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Do I owe retail sales tax on maintenance agreements for prewritten software sales?
Sales tax does not apply for separately itemized charges when the agreements do not include software upgrades or updates. However, these agreements are taxable under the service and other activities B&O tax.
When your maintenance agreement sale is considered a mixed element (this means there are software updates and upgrades), then you are subject to retailing B&O and retail sales tax. This is considered a bundled transaction.
This assumes the updates/upgrades represent at least 10 percent of the total price.
In cases where professional service charges and the update/upgrade charges are itemized separately, then each charge is taxed on the nature of the activity:
- The charge for the help desk support and diagnostic services is generally taxed under the service and other activities classification, and
- The charge for the updates/upgrades are subject to retail sales tax and retailing B&O tax.
What does the maintenance agreements definition include?
Computer software maintenance agreements typically include:
- software upgrades and updates
- telephone consulting
- help desk services
- remote diagnostic services
What kind of taxes do I owe on custom software or customization services?
You may owe service and other activities B&O tax on support service sales or maintenance sales if:
- the sale relates to custom software, or
- the sale relates to the customized elements of prewritten computer software.
