Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2016
Sales and Use Tax Annotations
490.0000 RETURNS, DEFECTS AND REPLACEMENTS—Regulation 1655
(2) Warranty Charges—When Includable In Tax Measure
490.0727 Software/Hardware Post-Warranty Service Agreement. Taxpayer, in connection with sale of network computing products including workstations, servers, software and microprocessors, offers customers post-warranty services on a contractual basis after the initial product warranty has expired. The post-warranty support services are offered through a four level multi-tiered program. Each level of support is sold for a single price and provides the customers with bundled hardware maintenance, operating system enhancements, and specific software telephone/on-line support, including patches and enhancements.
Since the customers are offered an optional lump-sum service agreement for both hardware and software maintenance, the service agreement is regarded as both an optional maintenance agreement on the equipment as well as an optional maintenance agreement for the software. Tax does not apply to that portion of the "hardware only" support agreement which relates to actual hardware maintenance. However, tax does apply to that portion of the agreement which represents the charges for the maintenance of the operational programs (software) since such software maintenance agreements consist of providing updates in tangible form (on storage media) to a prewritten operational program. Tax also applies to charges for consultation services (i.e., technical support) related to the operational program maintenance agreement unless the consultation is optional and such fees are separately stated. (Regulation 1502(f)(1)(C).) 4/22/97. (Am.2008–1). (Note: Effective January 1, 2003, 50 percent of the charge for optional software maintenance agreements is subject to tax. Prior to that date, generally 100 percent of the charge was subject to tax.)