Bulletin Number
VTB 95-8
Tax Type
Retail Sales and Use Tax
Description
Parts and Labor Maintenance Contracts
Topic
Taxability of Persons and Transactions
Date Issued
09-27-1995
PARTS AND LABOR MAINTENANCE CONTRACTS
This bulletin is intended to notify Virginia taxpayers of a change to the Retail Sales and Use Tax regarding parts and labor maintenance contracts.
Effective January 1, 1996, an exemption from the sales and use tax will apply to one-half of the total charge for those maintenance contracts which call for the provision of both parts and labor.
Scope of Exemption: This exemption applies to all agreements whereby a person agrees to maintain or repair an item of tangible personal property provided such agreements provide both repair/replacement parts and repair labor, including maintenance contracts on consumer appliances and electronics, computer hardware, computer software, machinery and equipment.
Persons providing maintenance pursuant to such parts and labor contracts may purchase repair or replacement parts exempt of the tax under the resale exemption.
Insurance Transactions: Extended warranty plans issued by insurance companies regulated by the Bureau of Insurance of the State Corporation Commission constitute exempt insurance transactions and are not subject to the tax.
Labor Only Contracts and Parts Only Contracts: This exemption does
not affect maintenance contracts which provide only the furnishing of repair labor. Pursuant to Virginia Regulation (VR) 630-10-62.1(B), such "labor only" contracts represent the provision of services and are not taxable.
Nor does this exemption apply to maintenance contracts which provide only the furnishing of repair or replacement parts. Pursuant to VR 630-10-62.1 (C), these "parts only" contracts represent the sale of tangible personal property and remain fully taxable. However, persons providing maintenance pursuant to such "parts only" contracts may purchase repair/replacement parts exempt of the tax under the resale exemption.
Contracts on Exempt Tangible Personal Property: This exemption does not affect parts and labor maintenance contracts sold to maintain exempt tangible personal property, and such contracts remain fully exempt. For example, no tax applies to contracts to maintain exempt manufacturing equipment or to contracts to maintain tangible personal property purchased by nonprofit hospitals, state, federal and local governments, etc.
Real Property Maintenance Contracts: This exemption applies only to maintenance of tangible personal property. Persons who provide maintenance to real property are deemed to be real property contractors as addressed in VR 630-10-27. Such contractors are the users and consumers of all property which becomes realty upon installation and must pay the tax on the cost price of such property.
Transitional Provision: The exemption will apply to parts and labor maintenance contracts which are invoiced or billed beginning January 1, 1996 as shown in the following examples:
_ EXAMPLE 1: On December 1, 1995, Retailer sells to Customer for $300 a three-year TV maintenance contract covering repair/replacement parts and repair labor. Because the charge for the contract is invoiced prior to January 1, 1996, Retailer must charge the tax on the total charge for the contract. Accordingly, Retailer charges sales tax of $13.50 ($300 contract price x 4.5% tax rate = $13.50).
_ EXAMPLE 2: The same transaction as above; however, the maintenance contract is sold to Customer on January 1,1996 or later. In this case, Retailer charges Customer $6.75 tax ($300 contract price x 50% exemption x 4.5% tax rate = $6.75).
_ EXAMPLE 3: In October 1995, Dealer sells to Customer a three-year computer hardware maintenance contract which provides for repair/replacement parts and repair labor. The terms of the contract call for Customer to pay to Dealer $ 100 per month for three years, with payment due on the 20th day of each month beginning October 20, 1995.
In this example, Dealer collects the tax on the full $100 charge made in October, November, and December 1995. For payments invoiced January 20,1996 and later, Dealer charges the tax on one-half the monthly charge made.
Note: Pursuant to VR 630-10-24(C), dealers may not keep any taxes erroneously collected from customers. If the dealer collects the tax on the full charge for maintenance contracts which have been invoiced or billed after January 1, 1996, then all the tax must be remitted to the department unless the excess tax is refunded to the customer.
Filing Requirements: Dealers must report the total gross sales price of maintenance contracts along with all other gross sales on line 1 of their Dealer's Sales and Use Tax Return (Form ST-9) or Out-of-State Dealer's Sales and Use Tax Return (Form ST-8). The one-half exempt portion of parts and labor maintenance contracts may be reported as a deduction on line 4 of these returns - "amount of exempt sales." The exempt portion of these parts and labor maintenance contracts will be the same for Column B (state) and Column C (local).
Dealers who purchase parts and labor maintenance contracts for their own use on which the tax was not charged by the vendor must report the purchase on line 2 of the Sales and Use Tax Return. The exempt portion of the contracts may be reported as a deduction on line 4 of these returns.
Other taxpayers who purchase parts and labor maintenance contracts which have not been taxed by the vendor must report the purchase on a Consumer Use Return (Form ST-7) or, if applicable, on a Direct Pay Permit Return (Form ST-6). Such taxpayers are to report on line 1 of these returns one-half (50%) of the cost price of these parts and labor maintenance contracts.
For Additional Information: Contact the Office of Customer Services; Virginia Department of Taxation; P. O. Box 1115; Richmond, Virginia 23208-1115 or call (804) 367-8037.
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