Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; Software development
Topic
Taxability of Persons and Transactions
Date Issued
03-15-2000
March 15, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of the retail sales and use tax audit assessment issued to ***** (the Taxpayer). Cited resources are enclosed. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer provides video display systems and computer applications for various clients. A first audit for the period December 1995 through July 1998 resulted in an assessment of use tax on untaxed project labor, expenses and software development services sold in connection with the sale of a video display system.
The Taxpayer takes exception to the entire assessment and maintains that the sale at issue required the Taxpayer to design, build and install a custom display system using custom hardware and software. The Taxpayer maintains that the software developed for this project was not prewritten but was custom written and used only for one project.
The Taxpayer collected sales tax on the sale of system components but not on any labor charges. In billing for labor, the Taxpayer charged on a lump-sum basis for each category of project labor, software development, and other expenses.
DETERMINATION
Software Development
This category represents labor charges in connection with the specific design and development of control system software for one customer. Although the Taxpayer had hopes of marketing this software for general or repeated sale, the Taxpayer informed a member of my Tax Policy staff that such hopes never materialized.
Based on the facts and documentation presented, l find basis to deem the software development charges to constitute charges for a custom program as defined by Code of Virginia § 58.1-602 and exempted by Code of Virginia § 58.1-609.5(7). Therefore, such software development charges will be removed from the audit.
Expenses
Under this category, tax was assessed on untaxed lump-sum charges consisting of expenses charged to the customer for the Taxpayer's per diem expenses (i.e., hotel and food expenses incurred on-site), air travel to fly persons to and from the customer's site, and shipping expenses for delivery of equipment to the customer's site.
Generally, the Virginia retail sales and use tax applies to the gross sale price of tangible personal property sold at retail. Code of Virginia §58.1-602 defines "sales price" as to "include any services that are a part of the sale," unless specifically exempted by statute. There is no statutory exemption for charges for per diem expenses or employee air travel expenses when incurred in connection with the taxable sale of tangible personal property. For a further explanation, see Public Document (P.D.) 96-88 (5/14/95).
However, separately stated charges for the delivery of equipment from the seller to the purchaser are exempted by Code of Virginia § 58.1-609.5(3). I would note that Title 23 of the Virginia Administrative Code 10-210-6000 specifically requires that the delivery or shipping charges must be "separately stated on the invoice to the customer." Although this was not done in this case, the Taxpayer's internal documentation provides a specific breakdown of the shipping charges. Therefore, for purposes of this first audit only, l will allow the removal of the shipping expenses from the audit.
Project Labor
Under this category, tax was assessed on untaxed lump-sum charges for project labor which consists of labor charges formanagement/oversightt, engineering for wiring and structure design, fabrication of racks and wire equipment, on-site installation of system equipment, commissioning the operation of the entire system (i.e., turning on and testing equipment, etc.), programming assistance to train the customer's programmer on the new system, programming to configure the equipment on-site, drafting via CAD drawing of the system's wiring, and documenting the operation of the entire system. It is my understanding that none of the project labor charges were for writing the custom program.
Code of Virginia § 58.1-609.5(2) provides an exemption for installation labor when separately charged. Although installation labor was not separately charged on the customer's invoice, l will allow the removal of such charges from the audit based on the internal documentation provided. As for the rest of the project labor charges, they are fully taxable as no specific statutory exemption applies to such charges.
Conclusion
As shown on the attached schedule, the audit assessment will be revised to remove the assessed sales tax and associated interest charges on charges for custom software development, shipping, and installation labor. Under separate cover, a revised bill will be sent to the Taxpayer for the outstanding liabilities. To avoid further interest charges, the Taxpayer should pay the revised balance of ***** within 45 days of the date of this letter.
For the future, the Taxpayer will need to separately state shipping charges and installation labor charges on customer's invoices in order for the exemptions to apply. If you have any questions about this final determination, please contact **** of my Tax Policy staff at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20914R
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of the retail sales and use tax audit assessment issued to ***** (the Taxpayer). Cited resources are enclosed. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer provides video display systems and computer applications for various clients. A first audit for the period December 1995 through July 1998 resulted in an assessment of use tax on untaxed project labor, expenses and software development services sold in connection with the sale of a video display system.
The Taxpayer takes exception to the entire assessment and maintains that the sale at issue required the Taxpayer to design, build and install a custom display system using custom hardware and software. The Taxpayer maintains that the software developed for this project was not prewritten but was custom written and used only for one project.
The Taxpayer collected sales tax on the sale of system components but not on any labor charges. In billing for labor, the Taxpayer charged on a lump-sum basis for each category of project labor, software development, and other expenses.
DETERMINATION
Software Development
This category represents labor charges in connection with the specific design and development of control system software for one customer. Although the Taxpayer had hopes of marketing this software for general or repeated sale, the Taxpayer informed a member of my Tax Policy staff that such hopes never materialized.
Based on the facts and documentation presented, l find basis to deem the software development charges to constitute charges for a custom program as defined by Code of Virginia § 58.1-602 and exempted by Code of Virginia § 58.1-609.5(7). Therefore, such software development charges will be removed from the audit.
Expenses
Under this category, tax was assessed on untaxed lump-sum charges consisting of expenses charged to the customer for the Taxpayer's per diem expenses (i.e., hotel and food expenses incurred on-site), air travel to fly persons to and from the customer's site, and shipping expenses for delivery of equipment to the customer's site.
Generally, the Virginia retail sales and use tax applies to the gross sale price of tangible personal property sold at retail. Code of Virginia §58.1-602 defines "sales price" as to "include any services that are a part of the sale," unless specifically exempted by statute. There is no statutory exemption for charges for per diem expenses or employee air travel expenses when incurred in connection with the taxable sale of tangible personal property. For a further explanation, see Public Document (P.D.) 96-88 (5/14/95).
However, separately stated charges for the delivery of equipment from the seller to the purchaser are exempted by Code of Virginia § 58.1-609.5(3). I would note that Title 23 of the Virginia Administrative Code 10-210-6000 specifically requires that the delivery or shipping charges must be "separately stated on the invoice to the customer." Although this was not done in this case, the Taxpayer's internal documentation provides a specific breakdown of the shipping charges. Therefore, for purposes of this first audit only, l will allow the removal of the shipping expenses from the audit.
Project Labor
Under this category, tax was assessed on untaxed lump-sum charges for project labor which consists of labor charges formanagement/oversightt, engineering for wiring and structure design, fabrication of racks and wire equipment, on-site installation of system equipment, commissioning the operation of the entire system (i.e., turning on and testing equipment, etc.), programming assistance to train the customer's programmer on the new system, programming to configure the equipment on-site, drafting via CAD drawing of the system's wiring, and documenting the operation of the entire system. It is my understanding that none of the project labor charges were for writing the custom program.
Code of Virginia § 58.1-609.5(2) provides an exemption for installation labor when separately charged. Although installation labor was not separately charged on the customer's invoice, l will allow the removal of such charges from the audit based on the internal documentation provided. As for the rest of the project labor charges, they are fully taxable as no specific statutory exemption applies to such charges.
Conclusion
As shown on the attached schedule, the audit assessment will be revised to remove the assessed sales tax and associated interest charges on charges for custom software development, shipping, and installation labor. Under separate cover, a revised bill will be sent to the Taxpayer for the outstanding liabilities. To avoid further interest charges, the Taxpayer should pay the revised balance of ***** within 45 days of the date of this letter.
For the future, the Taxpayer will need to separately state shipping charges and installation labor charges on customer's invoices in order for the exemptions to apply. If you have any questions about this final determination, please contact **** of my Tax Policy staff at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20914R
Related Documents
Rulings of the Tax Commissioner