July 25, 1983
__________ ("Company") is a supplier of telephone equipment. You inquire about the application of the Massachusetts sales and use taxes to the Company's agreements with its customers. The agreements fall into the following four categories:
(1) Contracts for sale of telephone equipment. These contracts include warranties that the Company will repair or replace defective equipment for one year after the equipment is installed.
(2) Leases of equipment. Under the leases, the Company undertakes to maintain the equipment in good working order, and to repair or replace defective parts for no additional charge, except in the case of repairs or replacements made necessary by the lessee's negligence or improper use.
(3) "Change orders," that is, agreements by the Company to supply equipment in addition to that which has already been sold or leased.
(4) Optional agreements for maintenance of telephone equipment that has been sold to a customer by the Company. These agreements require the customer to make periodic maintenance payments. They provide that the Company will not charge the customer for parts furnished in connection with the maintenance, unless the maintenance is required because of the fault or negligence of the customer.
In the case of change orders, the Company states separate charges on its customer invoices for equipment and for installation labor. It is assumed for purposes of this ruling that these separate charges are set in good faith.
In the case of agreements for sale or lease of equipment, the Company does not separately state any installation charges.
For Massachusetts sales and use tax purposes, "sale" includes leases and rentals (G.L. c. 64H, § 1(12)(a)).
Professional or personal service transactions which involve no sale or which involve sales as inconsequential elements for which no separate charges are made are not subject to the sales or use tax (G.L. c. 64H, § 1(13)(c)). On the other hand, Chapter 64H, Section (1)(14)(b)(i) provides that any amount paid for any services that are a part of a sale of tangible personal property are included in the "sales price" of the property to which the tax applies.
The sales price does not include the amount charged for labor or services rendered in installing the property sold (G.L. c. 64H, § 1(14)(c)(iii).
If a purchaser of tangible personal property who gives a resale certificate makes any use of the property other than retention, demonstration or display while holding it for sale in the regular course of business, the use is deemed a retail sale by the purchaser, and the cost to him is deemed the gross receipts from the sale (G.L. c. 64H, § 8(d).
Based on the foregoing, it is ruled that:
1. The Company's charges under the sale and lease agreements are subject to the sales or use tax.
2. Under the Company's change order agreements, charges for materials are subject to the sales or use tax. Separately-stated installation charges under such agreements are not subject to the sales or use tax.
3. The Company's periodic charges under the optional maintenance agreements are not subject to the sales or use tax. However, on its sales and use tax returns, the Company must include in its gross receipts the cost to it of property it uses under such agreements.
4. The Company must collect the sales tax when it transfers any tangible personal property under the lease and maintenance agreements for a separate charge.
Very truly yours,
/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue