05-134 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Tax applies to tangible personal property whether it is actually received

Topic

Taxable Transactions

Date Issued

08-10-2005

August 10, 2005

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

Dear ***********:

This is in response to your letter submitted on behalf of ***** (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued by the Department for the period February 1999 through June 2004.

FACTS

As a result of the Department's audit, the Taxpayer was assessed-tax on the untaxed purchase of ***** ("Software Package One") and ***** ("Software Package Two"). The Taxpayer contends these software packages are custom programs that were downloaded electronically from the vendor. The Taxpayer contends the programs are exempt from the retail sales and use tax pursuant to Va. Code §§ 58.1-609.5 1 and 58.1-609.5 7.

DETERMINATION

Software Package One

Custom Software vs. Prewritten Software

Virginia Code § 58.1-609.5 7 provides an exemption from the retail sales and use tax for custom programs as defined in Va. Code § 58.1-602. A custom program means

- a computer program which is specifically designed and developed only for one customer. The combining of two or more prewritten programs does not constitute a custom computer program. A prewritten program that is modified to any degree remains a prewritten program and does not become custom. [Emphasis added.]

Virginia Code § 58.1-602 also defines a prewritten program as

- a computer program that is prepared, held or existing for general or repeated sale or lease, including a computer program developed for inhouse use and subsequently sold or leased to unrelated third parties.

The first question to be determined in this case is whether Software Package One is a custom or prewritten program. The Software License and Support Agreement entered into between the Taxpayer and the vendor specifies that the vendor "markets, licenses and supports various software programs, systems and products for use in personal computers." The vendor's website indicates that Software Package One is "a well established packaged solution which is fully configurable." Based on this language, it is clear that Software Package One is not specifically designed and developed only for one customer, as the statute requires. Instead, the software is a prewritten program that is configured to meet the needs of each customer. Based on the information presented and the above authorities, Software Package One is a prewritten program that is subject to the retail sales and use tax.

Tangible vs. Intangible Delivery

The second question in this case is whether Software Package One is provided in tangible form or electronically. Virginia Code § 58.1-609.5 1 states that the retail sales and use tax shall not apply to "services not involving an exchange of tangible personal property which provide access to or use of the international network of computer systems commonly known as the Internet, and any other related electronic communication service, including software, data, content and other information services delivered electronically via the Internet." [Emphasis added.]

A review of the agreement reveals the Taxpayer is entitled to receive Software Package One in tangible form. Section II, Clause 2 of the Software License and Support Agreement states the vendor shall "deliver the initial System to Customer and install it at the location determined by the Customer on the date set forth . . . ." In addition, Section III, Clause 5 of the agreement provides that all products are shipped F.O.B. unless otherwise specified. In further support of the fact that the Taxpayer is entitled to receive tangible personal property, the agreement provides in Section IV, Clause 5 that software maintenance upgrades will be provided "via remote access within a reasonable amount of time . . . ." This clearly indicates that the upgrades will be downloaded electronically; however, the agreement fails to provide for this same delivery method for Software Package One.

Based on the foregoing, I find that the purchase of Software Package One was properly held as taxable in the audit. My decision is supported by Public Document 8729 (2/20/87), in which the Tax Commissioner determined that the tax applies to a contract so long as the contract entitles the purchaser to receive tangible personal property regardless of whether tangible personal property is actually received.

Software Package Two

With regard to Software Package Two, the Department's auditor was unable to obtain a copy of the software agreement from the Taxpayer. Because of the lack of documentation necessary to prove the assessment is erroneous, I find that the assessment with regard to Software Package Two is correct.

CONCLUSION

Based on the foregoing, the assessment is correct. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of this letter.

The Code of Virginia sections and public document cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department'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/53207.i

Rulings of the Tax Commissioner