The Ohio Supreme Court ruled that an automobile manufacturer is not liable for use tax on repair parts and services provided to customers pursuant to the manufacturer’s “goodwill repair” policy after the standard warranty had expired. The automobile owner, rather than the manufacturer, was the consumer of the parts and services. Since the cost of the parts and repairs was included in the price charged for the automobiles and the owners had paid sales tax on the price paid for the automobiles, no additional sales or use tax was due from the manufacturer. DaimlerChrysler Corp. v. Levin, __ Ohio St. 3d __, 2008-Ohio-259 (Jan. 30, 2008).
Facts: DaimlerChrysler Corporation (“DCC”) manufactures automobiles, which it sells to consumers through a network of authorized dealers. These automobiles are sold with general warranties that typically last 36 months or 36,000 miles. However, dealers may sometimes provide parts and perform repairs after the expiration of the warranty period pursuant to written policies established by DCC. These repairs are provided at no cost to the owner; instead, DCC reimburses the dealer for the cost of the parts and repairs. The anticipated costs of this “goodwill repair” program are factored into the price paid by consumers for the automobiles. When customers purchase the automobiles, sales tax is collected by the dealers and paid to the state. Thus, sales tax is paid on the parts and services provided under the goodwill repair program.
DCC was assessed use tax on parts and repairs for which DCC reimbursed its dealers under the goodwill repair policy. The Board of Tax Appeals (“BTA”) affirmed the assessment under authority of General Motors Corp. v. Wilkins, 102 Ohio St. 3d 33, 2004-Ohio-1869. In that case, the Court held that the manufacturer was the consumer of parts and services provided to customers under the warranty that was purchased as part of the price of the automobile, or provided to customers under “special-policy” repairs, which cover defects in materials or workmanship.
Majority Decision: On appeal, the Court declined to follow its decision in General Motors Corp. v. Wilkins (“GM”). Instead, it held that the owners of the automobiles were the consumers of the parts and services provided under the goodwill repair program. It observed that as the owners of the vehicles, it was the owners who received the parts and the benefits of the repairs. Therefore, they were “consumers” as defined in R.C. 5741.01(F).
The majority distinguished the decision in GM on the basis that in that case, General Motors (“GM”) was contractually obligated to make the repairs pursuant to the warranty. The customer paid for the warranty, not for the parts and repairs. Under the sales tax law, the costs of warranties that are included in the price of tangible personal property are taxable transactions and the warrantor is the consumer of the parts and services provided under the warranty program. The situation also provides the customer with the contractual right not to be charged for the repairs. Since GM consumed the parts and services in carrying out its contractual obligations under the warranty, it was viewed as the consumer of the parts and repairs.
In the present case, the Court pointed out that goodwill repairs were not performed pursuant to a contractual obligation to have repairs made at no charge, but rather were done as part of a for-profit enterprise. The Court pointed to three elements in support of its conclusion. First, the cost of the program was factored into the price paid for the automobile. Second, the increase in cost was directly related to the anticipated charge for the repairs; it was not for the contractual obligation of the manufacturer to pay for the repairs. Third, there was an ongoing relationship between the manufacturer and the dealer, such that the dealer was required to repair the automobile when presented by a customer.
As a result, the Court distinguished the goodwill repairs from cases in which a business distributes items free of charge in order to promote its business. In those cases, the recipients of the free items do not pay any charge for the item; therefore, they are not “consumers” under the use tax law. Nor would they become consumers if the cost of the free samples were included in the cost of products that are sold because the distributed sample does not “closely relate” to the product that was sold. In contrast, the repair that is provided under the goodwill repair program relates directly to the very automobile that was purchased.
Dissent: The dissent would have affirmed the BTA on the basis of the decision in GM. First, it likened the goodwill repairs to the “special-policy repairs”, which are repairs performed during the warranty period, but which are outside the normal warranty coverage. Second, it viewed the total consideration paid for the automobile to be paid for the automobile, not for the repairs and parts. There are a number of overhead expenses that are built into the price of the automobile, but in the view of the dissent, that does not mean that the customers are paying for those items. Thus, the fact that the cost of the repairs was built into the price charged for the automobile does not mean the customers are paying directly for those parts and repairs.
Discussion: Warranties, whether provided separately for cost, or provided as part of the price of tangible personal property, are subject to sales tax. While there is currently an exemption for parts and repairs provided by a warrantor to fulfill a warranty, that exemption was suspended during the time period involved in the GM decision. Additionally, in GM the taxpayer failed to raise the issue that was decided in DaimlerChrysler Corp. v. Levin (“DCC”): Whether including the cost of the parts and repairs in the price of an automobile made the customer the consumer of the parts.
The extent to which this decision will have an impact on other products is unclear. Other manufacturers may well include the anticipated costs of repairs into the price of their products. However, the Court placed great emphasis on the close contractual relationship between automobile dealers and manufacturers. It remains to be seen how important a factor this will be. Where a manufacturer can establish the existence of such a relationship, it may be able to take advantage of the decision in DCC to avoid additional use tax on parts and repairs provided outside of a warranty.