IT Service Agreement Taxable as Service Contract in North Carolina

An IT provider’s (taxpayer’s) service agreements were subject to North Carolina sales and use tax since the agreements met the definition of a taxable service contract. Per the taxpayer’s agreement, the taxpayer is providing “network equipment support,” which includes maintaining configuration, logging, and monitoring of network equipment, including routers, firewalls, switches, spam filters, and other equipment used to move, monitor, or intentionally affect ethernet traffic. Per the agreement, the taxpayer provides all services related to these products. Additionally, the agreement states that the taxpayer will monitor software updates and patches and, if necessary, deploy updates and patches during the maintenance windows for supported operating systems. Additionally, the taxpayer may perform emergency maintenance, such as security patch installation or hardware replacement. In a private letter ruling, the North Carolina DOR found that the taxpayer’s agreement meets the definition of a service contract as defined in the relevant tax statute. Per the statute, a “service contract” is defined in part as “[a] contract where the obligor under the contract agrees to maintain, monitor, inspect, repair, or provide another service included in the definition of repair, maintenance, and installation services to certain digital property, tangible personal property, or real property for a period of time or some other defined measure.” In North Carolina, service contracts are subject to tax. As a result, the taxpayer’s retail sales of the agreements are subject to North Carolina sales and use tax. (SUPLR 2020-0014, North Carolina Department of Revenue, October 16, 2020)

Posted on November 9, 2020