Tax Type
Retail Sales and Use Tax
Description
Software license; "True object" of the transaction
Topic
Taxability of Persons and Transactions
Date Issued
05-15-2001
May 15, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of the use tax assessment issued to **** (the "Taxpayer") as a result of an audit. I apologize for the delay in responding to your letter. Copies of cited sources are enclosed.
FACTS
The Taxpayer provides medical services. An audit for the period July 1997 through March 2000 resulted in the assessment of use tax on untaxed purchases.
The Taxpayer takes exception to the use tax assessed on a software license and maintains that this transaction is not subject to taxation. According to the Taxpayer, the software program was not transferred on a diskette or other tangible medium. Rather, the software was loaded directly onto its file server by the software vendor located outside Virginia. A tangible copy of the software program was never furnished. The vendor furnished, however, a tangible copy of the user's software manual for which no separate charge was made.
DETERMINATION
The department has long held that the sale of computer software transferred in tangible form (e.g., tape or disc) is the taxable sale of tangible personal property. In contrast, computer programs transmitted electronically (e.g., over telephone lines or keyed directly into a computer through its keyboard), are deemed to be nontaxable transactions because there is no transfer of tangible personal property. This issue is addressed in Public Documents 99-80 (4/21/99) and 96-143 (6/20/96) indicating that prewritten computer software uploaded by a software supplier onto customer-owned hardware, with no tangible medium provided, constitutes a nontaxable service.
As the transaction at issue in this case involves both services and materials, the "true object test" set out in Title 23 of the Virginia Administrative Code 10-210-4040(D) must be examined:
If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
The "true object" sought by the Taxpayer in the present case is for software services rather than the software manual which is incidental to the transaction. Accordingly, the contested transaction will be removed from the assessment. As the contested assessment has been paid, the Taxpayer will receive a refund of $*** (tax paid of *** and interest paid of ***). Interest owed by the department on this amount will be added to the refund.
If you have any questions about this response, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/29862R
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of the use tax assessment issued to **** (the "Taxpayer") as a result of an audit. I apologize for the delay in responding to your letter. Copies of cited sources are enclosed.
FACTS
The Taxpayer provides medical services. An audit for the period July 1997 through March 2000 resulted in the assessment of use tax on untaxed purchases.
The Taxpayer takes exception to the use tax assessed on a software license and maintains that this transaction is not subject to taxation. According to the Taxpayer, the software program was not transferred on a diskette or other tangible medium. Rather, the software was loaded directly onto its file server by the software vendor located outside Virginia. A tangible copy of the software program was never furnished. The vendor furnished, however, a tangible copy of the user's software manual for which no separate charge was made.
DETERMINATION
The department has long held that the sale of computer software transferred in tangible form (e.g., tape or disc) is the taxable sale of tangible personal property. In contrast, computer programs transmitted electronically (e.g., over telephone lines or keyed directly into a computer through its keyboard), are deemed to be nontaxable transactions because there is no transfer of tangible personal property. This issue is addressed in Public Documents 99-80 (4/21/99) and 96-143 (6/20/96) indicating that prewritten computer software uploaded by a software supplier onto customer-owned hardware, with no tangible medium provided, constitutes a nontaxable service.
As the transaction at issue in this case involves both services and materials, the "true object test" set out in Title 23 of the Virginia Administrative Code 10-210-4040(D) must be examined:
If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
The "true object" sought by the Taxpayer in the present case is for software services rather than the software manual which is incidental to the transaction. Accordingly, the contested transaction will be removed from the assessment. As the contested assessment has been paid, the Taxpayer will receive a refund of $*** (tax paid of *** and interest paid of ***). Interest owed by the department on this amount will be added to the refund.
If you have any questions about this response, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/29862R
Rulings of the Tax Commissioner