🔒CT auto dealer challenges state sales tax on warranties sold to out-of-state buyers

A used car dealership in Naugatuck is challenging a Connecticut sales tax assessment in a case that raises questions about the state’s authority to tax service contracts sold to out-of-state residents.

A Better Way Wholesale Autos Inc. filed a lawsuit against Commissioner of Revenue Services Mark Boughton in July 2024 contesting a $250,304 assessment from the state Department of Revenue Services from March 2016 through February 2019.

According to a court filing dated Nov. 18, a trial is scheduled for March 2026 in New Britain Superior Court. The trial was originally set to begin this month, but was postponed.

The dispute centers on whether Connecticut can impose its 6.35% sales tax on extended warranty and service contracts sold with motor vehicles to nonresidents who register those vehicles in other states.

The dealership claimed deductions for about $3.9 million worth of warranty contracts it says were sold to out-of-state residents during a three-year audit period. The state Department of Revenue Services disallowed those deductions, arguing that because the contracts were sold contemporaneously with vehicle purchases from a Connecticut location, they are subject to Connecticut sales tax regardless of the buyer’s residency.

The dealership has mounted a three-pronged legal challenge to the assessment.

First, it argues that the state regulation implementing the tax exceeds its statutory authority because it taxes warranty contracts as “services” even though no maintenance or repair services were actually rendered at the time of sale.

Second, A Better Way contends the tax violates the Commerce Clause of the U.S. Constitution by imposing an undue burden on interstate commerce. The dealership argues the tax creates a risk of double taxation when out-of-state buyers must also pay taxes in their states, and that Connecticut provides no services or benefits to those interstate purchasers.

Third, the company claims the assessment violates the Equal Protection Clause because the state is applying it differently to A Better Way than to similarly situated vehicle dealers.

In a pretrial brief, the Department of Revenue Services argues that Connecticut law is clear: a warranty contract purchased at the same time as a motor vehicle “is deemed to be sold at the location of such purchase,” based on state regulations.

“A maintenance, repair or warranty contract purchased in Connecticut shall be taxable at the tax rate that applies to sales of services … even if the motor vehicle, aircraft or vessel is purchased exempt or at a reduced rate of tax by a nonresident of Connecticut,” the regulation states.

The state maintains that all the warranty contract sales at issue were made by A Better Way’s employees from its Naugatuck location, where the vehicles were physically located at the time of sale and where the warranty contracts were filled out and paid for.

Also, the department’s brief raises questions about A Better Way’s record-keeping, noting that state auditors found discrepancies in the dealership’s documentation.

A Better Way has argued it should receive credit for sales taxes allegedly paid to other states on behalf of out-of-state customers. However, the state counters that Connecticut law only provides such credits when property “has already been subjected to a sales or use tax by any other state” before Connecticut’s sales tax is imposed.

A Better Way is represented by attorneys Kenneth A. Votre, Ross H. Garber and Matthew Gibbons. The Department of Revenue Services is represented by attorneys Louis P. Bucari, Erica C. McKenzie, Ben P. Mileski and Roman J. Musilli.