Title of Regulation: 23VAC10-210. Retail Sales and Use Tax (amending 23VAC10-210-910).

Statutory Authority: § 58.1-203 of the Code of Virginia.

Effective Date: October 28, 2009.

Agency Contact: Bland Sutton, Analyst, Department of Taxation, 600 East Main Street, Richmond, VA 23219, telephone (804) 371-2332, FAX (804) 371-2355, or email bland.sutton@tax.virginia.gov.

Summary:

The application of the retail sales and use tax to maintenance contracts that provide both parts and labor was amended by the 1994 General Assembly effective January 1, 1996. The amendments reflect this statutory change and provide examples illustrating the tax application of this change.

Summary of Public Comments and Agency's Response: No public comments were received by the promulgating agency.

23VAC10-210-910. Maintenance contracts and warranty plans.

A. Definitions. The following words and terms when used in this section shall have the following meanings unless the context clearly indicates otherwise:

"Maintenance contract" defined. As used in this regulation the term "maintenance contract" means any an agreement whereby a person agrees to maintain or repair an item of tangible personal property over a specified period of time for a fee which that is determined at the time when the agreement is entered into made. A maintenance contract may provide for provision of labor only, parts only, or labor and parts.

B. Maintenance contracts, generally.

1. Labor only contracts. Maintenance contracts which that provide only solely for the furnishing of repair labor are contracts for the provision of a service only services and charges for such contracts are not subject to the tax taxable. This includes software maintenance contracts that provide services, i.e., updates, revisions, replacements and programming, by electronic means such as online downloads or online remote access. Persons providing repair services under such contracts are liable for the tax on all items purchased for use in making repairs used and consumed in the provision of their services.

C. 2. Parts only contracts. Maintenance contracts which that provide only solely for the furnishing or replacement of parts, rather than labor, represent a sale of tangible personal property. The total charge to the customer for such parts only contracts is subject to the tax taxable. Persons providing replacement parts may purchase such parts under a resale certificate of exemption.

Example: Buyer A purchases a maintenance contract from Seller B that provides for repair and replacement parts only. It is stipulated in the contract that all repair labor will be billed separately to the buyer based on an hourly rate. This contract constitutes a parts only contract and is 100% taxable.

D. 3. Parts and labor contracts. Maintenance contracts, the terms of which provide that provide for the furnishing of both repair or replacement parts and repair labor, represent a sale of tangible personal property are a combination of taxable sales and nontaxable services. As it is impossible to determine in advance the percentages of labor and parts that will be provided under the contract, the contract will be deemed to be a contract for one-half labor and one-half parts, regardless of the percentages of labor and parts actually provided under the contract. The Thus, one-half of the total charge for such contracts a contract 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. Persons providing maintenance pursuant to such contracts may purchase repair or replacement parts under a resale certificate of exemption, but are liable for the tax on all items purchased for their own personal use and consumption in performing repairs or maintenance.

Example 1: A maintenance contract provides that if Purchaser C's refrigerator breaks down, Seller D will come out and fix it (repair labor) and replace any parts that are defective (replacement parts) for one year. The contract is a parts and labor contract and subject to tax on one-half of the total contract price.

Example 2: Buyer E purchases a maintenance contract for computer hardware and software from Seller F. Under the terms of the contract, Seller F provides 24-hour telephone hotline support, parts replacement for hardware, new releases, updates, revisions, and replacements of licensed software in tangible form, and services to correct programming errors. This maintenance contract constitutes a parts and labor contract and would be subject to the tax based on one-half the total contract price.

Thus the tax will apply to the total charge for such contracts, regardless of the fact that the contract may specify separate charges for parts and labor. Persons providing maintenance pursuant to such contracts may purchase repair or replacement parts under a resale certificate of exemption, but are liable for the tax on all items purchased for use in performing the repairs or maintenance.

E. 4. After hours maintenance charges. Additional Any additional charges for extended or after hours maintenance which that are based upon a percentage of or addition to the standard maintenance contract are taxable in the same manner as the contract upon which the additional charges are based.

Example: A maintenance contract that is part labor and part replacement parts will continue to be taxed at one-half of the total charge whether or not the buyer decides to add additional after hours protection to the contract.

F. 5. Extended warranty plans. The With the exception of extended warranty plans issued by licensed insurance companies, the tax applies to charges for extended warranty plans which that provide for the provision of repair parts and labor. The application of the tax to extended warranty plans is calculated in the same manner as maintenance contracts in this subsection. Extended warranty plans issued by an insurance company regulated by the Bureau of Insurance of the State Corporation Commission are insurance transactions and are not subject to the tax. For repairs generally, see 23VAC10-210-3050.