You think it would be easy to determine whether a warranty is optional or mandatory. Not like that. The Illinois Department of Revenue recently met with a company that makes the purchase of an optional extended warranty a mandatory condition for an optional product upgrade. It is understandable that the taxpayer does not know whether these contracts should be taxable or tax-exempt. The taxpayer sought the decision because he had been informed by the management of the tax assistance that “at 130.1935, section (b) the maintenance of the software is treated in the same way as the maintenance of the hardware and that, at point 140.301, point b) (3), it stipulates that, as long as there is no transfer of material personal property, the sale of sales and use taxes is exempt. However, one of the taxpayer`s clients is currently being audited and has been informed by the auditor that all software maintenance contracts they have acquired from the taxpayer should have been charged a fee. This is due to the fact that canned software upgrade fees are taxable under section 130.1935 (b) of point 130.1935. Therefore, where a maintenance contract provides for canned software updates and the costs associated with these updates are not listed separately and taxed on training, telephone assistance, installation, consulting or other maintenance costs, the entire agreement is taxable as a sale of can software. If an agreement to repair or maintain physical personal property is sold separately from the property, these agreements are not taxable transactions.
However, where maintenance, repair or parts services are provided under a tax-free agreement, the service or repair company is considered a service provider in accordance with the provisions of the Occupational Tax Act. When a service provider enters into a maintenance contract for equipment or real estate at a predetermined cost, the service provider is responsible for the user fee based on its costs related to the physical personal property used for the completion of maintenance or service. In its response, the department stated that computer software maintenance contracts are treated in the same way as maintenance contracts sold for other types of personal physical ownership. The viability of repair or maintenance agreements for physical personal property depends on whether the cost of the agreements is included in the sale price of the item. In this case, if the costs related to the agreements are included in the sale price of the property, the costs are taxable. However, there would be no tax on maintenance services or parts. The taxation of maintenance contracts can be complicated in all VAT Member States, in part because they can be different from each other. To facilitate compliance with tax rules, the Streamlined Sales and Use Tax Agreement (SSUTA) has defined this definition and allows states to define them in more detail. SSUTA was created with the aim of “simplifying and modernizing the administration of sales and taxation in order to reduce the burden of compliance with tax rules.” It currently has 23 full Member States and one associated Member State.