rotation
• Wheel balancing

 
Optional maintenance contracts are taxable, unless the cost of the taxable items is insignificant and is not easily measured. No sales or use tax is due when the contracted maintenance is performed.
 
If an optional maintenance contract is sold with a motor vehicle, then the contract is taxed at the 6.875 percent general sales tax rate and applicable local taxes.

Parts that are replaced or repaired under a warranty, recall, or service contract are taxed differently based on the terms of the agreement.

Repair labor or replacement parts are not taxable when they are covered by a manufacturer’s warranty or recall. The parts used are considered an exchange of inventory. 

Used car dealers in Minnesota must provide a warranty with the sale of certain used cars. If you sell such a vehicle and later make repairs under the warranty, no tax applies to the parts used in the repair.

Repair or replacement parts covered by a warranty or guarantee are not taxable when included in the purchase price of a rebuilt engine, transmission, etc.

Extended warranties to cover unexpected repair costs are not taxable. However, sales or use tax does apply to the parts used for contracted repairs. The following examples will tell you when tax is due and who pays it.