Tax Type
Retail Sales and Use Tax
Description
Direct use in the production of computer software
Topic
Appropriateness of Audit Methodology
Property Subject to Tax
Date Issued
01-09-2002
January 9, 2002
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in reply to your letter in which you seek correction of the department's retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period May 1997 through April 2000. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a provider of knowledge retrieval and management solutions. Included in the department's audit assessment are royalty payments paid by the Taxpayer associated with software purchases incorporated into its product. The Taxpayer contends that the software is used directly in the production of computer software for sale or resale and should be afforded the manufacturing exemption under Code of Virginia § 58.1-609.3(2). In addition, the Taxpayer contests the assessment of an annual subscription to a publication with supporting monthly CD-ROM updates.
DETERMINATION
Royalties
The Taxpayer's vendor provides the Taxpayer with computer programs in tangible form. The Taxpayer incorporates the vendor's programs into its product and makes a royalty payment to the vendor for each program used in generating a product for sale.
The department has consistently held that royalties paid for the use of prewritten software that is provided in tangible form are subject to the tax. I note that the auditor provided the Taxpayer with a copy of Public Document 94-209 (07/06/94), which provides additional information on the department's position. As the department has consistently held such payments taxable, I can find no basis to alter the auditor's findings.
Manufacturing
The industrial processing exemption is set out in Code of Virginia § 58.1-609.3(2) and provides that a business must manufacture or process products for sale or resale. In interpreting this statute, Title 23 of the Virginia Administrative Code (VAC) 10-210-920 specifically states that for a business to obtain this exemption, it first must be manufacturing or processing products for sale or resale and secondly, such production must be industrial in nature. Pursuant to Code of Virginia § 58.1-602, "industrial in nature" includes those businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification ("SIC") Manual. Since 1983, these classifications have served as the primary determinant for classifying a business as "industrial."
Based on the information before me and on comments by the department's auditor, the Taxpayer's activities more accurately fall within SIC group 73 - Business Services, and more specifically within group 7375 - Information Retrieval Services. Based on this information, the Taxpayer's operations are not "industrial in nature" and do not qualify for the manufacturing exemption.
Publication
Code of Virginia § 58.1-609.6(3) exempts from the retail sales and use tax:
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- Any publication issued daily, or regularly at average intervals not exceeding three months, and advertising supplements and any other printed matter ultimately distributed with or as part of such publications; however, newsstand sales of the same are taxable ....
A publication is defined as "a newspaper, magazine or other periodical which is available for general distribution to the public." Jefferson Publishing Co. v. W.H. Forst, 217 Va. 988, 234 S.E.2d 297 (1977). The Virginia Supreme Court in Lawrence Carr, Jr., v. W.H. Forst, Tax Commissioner, 249 Va. 66, 453 S.E.2d 274 (1995) reaffirmed the definition of "publication" in Jefferson.
The Tax Commissioner previously determined in Public Document 94-258 (8/12/94) that the exemption provided by Code of Virginia § 58.1-609.6(3) does extend to publications issued in CD-ROM format, provided that the other criteria of the exemption are met. I note that the publication at issue in this case is available to the general public; however, it does not satisfy the interval test because it is issued annually.
In addition, the monthly CD-Rom updates are not "publications." Periodic updates are not in and of themselves "publications" because they do not satisfy the definition in Jefferson. The purpose of the updates is to supplement a publication with current data, but the updates are not "a newspaper, magazine or other periodical." Based on the information presented, this item was correctly assessed and I find no cause to adjust the department's audit.
Conclusion
Based on the foregoing, the assessment is correct. I note that the assessment has been paid in full; therefore, no refund will be issued. If you have any questions regarding this matter, you may contact ***** of the department's Office of Policy and Administration, Appeals and Rulings, at *****@tax.state.va.us or at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/30376Q
Rulings of the Tax Commissioner