Presenting a live 110 ‐ minute teleconference with interactive Q&A Sales Tax on Warranties Navigating Divergent State Treatment of Product and Service Warranties and Software Maintenance Contracts THURSDAY, FEBRUARY 9, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Tom Johnson, Director, Ryan , Fort Lauderdale, Fla. Tom Johnson Director Ryan Fort Lauderdale Fla Linka Gomez, State and Local Tax Supervisor, McGladrey & Pullen , Miami Sean Evans, Director, Tax Advisory Services, DuCharme McMillen and Associates Inc. , Overland Park, Kan. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .
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Sales Tax On Warranties Seminar Feb. 9, 2012 Tom Johnson, Ryan Linka Gomez, McGladrey & Pullen tom.johnson@ ryan.com linka.gomez@ mcgladrey.com Sean Evans, DuCharme McMillen and Associates Inc. sevans@ dmainc.com
Today’s Program General State Tax Issues With Warranties Slide 7 – Slide 27 [Tom Johnson] Complex Issues With Warranties Slide 28 – Slide 37 [Linka Gomez] Tax Treatment Of Warranties In Various States Slide 38 – Slide 59 [S ean Evans and Tom Johnson] Slide 60 – Slide 65 Options For Multi-State Tax Compliance [S ean Evans]
Tom Johnson, Ryan GENERAL STATE TAX ISSUES GENERAL STATE TAX ISSUES WITH WARRANTIES
O Outline For This Section li F Thi S i I I. General state tax issues with warranties General state tax issues with warranties A. Mandatory vs. optional warranties and maintenance agreements 1. Nexus issues 2. What should be stated on an invoice? B. Physical products vs. software C. Special issues with extended warranties C S i l i i h d d i D. Taxability or exemption parts and labor 1. 1. Purchases of parts for warranty Purchases of parts for warranty E. Inventory related issues 1. Tracking inventory internally, to properly allocate use tax 2. Establishing taxable basis of inventory taken out 8
Mandatory Vs. Optional Warranties d l Example: Mandatory vs. optional software maintenance agreements • Maintenance agreements for canned software packages often Maintenance agreements for canned software packages often include: • Customer services, i.e. telephone consultations • Software updates (tangible): Updates on disks, CDs, tapes, etc. • Software updates (intangible): In the form of remote Software updates (intangible): In the form of remote downloads or telecommunications • Program enhancements (add-ons, new features, etc.) ( ) 9
Mandatory Vs. Optional Warranties (Cont.) Example: Mandatory vs. optional software maintenance agreements (Cont.) • These can be automatically included with the These can be automatically included with the program/software purchase (mandatory warranties) or can be added with the choice or discretion of the customer (optional warranties) warranties). • The tax treatment of both differs across various states and jurisdictions. But, in general, mandatory warranties are almost always taxable (precluding any exemptions). 10
M Mandatory Warranties d W i Mandatory maintenance agreements/warranties • Generally, most states tax mandatory software maintenance if the original software package was taxable the original software package was taxable. • Many states consider mandatory software maintenance to be services that are part of the sale of tangible personal property. • There may be exemptions if the software purchase qualifies for them (e.g., R & D, manufacturing, economic incentive, etc.) 11
Mandatory Warranties (Cont.) M d W i (C ) Several states exempt mandatory maintenance contracts/warranties from tax. • Arkansas: Software maintenance contracts are exempt; Arkansas: Software maintenance contracts are exempt; however, hardware is taxable. • Georgia: Software maintenance contracts are exempt if delivered electronically. • Vermont: Exempt if charges are separately stated 12
O Optional Warranties i l W i Optional maintenance agreements/warranties The taxabiliy of optional software maintenance agreements is much more complex. • Those states that do impose a tax on optional software maintenance have adopted • varying policies as to when and how to tax it. Some examples are: Minnesota: If only one charge in the optional software maintenance contract • for both upgrades/enhancements and support services, then 20% of contract price subject to tax Virginia: 50% of the total charge for optional software maintenance • Iowa: 50% of gross receipts from sale of software maintenance if the fee for the • taxable personal property (the software itself) is not separately stated California: 50% if updates are considered tangible personal property • Alabama: If non-taxble portions of a maintenance agreement are separately • stated, then only the portion representing upgrades or enhancements and new operating manuals are subject to tax . operating manuals are subject to tax 13
Optional Warranties (Cont.) O i l W i (C ) Optional maintenance agreements/warranties • In those states where optional maintenance contracts are exempt from tax (in about half of the states) there are exempt from tax (in about half of the states), there are generally two conditions that must be met: • (1) The optional maintenance contract must be separately stated. • (2) There must not be a transfer of tangible personal property. property. 14
Mandatory Vs. Optional Warranties (Cont.) • In many states, charges for new software and/or upgrades are taxable, whereas services are not. (Example: Nebraska) • This applies to both mandatory and optional warranties and to service agreements. 15
N Nexus Issues I In every single state, warranty repairs establish nexus for a seller I i l t t t i t bli h f ll in that state. Examples p • Arizona: If employee is present in the state for more than two days per year • California: If person performing repair is an employee (i.e., not independent unrelated contractor) • Utah: If seller regularly services products in that state Utah: If seller regularly services products in that state 16
N Nexus Issues With Warranties I Wi h W i • Examine the particular state for the rules on dealing with E i th ti l t t f th l d li ith warranties and support agreements • Services/support only are generally not taxable, whereas tangible personal proprety is. One must evaluate under what category a warranty/support agreement falls in a particular category a warranty/support agreement falls in a particular state. 17
What Needs To Be Stated On Invoice? In general, for warranties and maintenance/support agreements: I l f ti d i t / t t • Charges must be separately stated to be exempt. • The agreements must be optional rather than madatory in • The agreements must be optional rather than madatory, in order to be exempt. • There must only be service and support provided, and no tangible personal property transferred. 18
Physical Products (Hardware) Vs. Software • The treatment of warranties and maintenance agreements for Th t t t f ti d i t t f hardware is almost identical to those for software, as well as for hardware/software bundles. • In general, taxable if: • Mandatory • If not separately stated • Involves the transfer of tangible personal property 19
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