|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Sales and Use Tax
You request a letter ruling on behalf of "Company" as to whether the sale of optional “Service Contracts,” including “Accidental Damage Contracts,” and “Extended Warranties”,1 when purchased with taxable hardware as a “single solution for a package price”, is subject to the sales tax imposed pursuant to G.L. c. 64H. Stated otherwise, you request a ruling as to whether the amounts Company charges for Service Contracts, Accidental Damage Contracts, and Extended Warranties, or a combination thereof, are included in the “Sales Price,” as defined by G.L. c. 64H, § 1, and are therefore subject to sales tax when any amounts charged for these items are not separately stated from charges for computer hardware on a customer invoice or acknowledgment.
The following is your representation of the facts upon which we base this ruling.
Company, a Limited Partnership, is a direct or indirect subsidiary of “Parent.” Company sells computers and related products and services to various types of customers (e.g., individuals, businesses, government entities, etc.). In the course of each sale, each customer has the option of selecting from among different hardware, software, accompanying warranties, and service contracts. At the time of purchase, Parent issues its customers either an invoice or an acknowledgement2 that typically states only the total sales price for the aggregate of the products and services selected by the customer, i.e., it does not provide the customer with a separately stated/itemized list of the amount charged for each item/service purchased.
Parent's computer products sold by Company are warranted by Company for varying terms depending on the product. These warranties cover defects in materials and workmanship in Parent-branded products, and are either “return to depot” warranties, which require the customer to return the defective product or part to Company for repair or replacement, or, depending on the product, may include an element of onsite warranty service. You represent that a customer may, at its option, purchase an Extended Warranty from Company, which will generally result in a higher “single solution… package price.” In any event, Company typically does not separately state to the customer the price of any combination of warranties sold, whether on the invoice (if payment is not made in full at the time of the order) or on the acknowledgement (if payment is made in full at the time of the order).
You further represent that Company's customers also have the option of purchasing one or more Service Contracts when they purchase a Parent computer from Company, which will generally result in a higher “single solution… package price.” The terms of the different Service Contracts vary, e.g., some provide for the dispatch of an on-site repair technician and more comprehensive telephone technical support, while others provide for repair or replacement within certain time frames. Most of the Service Contracts will not include replacement parts; rather they provide only for the service of replacing the parts and/or technical support. However, Accidental Damage Contracts, a specific type of Service Contract, will cover the cost of the service and replacement parts in limited situations.
You state in your ruling request that Company markets the computers, various products, services and warranties together “as a single solution for a [single] package price.” You also represent that the purchase of Service Contracts, Accidental Damage Contracts, and Extended Warranties are optional on the part of the customer. 3 Company sends its customers invoices or order acknowledgements listing the computers, other products, services and warranties purchased in the “single solution… package price,” but generally will not list a separate price for any of the components of “a single solution… package price.” Instead, the invoice or order acknowledgement sent to the customer generally only lists one price for the “single solution… package price.”
You further note that, although the invoices and order acknowledgments issued by Company do not separately state the charges for Service Contracts, Accidental Damage Contracts or Extended Warranties, Company does document each customer’s purchase internally, and this documentation generally records a value for each component of the sale (i.e., Company records an itemized sales price internally, but typically does not share this with its customers on the invoices or acknowledgements that states the total sales price). Further, the prices recorded on these internal records will not necessarily reflect the standalone prices of the services purchased.
Whether Company is required to collect sales tax on the entire Sales Price for the “single solution… package price” as reflected on the invoices or order acknowledgements sent to its customers, notwithstanding the inclusion of Service Contracts, Accidental Damage Contracts and/or Extended Warranties as part of the purchase package.
Based on the facts that have been presented, the Department rules that Company is required to collect sales tax on the entire Sales Price for the “single solution… package” as reflected on the invoice or order acknowledgment sent to a customer since the amounts paid for Service Contracts, Accidental Damage Contracts, and/or Extended Warranties, are not separately stated on a customer’s invoice or order acknowledgment. G.L. c. 64H §§ 1, 2; 830 CMR 64H.1.3(4)(h)2. As a result of this initial conclusion, the Department does not reach the question of whether Company's internal records satisfy the additional requirement of 830 CMR 64H.1.3(4)(h)2, which states that separate charges must also be clearly stated on the vendor’s books and records in order for such charges to be excluded from the taxable sales price. Even assuming that Company's internal records did satisfy this requirement, the full price of the “single solution… package” would be taxable because any amounts charged for Service Contracts, Accidental Damage Contracts, and/or Extended Warranties are not separately stated on the invoices or acknowledgments, as would be required pursuant to 830 CMR 64H.1.3(4)(h)2.
Massachusetts General Laws chapter 64H, § 2 imposes an excise upon sales at retail of tangible personal property in the Commonwealth by any vendor at the rate of 6.25% of the gross receipts of the vendor from all sales of such property, except as otherwise provided in chapter 64H.
The “Sales Price” subject to the excise imposed by G.L. c. 64H § 2 includes the total amount paid by the purchaser to a vendor as consideration for a retail sale, valued in money or otherwise. G.L. c. 64H § 1 ¶ 19. Specifically, G.L. c. 64H § 1 defines Sales Price to include “any amounts paid for any services that are a part of the sale.” Id. The Commissioner has promulgated the Computer Industry Services and Products Regulation, 830 CMR 64H.1.3, which explains the application of Massachusetts sales and use taxes to computer products and software. More specifically, in this regulation, the Commissioner explains the application of the definition of Sales Price to “[s]ervices related to the sale of computer hardware.” 830 CMR 64H.1.3(4)(h)2. This section of the regulation applies the definition of Sales Price (found in G.L. c. 64H § 1) to transactions similar to those you describe, and provides that “[i]f [a] purchaser may purchase computer hardware without additional services, separately stated charges for the services are not considered part of the sales price for the hardware and are generally exempt.”
830 CMR 64H.1.3(4)(h)2. However, if additional services are purchased, unless the separately stated charges are clearly stated on both the bill or invoice presented to the customer and the vendor's books and records, the services are considered “part of the sale” and any amounts charged for the additional services will be included in the Sales Price and subject to sales tax. 830 CMR 64H.1.3(4)(h)2.
We assume for purposes of this ruling that if charges for Service Contracts, Accidental Damage Contracts, and/or Extended Warranties were separately stated both on the bill or invoice presented to the customer and on Company's books and records, such charges would not be subject to tax. In light of the facts as represented, however -- because Company does not separately state the price charged for Service Contracts, Accidental Damage Contracts and/or Warranties on the invoices or order acknowledgements it issues to its customers -- Company must collect sales tax on the entire sales price as listed on its customer invoices or acknowledgments (i.e., amounts charged for Service Contracts, Accidental Damage Contracts, and/or Extended Warranties are included in the Sales Price and are subject to tax). As such, there is no need to address the second part of the regulatory test, that is, whether Company “clearly stated in [its] books and records” the charges for optional services. 830 CMR 64H.1.3(4)(h)2.
Note that this ruling is based on the assumption that the value of the taxable components of the “single solution… package price” (e.g., the computers, software, etc.) is not inconsequential, as that term is defined in 830 CMR 64H.1.1(1), in relation to the total amount charged by Company for the “single solution… package price.” Stated otherwise, we assume that more than 10% of the value of the charges included in the “single solution… package price” consists of charges for taxable tangible personal property, as that term is defined in G.L. 64H § 1.
The Commissioner will consider all the facts and circumstances when determining whether a sale is subject to tax. Here, we note that Service Contracts, Accidental Damage Contracts and Extended Warranties are generally not taxable when sold separately. However, under the facts and circumstances as represented, the Commissioner rules that, since any amount paid for the Service Contracts, Accidental Damage Contracts, and/or Extended Warranties purchased along with taxable hardware is not separately stated on the invoices and acknowledgements Parent issues to its customers, Service Contracts, Accidental Damage Contracts, and/or Extended Warranties are “services that are part of the sale” and are therefore included in the Sales Price of the entire “single solution… package” transaction. In light of the foregoing, Company must collect sales tax on the sales price reflected on the invoice or acknowledgement.
Very truly yours,
/s/Mark E. Nunnelly
Mark E. Nunnelly
Commissioner of Revenue