During the last few years, many states have undertaken aggressive efforts to collect sales tax on amounts paid for service contracts a/k/a extended warranties, which in most states are deemed not to be insurance products. A recent example of this effort is the South Carolina Administrative Law Court’s decision in South Carolina v. Alltel Communications. Here, the South Carolina Department of Revenue sought to collect sales tax on two types of contracts that Alltel sold to its customers for their cellphones, one was a service contract covering electrical or mechanical malfunction of a cellphone resulting from manufacturer’s defect and the second was insurance covering a lost, stolen or damaged cellphone. Alltel conceded that it owed sales tax on the fees collected for service contracts sold in connection with sales of cellphones but challenged the South Carolina Department of Revenue’s assessment of sales tax on the amounts paid for the cellphone insurance. The court sided with Alltel finding that sales tax did not apply to the premiums collected for the cellphone insurance because the insurance was not tangible personal property, the type of property to which sales tax applies, and therefore the premiums were not gross proceeds from the sale of tangible personal property and the sales tax did not broadly apply, as the South Carolina Department of Revenue argued, to any property or services (i.e., insurance) sold in conjunction with the sale of the tangible property at issue here, cellphones.
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