Minnesota: Taxing Maintenance and Warranty Contracts
- Dec 3, 2012 | Gail Cole
Minnesota DOR defines a maintenance contract as "a contract under which the specific repair and replacement parts and consumable items needed to maintain the equipment are provided at no additional cost." "Consumable items" here refer to "items that are depleted, disposable, get used up, or items that need to be replaced after they have been used for a period of time."
Such maintenance contracts are sold for a lump-sum and defined as "bundled transactions" under the Minnesota Statues (Section 297A.61 (38)) because they "include two or more distinct and identifiable products." Products include repair labor, replacement parts, consumable items, and general services such as cleaning and inspecting.
Optional maintenance contracts are subject to sales and use tax in Minnesota, as are repair parts and consumable items used in fulfilling the maintenance contracts.
A warranty contract is defined as "a contract that acts like insurance against future unexpected repair costs." At the time of purchase, no one knows whether or not the warranty contract will ever be used.
Optional warranty contracts do not qualify as bundled transactions in Minnesota. There is no guarantee that any parts or services will ever be provided to the customer, so optional warranty contracts are exempt from sales and use tax.
Sales and use tax must be paid on any taxable items used to fulfill an optional warranty contract. The provider must pay the sales or use tax if the customer is not charged for the items. Alternatively, if the customer is charged for the items, the customer must pay the sales tax.