On extended service contracts, what must the dealer collect for tax purposes?

For extended service contracts, the dealer must collect retail sales tax on one half of the retail cost. In Virginia, this approach is taken because the service contracts are often considered to cover a specific period of time during which repairs or services are provided, rather than being a simple sales transaction. As a result, the tax is only assessed on a portion of the total cost, reflecting the portion that applies to the service provided rather than the entire retail value.

In this context, the rationale for collecting tax on one half of the retail cost aligns with state tax regulations, which aim to balance the need for revenue with the nature of these specific contracts. This method acknowledges that the service contract fee does not correspond to a traditional purchase and thus is treated differently for tax purposes.