Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 490.0516


(1) In General

490.0516 Repair and Service Contracts. Company A installs, services, and repairs computer disks which are manufactured by B, a related corporation. B sells the disks it manufactures to original equipment manufacturers (OEMs) for incorporation into computers sold to consumers. The OEMs and their dealers provide warranties to the consumers of the computers. These warranties may be included in the sales price of the computer (i.e., mandatory warranties) or may be optional warranties. The OEMs and dealers may, in turn, contract with A to perform necessary repairs. If A's contract with the OEMs and dealers provides that A is reimbursed based on repairs actually performed, whether on a time and material basis or on a standard amount per unit actually repaired (general repair contracts), the type of warranty between the OEMs/dealers and the end customer is relevant. Whether A is a seller or a consumer of the parts and materials furnished is determined under the general rules of Regulation 1546 (b). When A is the seller, it is making a sale for resale if the repairs are pursuant to the OEM's or dealer's mandatory warranty; A is making a taxable retail sale when the repairs are pursuant to an optional warranty.

However, when A's contract with OEMs and dealers provides that A (who is not the seller of the computer disks to the OEMs or dealers) is reimbursed on a flat fee basis (e.g., A is paid a fixed amount for each warranty which it undertakes to fulfill, or a lump-sum annual fee based on units sold), the maintenance contract between A and the OEMs/dealers is considered an optional warranty or maintenance contract. As such, A is the consumer of the parts and materials furnished. This would be true whether the OEMs' or dealers' warranties with their customers were optional or mandatory. 8/23/90.