Illinois Ruling Clarifies Taxability of Maintenance Agreements

In a recent private letter ruling, the Illinois Department of Revenue explained the sales and use tax treatment of software licensing charges and software maintenance and consulting services. This ruling replaces a previous ruling, which contained inaccurate information pertaining to maintenance agreements. Consulting services and maintenance agreements for software and hardware are exempt from sales or use tax. However, with respect to a maintenance agreement for hardware, any repair part transferred under the terms of the maintenance agreement will be subject to use tax, not service occupation tax, as stated in the previous ruling. Sellers of maintenance agreement are required to pay use tax to their suppliers on the cost price of tangible personal property transferred to a customer as an incident of performing a service or maintenance. (Private Letter Ruling, ST 06-0010-PLR, Illinois Department of Revenue)

Posted on October 23, 2006