A number of states are beginning to tax, or consider taxation, of a home warranty, either by an upfront sales tax on the total purchase price or a sales tax based on the tangible personal property portion of the home warranty. In these states, home warranty prices will increase to cover the cost of the sales tax. Most home service contract providers are including the sales tax in their warranty plan fees, rather than having the consumer estimate and pay the sales tax separately.
While no one can control how any state handles taxation, it is important that you and your clients are aware of how sales taxation will impact the cost of the warranty, as well as understand the tangible personal property considered taxable in your respective state.
Most assume that if a system or appliance is integral to the functioning of the house, such as a heating system, it is not considered tangible personal property; and once tangible personal property is permanently affixed to a residence, it becomes real property. Real property stays with the home during a resale transaction. Real property is typically not taxed at transfer of sale. In some states, however, items such as garbage disposals, built-in appliances, and even well pumps are not defined as real property, and as a result, are taxed as tangible personal property in relation to the purchase of a home warranty plan.
New Mexico, North Carolina, Ohio, Tennessee, Texas, and Utah currently charge sales tax on home warranty purchases, either in whole, or in part based on the value of covered tangible personal property. As a real estate professional, you may want to be aware of the impact of sales tax on the home warranty, and the trend that may continue to other states, thereby increasing home warranty prices and directly affecting you and your clients.
The National Home Service Contract Association (NHSCA) is advocating that tangible personal property versus real property be defined at a national level, so that taxation has some level of consistency from state to state.
To better understand the NHSCA’s position, their legal counsel has drafted this article.