Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2013
 

Sales and Use Tax Annotations


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R

490.0000 RETURNS, DEFECTS AND REPLACEMENTS—Regulation 1655

Annotation 490.0510.925

(c) WARRANTIES

(1) In General

490.0510.925 Lemon Law—Boat Replacement. The provisions of the California Lemon Law do not apply to the sale of boats. However, the manufacturer or the dealer of the boat may be obligated under a warranty with the customer to replace a defective boat.

When a boat is replaced pursuant to a mandatory warranty, the person obligated under that warranty is regarded as purchasing the replacement boat for resale. No tax is due with respect to the transfer of the replacement boat to the customer because the replacement boat is regarded as having been sold as part of the original sale subject to the mandatory warranty. This is true whether the person obligated under the warranty is the dealer or the manufacturer. Thus, if the dealer is the person obligated under the mandatory warranty and it removes a boat from resale inventory to replace a defective boat, no tax applies to the transfer of the replacement boat to the customer. When the manufacturer is the person obligated under the mandatory warranty, the manufacturer generally purchases the boat from the dealer (i.e., it purchases a boat back that it had sold to the dealer for resale). The manufacturer then instructs the dealer to deliver the replacement boat to the customer on the manufacturer's behalf. The manufacturer is purchasing the boat from the dealer for resale, and no tax applies to the manufacturer's transfer of that replacement boat to the customer.

On the other hand, if the warranty is optional, the entity obligated under the warranty is the consumer of that boat. The sale to that person, whether it is the seller or the manufacturer, is the taxable retail sale.

If the customer pays a "slight price increase" (i.e., the difference in price between a 1994 and 1995 boat), the increase is subject to sales tax whether the warranty on the boat is mandatory or optional and whether the warranty is from the seller or the manufacturer. 8/7/95.