Wednesday, February 18, 2009

Repair Labor and Maintenance Contracts

Here's the deal on maintenance contracts and repair labor.

Many states impose sales and use taxes on the labor to repair tangible personal property. In other words, if you get your rocket engine (see picture) repaired, you're gonna pay tax on the parts AND the labor. No surprise there, unless you're in a state that doesn't do this. In which case, you're probably shocked beyond all belief. Sorry. Hope you didn't spit anything on your laptop.

Anyway, the next question is whether or not maintenance contracts get taxed. Usually, maintenance and extended service contracts are taxable in states where the repair labor is taxable. And not taxable in states where repair labor isn't taxable.

However, if the contract includes a regular supply of materials - such as toner and paper in a copier contract, that will usually make the contract taxable. Even in states that don't tax repair labor. These types of contracts essentially become a pre-purchase of TPP and become taxable.

Finally, some states differentiate between a maintenance contract sold by the company who's going to be doing the service vs. a third party who will simply contract out the work when necessary. In the latter case, those are often considered insurance policies as opposed to maintenance contracts and not taxed.

Sales Tax Guy
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Copier Service Contracts said...

Many service contracts do not cover Staples, Paper and document feeder belts and there may be some others so check with your service provider so better first you have discuss about this before sign a contract.

Tax Debt said...

But if it still needs other equipment in the building to be able to function, then it might be considered a real property contract and treated under the normal contractor rules.

Jim Frazier said...

Reliance on other equipment in a building is generally not the deciding factor. Are you referring to any state in particular?