SALT Report 2598 – The Nebraska Department of Revenue issued a sales and use tax information guide that discusses the taxability of warranties, guarantees, and service maintenance agreements. Generally, sales of warranties, guarantees, service agreements, and maintenance agreements are taxable when the items or property covered, or services to be provided are taxable.
Taxable maintenance agreements include the following:
- Appliances, such as refrigerators and washing machines,
- Computer hardware and software, prewritten or custom,
- Copiers, printers, and scanners,
- Live plant care,
- Mobile devices, such as cell phones, pagers, Smartphones, PDAs, tablet computers, and
- Motor vehicles
Sales tax is due regardless of whether the agreements are sold with the item, separately charged, or sold at a later date. However, sales tax does not apply to repair or replacement parts, or repair labor when provided under a taxable maintenance agreement if it only covers tangible personal property.
Computer Software Maintenance Agreements
Computer software maintenance agreements are taxable when they are used to maintain computer software and include free or reduced-price upgrades, enhancements, changes, modifications, or updates. For example, a computer software company sells a software program to its customer for $10,000 and an annual maintenance agreement for $1,000. The maintenance agreement provides the customer with:
- Software updates to increase operating speed and efficiency,
- Correction of errors in the software program, and
- Installation of new software releases, for no additional charge
In this case the total taxable selling price would be $11,000 as both the agreement and the software program are taxable.
Exempt Maintenance Agreements
Sales of maintenance agreements that cover real estate, fixtures, certain services and structures are exempt from sales tax. For example:
- Agreements for agricultural machinery and equipment used in commercial agriculture,
- Agreements for exempt durable medical equipment, mobility-enhancing equipment, and prosthetic devices,
- Charges for help desk or technical support services for software that are provided separately from the maintenance agreement,
- Reimbursements received by a dealer from a vehicle manufacturer when the dealer provides a loaner vehicle to a customer when repairs are performed under a maintenance agreement, and
- Agreements that cover exempt manufacturing machinery and equipment
All taxable maintenance agreements should be taxed at the rate in effect at the location of the property covered by the agreement at the time the agreement is sold.
The information guide also discusses the taxability of home warranty contracts, motor vehicle maintenance contracts, maintenance agreements sold to exempt entities, purchases of covered replacement parts for resale, and partial coverage contracts.
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