## Facts

- A Tennessee automobile dealership sold extended warranty service contracts in connection with vehicle sales, largely to out-of-state purchasers.
- The contracts promised specified repairs after the manufacturer’s warranty expired, to be performed “free of charge” at participating dealerships nationwide.
- After an audit covering March 31, 1986 to December 31, 1988, the Department of Revenue assessed sales and use tax, penalties, and interest totaling $107,555.
- Of that amount, $106,458 was assessed as sales tax on the extended warranty contracts; $1,092 related to unpaid use taxes the dealership conceded.
- The underlying vehicle sales to nonresidents were exempt from Tennessee sales tax under Tenn. Code Ann. § 67-6-315, but the Commissioner taxed the associated warranty contract sales.
- The Commissioner relied on Tenn. Code Ann. § 67-6-102(22)(F)(iv) (and related provisions) defining taxable “sale” to include “the performing for a consideration of any repair services,” and adopted a rule treating extended warranties as taxable repair services.

## Issues

1. Whether the sale of an extended automobile warranty service contract constitutes “the performing for a consideration of any repair services” under Tenn. Code Ann. § 67-6-102(22)(F)(iv), making the contract sale subject to Tennessee sales tax.
2. Whether the Commissioner exceeded statutory rulemaking authority by classifying extended warranty contract sales as taxable repair services by regulation.

## Decision

- The Tennessee Supreme Court affirmed summary judgment for the dealership.
- The Court held that selling an extended warranty contract is not “the performing for a consideration of any repair services” and is not taxable as a repair service under Tenn. Code Ann. § 67-6-102(22)(F)(iv).
- The Court held the Commissioner’s rule impermissibly expanded the statutory tax base and exceeded the Commissioner’s authority.
- The sales-tax portion of the assessment attributable to warranty contract sales was invalidated; the conceded use-tax liability remained.

## Legal Principles

- A tax on “the performing for a consideration of any repair services” applies to the act of performing repairs, not the sale of a contract right to possible future repairs.
- Taxing statutes are strictly construed against the taxing authority and in favor of the taxpayer; courts will not extend taxation by implication where the legislature has not spoken clearly.
- Administrative agencies may implement statutes through rules but may not create new taxable events or expand the tax base beyond the statute’s text.

## Conclusion

The court ruled that extended warranty service contracts are not taxable repair services under the Tennessee sales-tax statute because they involve a contingent promise of future repairs rather than the present performance of repairs, and it invalidated the agency rule that attempted to tax such contracts beyond the statute’s scope.


Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132 (Tenn. 1992)