Document Number
06-72
Tax Type
Retail Sales and Use Tax
Description
Software royalty fees charged by vendors, use of prewritten licensed software
Topic
Assessment
Exemptions
Date Issued
08-18-2006

August 18, 2006



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"), as a result of an audit for the period January 2002 to September 2004. I apologize for the delay in responding to your appeal.

FACTS


The Taxpayer operates a software development business and sells services and prepackaged software primarily to government agencies. An audit resulted in the assessment of tax on software royalty fees charged by four vendors in connection with the use of prewritten licensed software. The Taxpayer disputes the assessment and maintains that the licensed software at issue is used directly and exclusively in exempt research and development activities. You indicate that three of the contested licenses are the same licenses at issue in the appeal of the Taxpayer's prior audit.

DETERMINATION


Based on the determination rendered in Public Document (P.D.) 06-35 (4/4/06) addressing the Taxpayer's appeal for the prior audit period (January 1999 through December 2001), I find basis to remove from the audit at issue the royalties charged in connection with the ***** ("Vendor A") and ***** ("Vendor B") licenses. Consistent with the determination in P.D. 06-35, I do not find sufficient basis for the removal of the ***** ("Vendor C") charges.

For the distribution license agreement with ***** ("Vendor D"), Section 2 (a) of this contract grants the Taxpayer a "license to use the [Vendor D] Product (i) in [Taxpayer's] internal development and in providing Tier 1 Technical Support to its End Users; (ii) to distribute the [Vendor D's] Product and package it in combination with one or more [of Taxpayer's] Products as an Application Bundle; (iii) to market and distribute the Application Bundle to End Users." Pursuant to Section 3 (f) of the contract, Tier 1 technical support consists of "help-desk (hot-line) intake of End Users questions and reported problems and the identification and classification of such questions and problems related to the [Vendor D] Product as packaged in the Application Bundle, as well as communication to [Vendor D] of [Vendor D] Product related issues and communication of resolution of [Vendor D] Product issues to the End Users."

Based on these terms, the contract is intended for dual purposes. On the one hand, the Vendor D's software product is to be bundled with the Taxpayer's product to produce a new product. On the other hand, the Taxpayer is clearly given the right to use Vendor D's product for internal non-development purposes, which do not appear to be de minimis in nature.

Virginia Code § 58.1-609.3 5 sets out an exemption from the sales and use tax for tangible personal property purchased for use and consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense. Title 23 of the Virginia Administrative Code 10-210-3071 explains the application of the exemption and provides that the exemption is limited in scope to tangible personal property used directly and exclusively in an actual research process. The regulation goes on to address de minimis usage in subsection C, which states:
    • When research property is used in a taxable manner, it will continue to be exempt from the tax if the taxable use is de minimis in nature. Taxable use of the property is considered de minimis if the taxable usage of the property (i) does not involve a continuous or ongoing operation; (ii) does not follow a consistent pattern, i.e., weekly, monthly, quarterly, etc.; (iii) is occasional in nature occurring no more than three times; and (iv) in total, accounts for no more than three days.

Based on the terms of the contract and the cited authorities, I must conclude that the provision of Vendor D's software product does not meet the exclusivity requirement of the exemption. Therefore, the research and development exemption does not apply in this instance.

CONCLUSION


The assessment will be adjusted in accordance with this determination, and a consolidated bill, with interest accrued to date, will be mailed to the Taxpayer for the revised balance due. The outstanding balance must be paid within 30 days from the date of the consolidated bill to avoid the accrual of additional interest. In addition, failure to submit full payment within this 30-day period may also result in the imposition of an additional 20% penalty on the tax due under the terms of the Virginia Tax Amnesty Program. See the enclosure entitled "Important Payment Information."

Payment should be remitted to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****. If you have any questions about this determination or payment of the
assessment, you may contact ***** at *****.
                • Sincerely,

                    • Janie E. Bowen
                  Tax Commissioner





AR/55884R

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46