Was a fixed-fee contract to manage and pay for hospital equipment repairs subject to Tennessee sales tax?

Plain-English summary

Tennessee treated the fixed-fee hospital equipment arrangement as a taxable warranty or service agreement. The contractor did not repair equipment itself, but it arranged the repairs, issued purchase orders, paid vendors, kept records, and assumed the covered repair costs in exchange for the fixed fee.

Because Tennessee expressly taxed service contracts warranting the repair or maintenance of tangible personal property, the contractor had to charge sales tax on its fee to the hospital.

The actual repair services covered by the agreement were not taxed again. The contractor could register for sales and use tax and buy those repair services for resale using a resale certificate.

What this means for you

A contract can be a taxable equipment service agreement even when the seller coordinates and finances third-party repairs rather than performing the repair work. The resale documentation prevents the covered repairs from being taxed both when purchased and again through the taxable service contract.

Common questions

Q: Was the contractor's fixed fee taxable?
A: Yes. The Department classified the arrangement as a taxable warranty or service agreement.

Q: Did it matter that outside vendors performed the repairs? A: No. The contractor's agreement covered and arranged the repair obligations.

Q: Were the repair vendors' charges also taxable to the contractor? A: Not if the contractor registered and bought the covered repairs for resale with a resale certificate.

Q: Is this revenue ruling binding?
A: No. Revenue rulings are advisory and not binding on the Department.

Citations and references

• Tenn. Code Ann. §§ 67-6-201 and 67-6-102(24)(F)(iv) and (ix)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/99-02.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING # 99-02

WARNING
Revenue rulings are not binding on the Department. This presentation of the ruling in a redacted form is information only. Rulings are made in response to particular facts presented and are not intended necessarily as statements of Departmental policy. SUBJECT Application of sales and use tax to contract for management services of capital equipment. SCOPE Revenue rulings are statements regarding the substantive application of law and statements of procedure that affect the rights and duties of taxpayers and other members of the public. Revenue rulings are advisory in nature and are not binding on the Department. FACTS Hospital is a for-profit institution located in [CITY], Tennessee. Hospital has contracted with the Taxpayer, an independent contractor corporation, to provide general management services of all maintenance services associated with all hospital capital equipment breakdown and repairs. The Taxpayer does not perform repair services itself at any time. The Taxpayer is paid a fixed fee based on Hospital’s previous year’s maintenance/repair costs for all capital equipment. In exchange for this fixed fee, the Taxpayer will pay all maintenance/repair costs associated with Hospital equipment breakdowns. The Taxpayer has no responsibility if repairs are performed improperly; in that case, the Hospital’s remedies are directly from the vendor. Following is a synopsis of the responsibilities of Hospital and the Taxpayer under the contract:

1. Purchase orders are issued by the Taxpayer to vendors of repair/maintenance
   companies.
2. The Taxpayer pays directly to the vendor for all service incidents of Hospital
   capital equipment.
3. The Taxpayer has complete authority to engage the service vendor in order to
   repair and service Hospital’s capital equipment.

4. Hospital must terminate its existing maintenance contracts which are cancelable and replace those contracts with other contracts under certain terms and conditions.

5. Hospital is authorized to call vendors who have been issued purchase orders
   by the Taxpayer to repair Hospital capital equipment.
6. The Taxpayer pays Tennessee sales tax to all vendors who repair Hospital
   capital equipment.
   ISSUE
   Whether the contract for services provided by the Taxpayer to Hospital is subject to sales tax. RULING The contract for services provided by the Taxpayer to Hospital is subject to sales tax, but the repairs purchased by the Taxpayer for the Hospital are exempt from sales tax provided the Taxpayer is registered and purchases the repairs using a resale certificate. ANALYSIS Tenn. Code Ann. § 67-6-201 declares the business of selling tangible personal property at retail to be a taxable privilege. A “sale at retail” is defined by Tenn. Code Ann. § 67-6-102(24)(F) to include certain services. The repair of tangible personal property is a taxable service. Tenn. Code Ann. § 67-6-102(24)(F)(iv). The statute also imposes the sales tax on “warranty or service contracts warranting the repair or maintenance of tangible personal property; provided, that any repairs to the extent covered by the contract shall not also be subject to tax.” Tenn. Code Ann. § 67-6-102(24)(F)(ix). The services provided by the Taxpayer in the contract do not include the actual maintenance or repair of equipment. The Taxpayer does, however, arrange for the equipment to be repaired and keeps proper records of such repairs. This agreement between the Taxpayer and the Hospital is a service agreement. The sale of a warranty or service agreement is among the taxable services enumerated in Tenn. Code Ann. § 67-6-102(24)(F). Accordingly, the charges for the Taxpayer’s services are subject to sales tax. The Taxpayer should not pay tax, however, on the purchase of repair services for the Hospital pursuant to the contract. The Taxpayer should register with the Department for sales and use tax to enable to purchase the repairs using a resale certificate.

Caroline R. Krivacka, Tax Counsel

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APPROVED: Ruth E. Johnson, Commissioner
DATE:

1-28-99

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