Sales of Optional Maintenance Contracts Are Now Subject to Sales Tax in Indiana

Tuesday, April 9th, 2013

 
 
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Indiana
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For the second time in three months, the Indiana Department of Revenue (DOR) has updated a sales tax information bulletin addressing sales of maintenance and warranty contracts. Ind. Sales Tax Info. Bull. No. 2 (Dept. of Revenue Aug. 2013). Taken together, these bulletins announce and clarify that the DOR has changed its position on the sales tax treatment of optional maintenance contracts and optional warranty contracts.

Prior to these bulletins, the DOR's position had been that sales of both optional maintenance contracts and optional warranty contracts were not subject to tax. But, the DOR has changed that position. Now, the DOR considers sales of most optional maintenance agreements to be taxable bundled transactions, while sales of optional warranty contracts remain not subject to sales tax because they are sales of non-taxable services. The key to this change in policy is that the DOR now distinguishes between maintenance contracts and warranty contracts, when, prior to these bulletins, the DOR made no such distinction.

In the updated bulletins, the DOR explains that a maintenance contract is an agreement in which "both the customer and the service provider are aware at the time the contract is executed that consumable items will be provided under the contract." Additionally, in a maintenance contract, the taxable items provided under the contract are more than de minimis compared to the cost of the contract. In contrast, the DOR explained that a warranty contract acts like insurance against future potential repair costs and includes extended service contracts. So, under a warranty contract, "neither the seller nor the purchaser is certain at the time the contract is signed whether any tangible personal property will be provided under the terms of the contract." Unlike a maintenance contract, the replacement of consumable items is not included under a warranty contract.

The DOR determined that maintenance agreements are bundled transactions because they combine two or more distinct and identifiable products such as repair labor, general services (like cleaning or inspection), replacement parts, and consumable items. Thus, as bundled transactions, maintenance agreements are subject to tax. On the other hand, warranty contracts do "not include the sale of two or more products because . . . there may never be any parts or services provided to the customer." Therefore, warranty contracts are not bundled transactions and are not subject to sales tax.

In sum, Indiana taxes sales of optional maintenance contracts--those that provide repair and replacement parts and consumable items at no additional cost. But, warranty contracts that cover future unexpected repair costs and do not include consumable items needed to maintain the equipment are not subject to sales tax in Indiana.

Also, this change in interpretation does not affect computer software maintenance contracts because they are specifically addressed in Ind. Code sec.6-2.5-4-17. That statute imposes tax on the sale of a computer software maintenance contract to provide future updates or upgrades to computer software.


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