Changes in the Minnesota statutes prompt the Department of Revenue to issue notice.
Changes in the Minnesota statutes prompted the Minnesota Department of Revenue to issue a notice clarifying the difference between maintenance and warranty contracts in regard to the application of sales and use tax.
Maintenance Contracts are defined 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” refers 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.”
Under the Minnesota Statutes (Section 297A.61 (38)), these contracts are defined as “bundled transactions” because they include “two or more distinct and identifiable products.” These products may 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 the repair parts and consumable items used in fulfilling the maintenance contracts.
Warranty Contracts are defined as “a contract that acts like insurance against future unexpected repair costs.” Optional warranty contracts are not considered bundled transactions in Minnesota. Since, at the time the warranty is purchased no-one knows if any parts or services will ever be provided to the customer, optional warranty contracts are exempt from sales and use tax.
Sales and use tax must be paid at the time of service on any taxable items used to fulfill the contract. This tax is paid by the provider if the customer is not charged for the items. If, however, the customer is charged for items used, they are responsible for the sales and use tax at that time.
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