Tax Type
Retail Sales and Use Tax
Description
Taxability of Web services
Topic
Basis of Tax
Documents Subject to Tax
Property Subject to Tax
Date Issued
06-17-2002
June 17, 2002
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in reply to your letter in which you request a ruling on the application of the Virginia retail sales and use tax to web site services provided by ***** (the "Taxpayer").
FACTS
The Taxpayer performs services in connection with the creation of a web site, including strategic consulting, design, development, and web site registration. The web site is transferred to the client either by electronic means or on diskette or CD. In addition, the Taxpayer has developed pre-written web site modules that contain specific functionality and features. These modules are sold, with slight customization, to clients in the context of creating the overall web site. You request a ruling on the application of the retail sales and use tax to these transactions.
RULING
Public Document 97-239
In Public Document (P.D.) 97-239 (5/23/97), a taxpayer was involved in the production and placement of web sites on Internet services. The taxpayer would also register the web site design or homepage on behalf of its client, with an Internet service. The Internet service would charge the taxpayer a monthly or yearly site fee. The fees were marked up by the taxpayer and, in turn, charged to the client.
The Tax Commissioner determined that the costs associated with web site or homepage production or design are not taxable, even if the design is presented to the client in tangible form. The tangible form represented the review phase of the design process and was not considered to be a sale of tangible personal property. Once the client approved the design, the taxpayer registered the design with a site provider and transferred the design electronically. In addition, the registration or placement of the web site was not a taxable transaction for retail sales and use tax purposes, as there was no exchange of tangible personal property.
Web site services
In the situation presented, the Taxpayer is consulting, designing and developing its client's web site and performing web site registration. In accordance with P.D. 97-239, these services qualify for the exemption under Code of Virginia § 58.1-609.5(1). This Code section exempts from the retail sales and use tax professional or personal service transactions that involve sales as inconsequential elements for which no separate charges are made. Because this transaction is considered to be a nontaxable service transaction, the Taxpayer is deemed to be the user and consumer of all tangible personal property used in such transactions, and must pay the tax to its suppliers on such purchases.
Web site transferred electronically
The department has long held that the sale of computer software transferred in tangible form (e.g., diskette or CD) is the taxable sale of tangible personal property. In contrast, computer programs transmitted electronically are deemed to be nontaxable transactions because there is no transfer of tangible personal property. This issue is addressed in P.D.'s 99-80 (4/21/99) and 96-143 (6/20/96), indicating that pre-written software uploaded by a software supplier onto customer-owned hardware, with no tangible medium provided, constitutes a nontaxable service.
In the Taxpayer's situation, when the web site is transferred electronically to the client, the charge for the web site is not subject to Virginia's retail sales and use tax. As noted in P.D.'s cited above, the transaction is considered to be a nontaxable service and the tax does not apply when there is no exchange of tangible personal property.
Web site transferred in tangible form
When the web site is transferred to the client on a diskette or CD, this is the equivalent of providing a computer program in tangible form. As noted above, the department's policy is that such a transaction is the taxable sale of tangible personal property.
In the situation presented, the Taxpayer is using pre-written web site modules (i.e., pre-written computer programs) and modifying them to create a web site that is sold to the client. A pre-written program that is modified to any degree remains a prewritten program and does not become custom. See Code of Virginia § 58.1-602, definition of "custom program." The Taxpayer is selling pre-written computer programs in tangible form and is required to collect tax on the retail sale.
Code of Virginia § 58.1-609.5(6) does provide an exemption from the sales tax for an amount separately charged for labor or services rendered in connection with the modification of pre-written programs. The charge for the pre-written program itself is subject to the tax. Only the separately stated charges for modification labor or services are exempt. If the modification labor or services are not separately charged, the entire charge for the program (web site) is taxable.
I hope this information is helpful. Copies of the Code of Virginia, regulations and other reference documents 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 regarding this matter, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/33995
Rulings of the Tax Commissioner