Is a maintenance contract on leased equipment taxable in Kansas, and does the repair shop charge the contract company tax?

Plain-English summary

A company that sells building materials leases "trucks, cranes, trailers, and forklifts" from various financing companies. The financing company requires the business to secure a maintenance contract on the leased equipment. Importantly, "[t]he maintenance contract is separate from the lease agreement," and it is bought from a different entity than the one that leases the equipment. The company asked how Kansas sales tax applies.

Maintenance-contract sellers are retailers. The Department ruled that "[c]ompanies engaged in the sale of maintenance contracts are retailers for purposes of the Kansas retailers' sales tax act. They are required to register, collect and remit to Kansas, sales tax on their gross receipts." So the leasing business "should be paying sales tax to the maintenance company on their monthly charges to you."

A repair done under the contract is a sale for resale. When "a repair is made pursuant to the maintenance contract by a third party, the sale between the maintenance contract company and the third party is a sale for resale and not subject to sales tax. See K.A.R. 92-19-62(d)." As a result, "the third party repairman (the 'local dealer') should not be charging sales tax to the maintenance company."

Bottom line: the customer pays sales tax once — on the maintenance company's monthly charges. The underlying repair that the maintenance company arranges with a third-party shop is a resale, so the shop should not tax the maintenance company for it.

What this means for you

Selling a maintenance contract is a taxable retail activity

A company that sells maintenance contracts must register as a Kansas retailer and collect and remit sales tax on its gross receipts from those contracts. The customer buying the contract should expect to be charged Kansas sales tax on the periodic charges.

The customer pays tax on the monthly contract charge

Here, the equipment lessee had to pay Kansas sales tax to the maintenance company on its monthly maintenance-contract charges — regardless of the fact that the maintenance contract was separate from, and with a different company than, the equipment lease.

The actual repair is bought for resale

Because the maintenance company has already collected tax from the customer on the contract, when it hires a third-party shop to perform a covered repair, that repair is a purchase for resale by the maintenance company. The repair shop should take a resale exemption certificate and not charge the maintenance company sales tax.

Avoiding double taxation

The resale treatment prevents the same repair from being taxed twice — once on the customer's contract charge and again on the shop's charge to the maintenance company. Tax is due on the customer-facing contract, not on the back-end repair.

Common questions

Is a maintenance contract taxable in Kansas?
Yes. Sellers of maintenance contracts are retailers and must collect and remit Kansas sales tax on their gross receipts, so the customer pays tax on the contract charges.

Does it matter that the contract is separate from the equipment lease?
No. The contract was separate from the lease and sold by a different company, and it was still a taxable maintenance-contract sale.

Should the repair shop charge the maintenance company sales tax?
No. A repair the shop performs under the maintenance contract is a sale for resale to the maintenance company under K.A.R. 92-19-62(d), so the shop should not charge it sales tax.

Who ultimately bears the tax?
The customer, through the maintenance company's monthly charges. The back-end repair is a resale and is not taxed again.

Citations and references

• K.A.R. 92-19-62(d) — the Department cited this regulation in ruling that a repair performed by a third party under a maintenance contract is a sale for resale to the maintenance company and is not subject to sales tax.
• The ruling also states the general rule that sellers of maintenance contracts are retailers who must register, collect, and remit Kansas sales tax on their gross receipts, without citing a numbered K.S.A. section.
• K.A.R. 92-19-59 — authorizes Kansas private letter rulings; this ruling binds the Department only as to the requesting taxpayer and the facts presented.
• Issued September 23, 1998 by Mark D. Ciardullo, Tax Specialist, Kansas Department of Revenue.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1998-134

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 23, 1998

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Dear XXXXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated August 18, 1998.

You stated in your letter that your company is in the business of selling building materials. Your company leases trucks, cranes, trailers, and forklifts from various financing companies for use in your business. The financing company requires you to secure a maintenance contract for this leased equipment. The maintenance contract is separate from the lease agreement. The entity that you purchase maintenance contracts from is not the company from which you lease equipment.

Companies engaged in the sale of maintenance contracts are retailers for purposes of the Kansas retailers’ sales tax act. They are required to register, collect and remit to Kansas, sales tax on their gross receipts. Accordingly, you should be paying sales tax to the maintenance company on their monthly charges to you.

If a repair is made pursuant to the maintenance contract by a third party, the sale between the maintenance contract company and the third party is a sale for resale and not subject to sales tax. See K.A.R. 92-19-62(d), per Appendix. Accordingly, the third party repairman (the “local dealer”) should not be charging sales tax to the maintenance company.

This private letter ruling is pursuant to Kansas Administrative Regulation 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further Department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 09/23/1998 Date Modified: 10/10/2001

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