Minnesota – Taxability of Optional Warranty and Maintenance Contracts

SALT Report 1924 – The Minnesota Department of Revenue issued guidance regarding the taxability of charges for optional maintenance contracts and warranties.  The Department’s position has long been that optional maintenance contracts and optional warranty contracts were exempt from sales tax and that the service provider was responsible for paying tax on any taxable items used to fulfill the contract. However, this exemption no longer applies to optional maintenance contracts due to the fact that several statutes regarding bundled transactions have changed.

Optional Maintenance Contracts

The Department’s position regarding maintenance contracts is that they are generally considered bundled transactions as they include two or more distinct and identifiable products or services.   In most cases, maintenance contracts include repair labor, replacement parts, consumable items, and cleaning and inspection services.

Normally, the consumable items that are necessary to ensure that the item functions properly are not provided with, nor are they essential to, the general maintenance service portion of the maintenance contract. The repair parts and consumable items provided under a maintenance contract are insignificant compared to the total cost of the contract. Therefore, under current law, optional maintenance contracts are taxable.

Optional Warranty Contracts

The Department’s position on optional warranty contracts is not affected by the bundled transaction provisions. Generally, these transactions do not include the sale of two or more products because, under a warranty contract, there may never be any parts or services provided to the customer. Therefore, optional warranty contracts remain exempt.

Further, the provider of the service is still required to pay sales or use tax on the cost of all taxable items used under the contract. However, if the service provider charges a separate amount for parts or other taxable items, the provider should purchase the items for resale and charge sales tax to the customer.

The Department’s notice does not apply to optional maintenance contracts on computer software.

For Further Information:

Minnesota Department of Revenue – Revenue Notice 12-12