Could an elevator maintenance contract tax only the percentage allocated to repairs and exclude scheduled maintenance and inspection?

Plain-English summary

The parties proposed amending elevator maintenance contracts to allocate 72% of the price to regularly scheduled preventive maintenance and inspection and 28% to repairs, including labor and materials. The repair percentage would be reviewed annually and adjusted based on the prior year's repair experience.

The Comptroller accepted the allocation for sales-tax purposes if the percentages were supported by credible evidence available to an auditor and both parties agreed to the contract modification. The elevator service provider then collected state and local sales tax only on the percentage allocated to repairs.

The Comptroller suggested changing the draft phrase "not subject to Texas State Tax" to "not subject to Texas State or local Tax" for the maintenance-and-inspection portion.

What this means for you

A contract allocation could separate taxable repairs from nontaxable scheduled maintenance and inspection, but the percentages could not be arbitrary. They needed credible job-history support, mutual agreement, and periodic adjustment based on actual repair experience.

This letter accepted the specific 72/28 methodology presented in 1991. Current maintenance-contract rules and substantiation standards should be checked before using a similar allocation.

Common questions

Was all elevator contract revenue taxable? No. Only the supported percentage allocated to repairs was taxed under the letter.

What portion was treated as nontaxable? The proposed 72% for regularly scheduled preventive maintenance and inspection.

What evidence supported the percentages? Job histories credible enough to be available to and accepted by an auditor.

Could the allocation remain fixed forever? The proposal called for annual review and adjustment based on prior repair experience.

Did local tax apply to the repair portion? Yes. The Comptroller expressly referred to state and local sales tax.

Citations and references

The letter did not cite a numbered statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9107L1123C12

Original ruling text

July 30, 1991

Dear **:

Thank you for your recent letter regarding elevator maintenance contracts
between COMPANY A, COMPANY B, and COMPANY C. You asked if the following
contract modifications would be acceptable for sales tax purposes.

"This amendment is hereby made a part of Master Maintenance Agreement date
4/15/90 between COMPANY A and COMPANY C and shall govern between the parties
any and all of those items, language, or provisions that are herein modified,
deleted, substituted, or supplemented.

Based on job histories, it is established that 72% of the contract price is for
regularly scheduled preventive maintenance and inspection, not subject to Texas
State Tax imposition under current law. The remaining 28% of the contract price
is for repairs, including labor and materials. The 28% of the contract price is
for repairs, including labor and materials. The 28% for repairs will be
reviewed annually, and adjusted if necessary based on prior years repair
experience."

Response: I would suggest that the language be modified to say, "not subject to
Texas State or local Tax.''

Assuming the percentages given are based on credible evidence available to an
auditor, and that the modifications are agreeable to both parties to the
contract, the language in the modifications is acceptable to meet Texas sales
tax requirements. The person servicing the elevators would only be required to
collect state and local sales tax on the percentage determined to be for
repairs.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, you may call me toll free
at 1-800-252-5555, extension 3-4633. The regular number is 512/463-4633.

Sincerely,

Wanda Hutcheson
Tax Administration Division