How should a computer-maintenance company buy and tax repair parts used under old and newly taxable service agreements?

Plain-English summary

The computer-maintenance company could issue resale certificates when buying inventory parts and maintain that inventory tax-free. If it used parts to fulfill maintenance agreements entered before October 2, 1984—when the described maintenance service was nontaxable—it had to accrue use tax on those parts.

The Comptroller agreed with Part A of the company's proposed procedure for parts used under maintenance contracts whose full value was taxed, explaining that tax-free inventory should simplify recordkeeping. The response did not separately approve every detail of the Part B exchange procedure involving parts kits, donor machines, and boards returned to manufacturers.

Common questions

Could the company buy inventory parts with a resale certificate? Yes.

What happened when parts were used under pre-October 2, 1984 maintenance agreements? The company had to accrue use tax on them.

Did the Comptroller agree with the proposed treatment for taxed maintenance agreements? It expressly agreed with Part A and recommended maintaining tax-free inventory.

Was the entire exchange procedure in Part B expressly approved? No. The response does not separately address all of those details.

Citations and references

The reproduced letter cites no numbered statute or rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8508L0725D11

Original ruling text

August 7, 1985

Dear ***:

Thank you for your recent letter which is restated with response below.

Prior to October 2, 1984, maintenance performed by a service organization
was not taxable under the Texas Sales and Use Tax rules and regulations.

CORP A is a microcomputer and peripheral maintenance service organization.
CORP A was audited in September 1984 by representatives of the Sales and Use Tax
Division of the State Comptroller's office. During the audit we were advised
that we had to pay tax on all parts purchased for maintenance because we
used them to repair machines and equipment under existing maintenance
contracts although no charge was made to the customer for such service and parts.

Subsequent to October 2, 1984 as our maintenance contracts came up for renewal,
tax has been assessed, collected, reported and paid. By October 2, 1985 all of
our maintenance business will be taxable.

Prior to October 2, 1985, we need clarification in certain areas and therefore
specifically request that you or your designate comment on the following procedures
we intent to initiate. Please comment in writing to the undersigned.

A.(i) Parts purchased by CORP A are not taxable to CORP A when they are used to
repair customer's equipment under a maintenance contract, the total value of
which is taxed and such tax is remitted to the State Comptroller when received b),
CORP A (ii) Parts used to same remitted to the State. (See attached Exhibit "A"
as an example of both situations).

B. Due to the quick response time required and dictated by the industry is
required to purchase complete parts kits and/or a new machine to use as a
source of parts to use in machines that we service. When we purchase these
kits or machines CORP A is assessed and pays the tax. When a machine covered by
a maintenance contract needs servicing and repair, CORP A will take boards
(parts) etc. from our stock or machines and put them in a customers machine
to get it back on-line. These boards (parts) taken from the repaired contact
machine are then returned to the manufacturer for exchange. This exchange
transaction is not taxable as the total value of all service and parts have
been taxed and such tax was remitted when the cost of the maintenance contract
was paid.

Response: I recommend that you issue a resale certificate when purchasing
inventory parts. Then, if you use some of them to fulfill maintenance agreements
entered into prior to October 2, 1984, may accrue use tax on them.

I agree with part A of your letter. By maintaining a tax free inventory you
should be able to simplify your record keeping.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas. You may write us at the
Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division