Tax Type
Retail Sales and Use Tax
Description
Contract parts and labor for computer maintenance and repair
Topic
Appropriateness of Audit Methodology
Basis of Tax
Date Issued
09-26-2002
September 26, 2002
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in reply to the letter from ***** regarding the sales and use tax assessment issued to ***** (the "Taxpayer") for the period September 1997 through August 2000. I note that the assessment is paid. I apologize for the delay in the department's response.
FACTS
The Taxpayer contracts to provide parts and labor computer maintenance and repair services for customer owned equipment. In order to service its contracts, the Taxpayer purchases and maintains an inventory of computer spares that are temporarily loaned to customers while the Taxpayer repairs their equipment. On occasion, the computer spares are provided as replacement parts. In order to recover the costs related to obsolescence, the Taxpayer classifies the computer spares as assets and depreciates them for income tax purposes. Because the Taxpayer withdrew the computer spares from inventory for purposes other than resale and depreciates them as assets, the auditor assessed the tax.
The Taxpayer disputes the tax and believes that the computer spares may be purchased for resale in accordance with Code of Virginia § 58.1-609.10(3) and Public Document 00-191 (10/12/00).
DETERMINATION
Title 23 of the Virginia Administrative Code (VAC) 10-210-910 addresses the application of the tax to maintenance contracts that provide parts and labor and states in section D that "persons providing maintenance pursuant to such contracts may purchase repair or replacement parts under a resale certificate of exemption, but are liable for the tax on all items purchased for use in performing the repairs or maintenance."
The computer spares in this case remain the property of the Taxpayer and are withdrawn from inventory when needed to provide repair services to a computer under contract. The computer spares, whether provided as loaner equipment or for replacement purposes, are used by the Taxpayer to satisfy its contractual obligations and are taxable in accordance with the regulation.
The department has previously addressed the issue of spare devices used in providing services under maintenance contracts in Public Document 93-213 (10/27/93). Similar to the facts in this case, the spare devices remained the property of the taxpayer and were used as temporary replacement equipment when the taxpayer provided repair services. The Tax Commissioner determined that the spare devices were used by the taxpayer to provide services in accordance with the regulation and the tax was upheld.
The Taxpayer disagrees that depreciating the computer spares as assets subjects them to the use tax and cites Code of Virginia § 58.1-609.10(3) and Public Document 00-191 to support its position. In the public document, the Tax Commissioner determined that the depreciation of gas cylinders for income tax purposes was not inconsistent with the exempt purchase of the cylinders for future rental. The public document and the cited statute, however, do not apply in this instance, as the Taxpayer is not engaged in the lease or rental of the computer spares.
Lastly, the Taxpayer contends that it applies the sales tax to its charges for maintenance contracts, and that assessing the tax in the audit applies the tax to the same item multiple times. I do not agree. The charge for a maintenance contract that provides both parts and labor is subject to the sales tax because at the time the contract is entered into it is impossible to ascertain what portion of future repair transactions will represent parts and what portion will represent labor. The Taxpayer's use of the computer spares in satisfying the terms of its contracts is a separate and distinct transaction and is taxable as discussed above.
I find that the assessment of the tax on the computer spares is correct. If you have additional questions regarding the determination set forth in this letter, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/33447J
Rulings of the Tax Commissioner