05-12 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Method of conveyance by tangible means and not via an electronic method

Topic

Appropriateness of Audit Methodology

Collection of Delinquent Tax

Date Issued

02-07-2005

February 7, 2005

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear ********:

This is in response to your letter in which you request the Department to reconsider its determination of January 13, 2004, concerning the retail sales and use tax assessment issued to ***** (the "Taxpayer") and ***** (the "Predecessor Company") for the periods July 1996 through September 2001. I apologize for the delay in the Department's response.

FACTS

The Taxpayer and the Predecessor Company are service providers. As a result of the Department's audit, tax was assessed on fixed assets and other purchases of tangible personal property. The Taxpayer contested the tax assessed on charges for printing, certain software programs, and a software license. The Predecessor Company contested the tax assessed on charges for a software license.

In my determination letter of January 13, 2004, I allowed the Taxpayer 60 days to furnish additional documentation regarding the contested computer software programs. Specifically, the Department requested the Taxpayer to provide documentation proving (1) the software at issue was exempt custom software, or (2) the transactions at issue included modification labor to prewritten software. The tax assessed on charges for a software license was upheld based on contract language indicating the software was provided to the Predecessor Company in tangible form.

You maintain that the software for which the license was granted is exempt from the retail sales and use tax. You contend that employees of ***** ("DMS") installed the software, and no tangible copies of the software were provided. In addition, you state that despite language in the contract, the Taxpayer did not have the computer expertise on staff to install the software.

DETERMINATION

Documentation

On three separate occasions, the Taxpayer was asked to provide documentation supporting the claim that the software license was received electronically and employees of DMS installed the software. The first occasion resulted from the audit conducted by the Department during which the assessment of the audit was delayed to enable the Taxpayer sufficient time to find documentation supporting its assertions.

The second occasion resulted from the original determination letter dated January 13, 2004, wherein the Department allowed the Taxpayer an additional 60 days to provide the Department "with other documents, if any, that directly relate to these two contested transactions." This 60-day period elapsed and no documents were provided to the Department to support the Taxpayer's assertions.

At the conclusion of the 60-day period, the Taxpayer held a conference call with a representative of the Department during which the Taxpayer was provided additional time to provide evidence to support its claim. In your letter requesting reconsideration of the Department's determination, you acknowledge, "Through our search for this information, we have not been able to accumulate additional written evidence to support our assertions."

Contract

The contract entered into between the Taxpayer and DMS makes clear the delivery and installation procedures. The "Delivery and Installation" section of the contract, section 6, states, "DMS will deliver to [the Taxpayer] the Licensed Software (in machine readable form), on or about the date of this Agreement. [The Taxpayer], at its expense, will install the Licensed Software promptly upon receipt thereof. [The Taxpayer] is responsible for procuring, installing and maintaining all equipment, telephone lines, communication interfaces and other hardware necessary to operate the Licensed Software. " This language itself is strong evidence that the installation was to be performed by the Taxpayer and not DMS.

In addition, section 16 of the contract requires the vendor, DMS, to deliver all, "shipments of software, hardware, and documentation," to the Taxpayer at a specific address included in the Software License and Services Agreement. This language by itself is strong evidence that the method of conveyance was meant to be by tangible means and not via an electronic method.

In considering whether a software license is conveyed electronically or by tangible means, the Department has consistently looked to the language of the contract and other accompanying documents and records created at the time that the license took effect. The documents presented to the Department fully support the auditor's position that the software was provided in tangible form.

Furthermore, pursuant to Va. Code § 58.1-205, the Taxpayer has the burden of proving an assessment erroneous. The Taxpayer, as is detailed above, has not satisfied that burden of proof.

Conclusion

Although I recognize your continuing disagreement with the validity of the assessment at issue, this letter and the determination letter of January 13, 2004, clearly explain the Department's position. For the reasons outlined above, and because the Taxpayer has not provided documentation supporting its position, the assessment is correct. This letter constitutes the Department's final determination on this matter.

A consolidated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit your payment 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 section cited, along with other reference documents, are available on-line in the Tax Policy library section of the Department of Taxation's website, located at www.policylibrary.tax.virginia.gov. 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,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/50638i

Rulings of the Tax Commissioner