The definition of "extended warranty services" in KRS 139.010(15) now includes "prewritten computer software access services" as a type of warranty contract subject to sales and use tax. The effective date for this change is January 1, 2023. Prior to the January 1 effective date, separately executed extended warranty service contracts that covered prewritten computer software access services (cloud-based software) were not subject to sales and use tax. This change ensures comparable treatment for prewritten computer software access services.
Another significant change to the definition of "extended warranty services" expands the meaning to include contracts covering all real property, tangible personal property, and digital property regardless of whether the property itself is subject to sales and use tax or exempt. These changes were also effective January 1, 2023.
In particular, contractors, normally treated as service providers not liable for tax on their receipts, need to understand that payments from clients for extended warranty contracts are now taxable receipts subject to the 6% sales and use tax.
This change in taxation also impacts when a contractor is liable for tax on the cost of construction materials and when the materials may be purchased under resale. When a contractor buys materials to make repairs covered under an extended warranty contract, the contractor may purchase those materials that become part of the repair and permanently remain with the customer under a resale certificate. However, the opposite treatment applies when a contractor is performing a job not under an extended warranty contract. Except when operating as a retailer, contractors are the consumers of materials and fixtures used in performing their construction, improvements, or repairs to real property. See KY Regulation 103 KAR 26:070, Section 2 for further details. Also, see articles in the June and September 2022 Sales Tax Facts for examples of taxable extended warranty contracts for real property, tangible personal property, and digital property.