SALT Report 2612 – The Illinois Department of Revenue issued a general information letter regarding the application of sales and use tax to computer software maintenance agreements. The Taxpayer in this case, is an IT consulting business who resells technology related equipment and software. This includes the resale of maintenance agreements that are offered by various software and hardware manufacturers which it sells separately from the initial product or software license.
The Taxpayer requested the ruling because they had been told by the Taxpayer Assistance line that, “Under 130.1935, Section (b) software maintenance is treated the same as hardware maintenance, and that under 140.301 Section (b)(3) it states that as long as there is no transfer of tangible personal property then the sale is exempt from Sales and Use taxes.”
However, one of the Taxpayer’s customers is currently undergoing an audit and has been told by the auditor that they should have been charged tax on all the software maintenance agreements they purchased from the Taxpayer.
In its response, the Department stated that computer software maintenance agreements are treated the same as maintenance agreements that are sold for other types of tangible personal property. The taxability of agreements for the repair or maintenance of tangible personal property will depend on whether the charges for the agreements are included in the selling price of the item. In this case, if the charges for the agreements are included in the property’s selling price, the charges are subject to tax. However, no tax would be incurred on the maintenance services or parts.
If an agreement that provides for the repair or maintenance of tangible personal property is sold separately from the property, those agreements are not taxable transactions. However, when maintenance, repair services, or parts are provided under a nontaxable agreement, the service or repair company will be deemed acting as service providers under provisions of the Service Occupation Tax Act. Therefore, when a service provider enters into an agreement to provide maintenance services for equipment or property for predetermined fees, the service provider will be liable for Use Tax based on its cost of the tangible personal property used to complete the maintenance or service.
Any property transferred during a patch or bug fix is taxable based on the circumstances of the sale of the maintenance agreement, as detailed above, which provides for the patch or bug fix. However, if the sale of a maintenance agreement includes charges for updates of canned software, such as new releases or new versions designed to replace an older version of the same product, and also includes product enhancements and improvements, the rules governing the taxability of maintenance agreements do not apply.
This is because charges for updates of canned software are taxable as sales of software under section 130.1935(b). Therefore, if a maintenance agreement provides for updates of canned software, and the charges for those updates are not separately stated and taxed from the charges for training, telephone assistance, installation, consultation, or other maintenance agreement charges, then the entire agreement is taxable as a sale of canned software.
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