Tax Type
Retail Sales and Use Tax
Description
Online digital identification service to companies, nexus
Topic
Exemptions
Property Subject to Tax
Date Issued
07-26-2002
July 26, 2002
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in reply to the letter from ***** seeking a ruling on the application of the Virginia retail sales and use tax to services provided by your client (the "Company"). I apologize for the delay in the department's response.
FACTS
The Company provides an online digital identification ("ID") service to companies and individuals. A digital ID is a computer software identification device used by parties to communicate with and identify one another prior to engaging in electronic commerce over the Internet. Each digital ID is delivered electronically through the Company's online digital ID center to the customer for online use. The Company does not provide any tangible personal property to its customers as part of the provision of its digital ID service.
The Company has sufficient physical contact with Virginia and has established nexus for sales and use tax purposes. The Company questions the application of the tax to its charges for the digital ID service and raises three issues for consideration: (1) Are digital IDs tangible personal property subject to the Virginia sales tax? (2) If a digital ID is considered tangible software, is it "custom" or prewritten? (3) Is the transfer of digital IDs over the Internet taxable data processing?
RULING
Services v. Tangible Personal Property
Code of Virginia § 58.1-609.5(1) provides an exemption from the sales and use tax for "professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made."
The department traditionally has held that transactions involving data accessed online by personal computers are nontaxable service transactions under Code of Virginia § 58.1-609.5(1). This is also true of information sent via fax, Internet, or other electronic means. Intangible property or services generally are exempt from the tax unless provided in connection with the sale of tangible personal property. See Public Document (P.D.) 97-306 (7/18/97).
The Company's digital ID service involves electronic activity transmitted online, and there is no exchange of tangible personal property. Therefore, the Company's digital ID service is deemed a nontaxable service transaction and the Company is not required to collect the Virginia sales tax on its charge to Virginia customers.
In accordance with Title 23 of the Virginia Administrative Code (VAC) 10-210-4040, the Company, as a service provider, is the taxable user and consumer of all tangible personal property purchased for use in Virginia in providing exempt services. The Company must pay the tax to its vendors at the time of purchase on all tangible personal property used in Virginia to provide its digital ID service. If a vendor is not registered to collect the Virginia tax, the Company must remit the tax directly to the department.
Computer Software
Code of Virginia § 58.1-609.5(7) provides an exemption from the sales and use tax for custom programs as defined in § 58.1-602. A custom program is "a computer program which is specifically designed and developed only for one customer. The combining of two or more prewritten programs does not constitute a custom computer program. A prewritten program that is modified to any degree remains a prewritten program and does not become custom."
Code of Virginia § 58.1-602 also defines a prewritten program to mean "a computer program that is prepared, held or existing for general or repeated sale or lease, including a computer program developed for in-house use and subsequently sold or leased to unrelated third parties."
You have clarified that the Company is not making sales of computer software in providing its digital ID service. It is not clear, however, whether the Company purchases computer software for use in Virginia to provide its digital ID service. Any purchases of custom software by the Company for use in Virginia in providing its services would be exempt. Conversely, as a service provider, the Company is liable for the tax on its purchases of tangible prewritten computer software used in Virginia to provide its digital ID service. Purchases of prewritten software that are transmitted to the Company online would be exempt, provided there is no exchange of tangible personal property. P.D. 99-80 (4/21/99).
Data Processing
It has been the department's long-standing policy that the "true object" of data processing services that transfer information by means of microfiche, computer tape, or hardcopy are nontaxable services. P.D. 96-184 (7/26/96). Clearly, data processing services that involve the transfer of data online where there is no transfer of tangible personal property would also be a nontaxable service. In this case, there is insufficient information to determine whether the Company's digital ID service would be considered data processing services. In any event, the Company's online provision of its digital ID services is not deemed a taxable sale.
This ruling is based on the facts as presented. Any variation of the facts from those presented may lead to a different result. The Code of Virginia, regulations and public documents cited are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have additional questions, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/28872J
Rulings of the Tax Commissioner