Tax Type
Retail Sales and Use Tax
Description
Computers and software used solely in software or game development
Topic
Accounting Periods and Methods
Exemptions
Date Issued
01-05-2004
October 5, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your request for reconsideration of the Department's determination issued on January 18, 2003. The initial determination responded to the appeal of a retail sales and use tax assessment issued to ********** (the "Taxpayer") for the period July 1994 through April 2000. I understand that the Taxpayer was sold to ***** (the "Successor") in May 2000. I apologize for the delay in the Department's response.
FACTS
In the original appeal, the Taxpayer "sought revision of the assessment only with respect to computers and software used solely in software or game development." Based on the reasons provided in the prior determination, sufficient basis was not found for exempting that contested property based on the research and development and audiovisual works exemptions, Va. Code §§ 58.1-609.3(5) and 58.1-609.6(6), respectively. You cite a variety of reasons to justify additional consideration of the issues.
DETERMINATION
Research and development exemption
Monsanto case. You assert that the e-mail and Internet functionality of the contested computer does not constitute a taxable use outside the scope of the research and development exemption. In support of your position, you cite a decision by the Massachusetts Appellate Tax Board ("ATB") in Monsanto Company v. Commissioner of Revenue (Docket No. F224265, 12/03/97). In that case, the Massachusetts' ATB ruled that computers used in exempt research and development activities and encompassing word processing, e-mail, graphics, spreadsheet, and data management applications were deemed used directly and exclusively in research and development and were, therefore, eligible for the Massachusetts' research and development exemption under General Laws Ch. 64H, § (r) and (s).
What you fail to point out about the Monsanto opinion is that it specifically states that "[t]he Supreme Judicial Court and this Board have repeatedly held that the § 6 (r) and (s) [i.e., the Massachusetts' research and development exemptions] are not subject to narrow construction." [Insert and emphasis added.] In other words, the broad construction applied to the research and development exemption in Monsanto is the contrary to the narrow construction that Virginia must apply to its exemptions from the sales and use tax. See Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973). Because the courts in Virginia have always required a strict construction of the exemptions from the Virginia retail sales and use tax, the Monsanto decision has no relevance to the interpretation and application of Virginia's research and development exemption.
Tour. You propose that the Department's auditor tour one of the Successor's California locations "where equipment used in performing research and development functions similar to those performed in Virginia could be viewed."
During the audit, while the Taxpayer still had its Virginia facility and its Software Development Department, the Taxpayer's Controller refused the auditor's request to tour such facility for the purpose of determining whether the research and development exemption applied to the contested computer hardware and software. At the time of audit, it was still possible to have conducted a physical survey of at least some of the contested property (or replacements thereof) to determine usage. By not allowing the Department access to the contested items or replacement property thereof with equivalent usage at the same location and operations, the equipment usage could not be verified at the time of audit.
Ten months after the audit, the Taxpayer invited the Department to tour the Virginia facility, although the Taxpayer's Software Development Department was gone, and its workforce significantly reduced from 200 to 30. As you stated on page 10 of the initial appeal, "[a] review of Client's computers and the use thereof today [i.e., February 14, 2002] would not present a full understanding of the use of the computers during the audit period." Accordingly, you were cognizant that much had changed as to the makeup of the Taxpayer's Virginia operations before the tour invitation was offered. It is apparent that a tour under those circumstances would not be sufficient to gather the necessary information, particularly when compared to a tour conducted during the audit.
Because the Virginia location is closed, the Taxpayer now invites the Department on a tour of a California facility operated by its Successor to determine the computer usage at such facility for application to the contested Virginia property. Although the Taxpayer was given the opportunity to establish the equipment usage of the contested property, it refused to do so when the Virginia facility was still in existence and had a Software Development Department. Because no exceptional mitigating circumstances prevented the Department from verifying the usage of the Virginia contested property, I find that the only acceptable solution for determining the equipment usage was to have allowed the auditor's access to the Taxpayer's Virginia facility at the time of audit.
Consequently, your proposal for a tour of a California facility for determining Virginia equipment usage is not acceptable. Further, no documentation has been provided to demonstrate that the Department's denial of the research and development exemption to the transactions at issue is erroneous.
Audiovisual works exemption
The audiovisual works exemption provided in Va. Code § 58.1-609.6(6) is limited in its application to equipment used in the production of radio and television programs and feature films. In the prior determination, I concluded that "the audiovisual exemption does not extend to the Taxpayer's audiovisual games." After considering all of your claims to the contrary, I continue to find no basis for expanding the audiovisual works exemption to encompass audiovisual games, whether conveyed electronically or by tangible media.
CONCLUSION
Based on the foregoing, the assessment is correct and remains due and payable. 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 the consolidated bill is mailed to the Taxpayer 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: *****. For any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections 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 determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/46002R
Rulings of the Tax Commissioner