Tax Type
Retail Sales and Use Tax
Description
Settlement payment; gross sales price paid for the sale of tangible personal property
Topic
Accounting Periods and Methods
Property Subject to Tax
Date Issued
09-14-2004
September 14, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the audit period May 2000 through February 2002. I apologize for the delay in the Department's response.
FACTS
The Taxpayer purchased software from its vendor. The vendor also provided services to the Taxpayer with regard to the implementation of the software. After encountering numerous problems trying to implement the software, the Taxpayer began holding payment for the implementation services. Ultimately, the Taxpayer and its vendor entered into a settlement agreement. As a condition of this agreement, the Taxpayer paid to its vendor $50,000 in settlement of the account.
During the audit by the Department, the Taxpayer was assessed tax on the settlement payment. You maintain that the payment is not for the use of the software or software license, and the payment is not subject to sales tax.
DETERMINATION
Virginia Code § 58.1-603 imposes the sales tax on the gross sales price of tangible personal property sold in Virginia. Virginia Code § 58.1-602 defines sales price as the total amount for which tangible personal property or services are sold, including any services that are a part of the sale.
In Public Document 95-53 (3/23/95), the taxpayer engaged in the retail sale of commercial coffee brewing equipment. The taxpayer requested a ruling regarding the applicability of the retail sales and use tax to a cancellation penalty it planned to charge its customers who terminated coffee service within ninety days of entering into the contract. The Department ruled that the penalty amount represented a recapture of any loss sustained by the taxpayer from the transaction. The penalty amount constituted an element of gross receipts derived from the sale of tangible personal property. The penalty amount was considered to have been made in connection with the sale of tangible personal property and was thus subject to the tax.
In the Taxpayer's case, the settlement payment represents a recapture of a loss sustained by the Taxpayer's vendor as a result of the transaction. The settlement payment constitutes an element of gross sales price paid for the sale of tangible personal property, i.e., the software. As you acknowledge in your letter, the Taxpayer retained possession of the software, which is loaded on a processor owned by the Taxpayer. There is clearly a sale of tangible personal property to the Taxpayer, and the settlement payment represents a portion of the sales price (i.e., a portion of the total amount for which the software was sold). Accordingly, the settlement payment is deemed to be made in connection with the sale of the software and is subject to the tax.
Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest or penalties will accrue provided the outstanding balance is paid within thirty days of the date of the updated bill.
The Code of Virginia sections and public document cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this response, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/49813P
Rulings of the Tax Commissioner