SALT Report 1846 – The Tennessee Department of Revenue issued a ruling regarding the taxability of computer software maintenance contracts, as well as the repair services, replacement parts, and labor charges provided in the maintenance contract.
The Taxpayer that requested the ruling is located outside Tennessee but sells computer software maintenance contracts to customers in Tennessee. These sales consist solely of computer software maintenance contracts and are not included in the sale of computer software.
The Department determined the taxability as follows:
- The Taxpayer is required to collect sales tax on computer software maintenance contracts that are sold in Tennessee. The tax rate should be determined by the location of the computer on which the software is installed.
- If the Taxpayer fails to collect sales tax, the customer will be subject to use tax.
- The taxpayer is not required to collect tax on charges for repair or replacement parts not covered by a software maintenance contract when the parts are sold outside Tennessee. However, the Taxpayer is required to collect tax if the parts are shipped to a customer in Tennessee.
- Repair labor charges not covered by a maintenance contract are not subject to tax if they are performed outside Tennessee.
- If the taxpayer does not charge the customer for repair or replacement parts or repair labor under a maintenance contract in which tax has been paid, the customer is not subject to use tax on the parts or labor.
Finally, Tennessee Code § 67-6-231(b)(2) provides that, “no additional tax is due on any repairs to the extent they are covered by the computer software maintenance contract, including use tax.” Therefore, when the Taxpayer sells a computer software maintenance contract, the taxability applies to the sale of the contract, not on the repairs performed under the terms of the contract.
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