Tax Type
Retail Sales and Use Tax
Description
Charges for a computer software license and consulting services
Topic
Manufacturing Exemption
Date Issued
09-16-2004
September 16, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter seeking correction of the sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period March 1999 through February 2002. I apologize for the delay in the Department's response. I also want to thank you for providing the English translation of the German documents at issue.
FACTS
The Taxpayer manufactures abrasive rolls, sheet belts and discs for furniture manufacturers and others. An audit resulted in the assessment of tax on certain fixed assets and on charges for a computer software license and consulting services.
The Taxpayer claims that the charges for a computer software license and consulting services are not taxable. The contested charges were billed by the Taxpayer's German parent company ("Parent"), which had obtained a prewritten computer software license from a German vendor on behalf of all users in the Parent's international group. To implement the software, the Parent also received consulting services from the same German vendor. This software was subsequently installed and implemented at the Taxpayer's Virginia location. As a result, the Taxpayer was billed by the Parent for its proportionate share of the Parent's cost for the software license and consulting fees. I understand that the Taxpayer received the software in March 1999 and "went live with the system on November 1, 1999." I also understand that the software is used to perform administrative functions only.
The Taxpayer maintains that the licensing and consulting work (between the German vendor and Parent) are set out in separate documents and are completely independent of each other. Accordingly, the Taxpayer claims that the consulting services billed to it by the Parent are "not in connection with the sale of software" and are not taxable. The Taxpayer also maintains that "most of the services were performed in Germany and have no nexus with Virginia."
The Taxpayer further maintains that the software license charge is not taxable because it is merely a reimbursement to the Parent "for its portion of the costs associated with the system." The Taxpayer contends that the charges invoiced by the Parent "are simply an intercompany transfer to maintain accurate accounting."
The Taxpayer indicates that it had assistance from the Parent and an outside consultant to implement the software in Virginia. I understand, however, that the charges made by the outside consultant were not included in the audit. The Taxpayer also disputes the hardware costs because sales tax was paid. I understand, however, that the hardware costs were also not included in the audit.
DETERMINATION
Pursuant to Va. Code §§ 58.1-602 and 58.1-603, the transfer of tangible personal property for a consideration to the consumer constitutes a retail sale subject to the Virginia retail sales and use tax. These statutes support the Department's longstanding policy to apply tax to the licensing of prewritten computer software if the license provides the customer not only the right to use the software, but also a copy of the software itself in some tangible form. As set out in § 58.1-602, services charged in connection with the sale of tangible personal property are subject to taxation. See Public Document (P.D.) 88-211 (7/26/88). Furthermore, transfers of tangible personal property for a consideration between separate but affiliated entities are generally deemed sales subject to the retail sales and use tax. See P.D. 94-271 (8/30/94).
Although you contend that the contested purchases of software and services are from a German vendor, the records presented prove that the Parent billed the Taxpayer for a software license and consulting services, thus establishing that the contested purchases are only between the Parent and the Taxpayer. These records further establish that the software and services are not independent and separate transactions. Rather, as is evident from the Parent's invoicing and other billing documents, it is established that the Taxpayer purchased a bundled software system consisting of software and services, thus making a clear connection between the software and services.
A close review of the billing records presented reveals that they are too vague to establish an exemption from the tax pursuant to Va. Code §§ 58.1-609.5(2) [relating to exempt installation labor] and 58.1-609.5(6) [relating to exempt software modification labor charges]. Furthermore, the contested "external consulting" charges appear to consist of taxable and exempt service charges. For example, the Outline Consulting Contract has provisions for four types of services: (1) organizational and managerial consulting, (2) software alterations and/or additions or support, (3) interface installation, and (4) training. It is not possible from the documentation provided to determine the specific amounts of exempt services. In these instances, a lump-sum charge consisting of both taxable and exempt services is deemed taxable. I understand that the Taxpayer has not provided an exempt and taxable breakdown of the contested service charges although the Department's auditor requested such information. Absent credible evidence showing the breakdown of the specific amounts of installation labor and software modification labor that was billed to the Taxpayer by the Parent in connection with the contested charges, I find no basis for revising the audit.
Based on this determination, the assessment is correct. A consolidated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. The outstanding balance must be paid within 30 days from the date of this letter to avoid the accrual of additional interest and an additional 20% penalty on the tax due. Payment should be remitted to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections and the 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 any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/45281R
Rulings of the Tax Commissioner