SALT Report 1140 – Maine has updated its sales and use tax guidance on product warranties, service contracts, and maintenance agreements. The update is intended to address the tax treatment and responsibilities of retailers and customers regarding product warranties, sales, and repairs of tangible personal property.
Sales – Many sellers of tangible personal property offer a manufacturer’s warranty that is included in the sale price of an item. Manufacturers’ warranties are considered part of the sale price of the item when originally purchased therefore, sales tax is calculated on the entire sale price.
Repairs – Since the warranty has been taxed as part of an item’s original purchase price, covered repairs and replacement parts used to complete repairs are not subject to sales or use tax to the warrantor. Repair and replacement parts that are not covered by warranty are subject to sales tax.
Service Contracts and Maintenance Agreements – In most situations the stand-alone sale of a service contract or maintenance agreement for tangible personal property already owned by the purchaser/customer is not subject to sales or use tax. Covered repair and replacement parts used by the seller are subject to use tax based on its acquisition cost for the parts, even if the customer is exempt from sales tax.
Computer Software Service Contracts – Software updates are not considered to be “repairs.” Canned computer software is taxable as tangible personal property, and updates to such software are similarly taxable. Therefore, a seller of a maintenance agreement for “canned” computer software that provides updates must collect sales tax from its customer if the updates are not separately listed; if they are separately listed, tax applies only to the price of the updates.
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