Tax Type
Retail Sales and Use Tax
Description
Services; repair and installation; Maintenance contracts
Topic
Taxability of Persons and Transactions
Date Issued
02-13-1997
February 13, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************
In your letter, you seek correction of the consumer use tax assessment issued to************* (the Taxpayer). I apologize for the delay in responding to your letter. Copies of all references are enclosed.
FACTS
The Taxpayer provides consulting services. An audit for the period June 1993 through May 1996, resulted in the assessment of use tax on untaxed purchases of supplies, computer equipment and maintenance contracts.
The only issue raised by the Taxpayer is the tax assessed on maintenance contracts. The Taxpayer maintains that the maintenance contracts are exempt based on the seller making a statement on the contracts that the Taxpayer is tax exempt.
DETERMINATION
It is my understanding that the maintenance contracts in question provide for the furnishing or replacement of parts and repair labor. Although the seller may indicate that the contracts are exempt from taxation, the application of the tax to parts and labor maintenance contracts is set out in Virginia Regulation (VR) 630-10-62.1(D) and provides, in part, the following:
-
- Maintenance contracts, the terms of which provide both repair or replacement parts and repair labor, represent a sale of tangible personal property. The total charge for such contracts is subject to the tax since 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.
Please note that the above cited regulation became effective January 1, 1985 and is applicable for the entire period of the Taxpayer's audit, except that, effective January 1, 1996 and thereafter, "parts and labor" maintenance contracts are subject to the tax based on one-half of the total charge for such contracts. See Tax Bulletin 95-8 (9/27/95).
I would also note that the application of the tax to various types of parts and labor maintenance contracts is set out in numerous public documents (PDs) issued by the department. For example, PDs 91-20 (2/22/91) and 92-196 (9/30/92) clearly demonstrate a well established policy to tax parts and labor maintenance contracts regardless of whether the agreement is for computer software updates or for maintaining or repairing computer hardware or other equipment.
Furthermore, as the Taxpayer is engaged in a service type of business, it is not entitled to an exemption from the retail sales and use tax on its purchases of tangible personal property and maintenance contracts. Accordingly, the Taxpayer is considered the final user or consumer of the tangible personal property and maintenance contracts which it purchases for use in the performance of its services and therefore bears the ultimate liability for the retail sales and use tax on these purchases.
Based on all of the foregoing, the maintenance contracts were appropriately held taxable in the department's audit, except for parts and labor maintenance contracts taxed on the total charge, rather than one-half of the total charge, during the 1996 period of the audit. Accordingly, the audit will be revised to only charge tax on one-half of the total charge for maintenance contracts assessed during the period of January 1996 through May 1996.
Upon completion of the revision, the Taxpayer will be sent a revised audit report and a revised and updated bill for the outstanding balance due. If you have any questions about the revision, please contact ***** of the department's *******District Office at**********.
.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11964R
Rulings of the Tax Commissioner