TR 26: Maintenance Contracts, Service Agreements and Warranties
Maintenance contracts, service agreements and extended warranties sold to maintain a specific piece of equipment or computer software beyond the manufacturer's original warranty may be subject to sales/use tax.
- If the contract, agreement or warranty is a mandatory charge as a part of the original sale, lease or rental transaction, the charge would be subject to sales/use tax.
- If the contract, agreement or warranty is for labor only and any parts will be billed to the customer separately, the contract, agreement or warranty would not be subject to sales/use tax (subsection 3-2-6(a), BRC, 1981). However, sales/use tax must be paid on any repair parts.
- If the contract, agreement or warranty includes parts, materials or software updates and they are not separately stated, the entire amount of the contract, agreement or warranty is subject to sales/use tax. However, if the vendor has advanced approval in writing from the City Manager allowing the vendor to use a percentage of the total sales price to separate the parts, materials or computer updates from labor, then only the percentage of the total sales price allocated to parts, materials or computer updates would be subject to sales/use tax (subsection 3-2-6(b), BRC, 1981).
- A software company sells an optional service agreement with the sale of its software package. The agreement consists of online support and updates which are not separately stated for $2,000.00 per year. The service agreement is subject to sales/use tax, because the update is commingled with the labor and there is no prior agreement with the City for only a percentage to be taxable.
- An equipment manufacturer sells an extended warranty with the purchase of any piece of equipment. The warranty is optional and for labor only. It begins after one year, when the original warranty expires. The warranty is not subject to sales/use tax, but any parts used during the extended warranty period would be subject to sales/use tax.
- A leasing company leases computers and requires that a maintenance agreement be sold with all leases. The maintenance agreement is subject to sales/use tax, because it is mandatory.