Refunds Hidden in Service, Repair, & Maintenance Contracts
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Every business signs service contracts.
Every facility schedules repairs.
Every plant pays for preventive maintenance.
And almost every company overpays sales & use tax on these invoices — not because they did anything wrong, but because service providers almost always tax everything by default.
But here’s the hidden truth:
➡️ Many service, repair, and maintenance charges are legally exempt — or only partially taxable — depending on the state and the type of equipment.
➡️ And businesses routinely recover 6–7 figure refunds from invoices they thought were “fully taxable.”
Where Tax Leakage Happens in Service Contracts
|
Line Item on Invoice |
How Vendor Bills It |
Actual Tax Rule in Many States |
|
Labor for repair |
✅ Taxed |
❌ Labor is exempt unless bundled |
|
Replacement parts |
✅ Taxed |
✅ May be exempt if used on exempt equipment |
|
Preventive maintenance |
✅ Fully taxed |
❌ Often exempt if tied to production assets |
|
Warranty or service agreement |
✅ Tax applied on full contract |
⚠️ Only parts portion may be taxable |
|
Calibration services |
✅ Taxed |
✅ Exempt as “professional service” |
|
Software support or updates |
✅ SaaS tax applied |
✅ Often exempt as nontaxable service |
|
Inspection or diagnostics |
✅ Taxed |
❌ No tax owed if no tangible property transferred |
The key problem: Vendors are not responsible for knowing your exemption eligibility.
They charge tax to protect themselves — not you.
Real Example: Maintenance Contract Refund
A manufacturer paid sales tax for 4+ years on a multi-state equipment maintenance contract.
-
Vendor charged tax on full contract value
-
60% of the contract was labor (non-taxable)
-
Equipment qualified for manufacturing exemption
✅ $489,000 refunded
✅ Future contracts rewritten with tax-eligible language
✅ Maintenance now coded as exempt in AP system
Why Companies Miss These Refunds
|
Assumption |
Reality |
|
“The vendor is taxing it, so it must be right.” |
Vendors tax to be safe, not to be compliant |
|
“Services are always taxable.” |
In many states, services are NOT taxable at all |
|
“Maintenance is operational expense, not exempt.” |
If tied to exempt equipment → exemption applies |
|
“AP system already calculates tax correctly.” |
ERPs don’t interpret state law or usage purpose |
|
“We’d have to audit every invoice manually.” |
TaxMatrix automates this review across years of data |
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