10-241 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Software packages include a base system and optional add-on modules/Software sales and services

Topic

Documents Subject to Tax

Tangible Personal Property

Taxable Transactions

Date Issued

10-04-2010

October 4, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *****:

This is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you request a ruling on the application of the retail sales and use tax to sales of software. I apologize for the delay in responding to your request.

FACTS

The Taxpayer's business activities are related to computer software sales and services. The Taxpayer's software packages include a base system and optional add-on modules. The questions presented by the Taxpayer are addressed separately below.

RULING

Question 1

When a customer initially purchases the software, the base system is purchased along with any optional add-on modules, training and one year of support. The items purchased are listed as a separate line item on the invoice. The software is sent to the customer on a CD with only the optional add-on modules purchased activated. Are all of these items subject to Virginia sales tax?

Virginia Code § 58.1-602 defines sales price as:

- The total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.

Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A provides, "Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable." When transactions involve both the sale of tangible personal property and the provision of services, the true object test, as explained in subsection D of this section is used to determine the taxability of these transactions.

Title 23 VAC 10-210-4040 D states, "If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable."

Pursuant to Public Document (P.D.) 01-61 (5/5/01), the Department has long held that the sale of computer software transferred in tangible form is the taxable sale of tangible personal property. Conversely, computer software transferred electronically is deemed to be a nontaxable transaction because there is no transfer of tangible personal property.

In P.D. 10-43 (4/23/10), the invoice at issue included charges for software, services and subscriptions. Based on the description provided in the purchase agreement related to this invoice, the software was provided to the taxpayer's customer in tangible form and was deemed a taxable transaction with respect to the Virginia retail sales and use tax. Pursuant to Title 23 VAC 10-210-4040, the true object test was applied and it was determined that the true object of the sale at issue was the software. In accordance with Va. Code § 58.1-602 and P.D. 01-61, the total amount charged for the software, services and subscriptions were subject to the retail sale; and use tax.

Based upon the facts provided, the software is provided to the Taxpayer's customers in tangible form and is a taxable transaction with respect to the retail sales and use tax. The true object test must be applied to the transaction at issue because the Taxpayer is providing both tangible personal property and services to its customers. Based upon the facts provided, the true object of the transaction is the tangible software. Accordingly, pursuant to Va. Code § 58.1-602, P.D. 01-61 and P.D. 10-43, the total amount charged for the tangible software, training and support is subject to the retail sales and use tax.

Question 2

The customer can purchase additional add-on modules at any time. At the time they are purchased, support is also sold and pro-rated to the date of their current support contract. The items are listed as a separate line item on the invoice. Once the module is purchased, the customer is contacted by phone and instructed how to activate the module(s) through a program designed by the Taxpayer. Are these items subject to Virginia sales tax?

Based upon the facts provided, the add-on modules are accessed by the Taxpayer's customers electronically. Pursuant to P.D. 01-61, the transaction is not subject to the retail sales and use tax.

Question 3

Customers are required to purchase an annual support contract. In addition to phone support, the customer is also entitled to any updates, fixes, or enhancements to the software as part of the support contract. Currently the customers are able to download the updates, etc. via the Taxpayer's website. In the past, updates have been sent via a CD. Is the contract subject to the Virginia sales tax? Additional training days may also be purchased at a later date. Are they subject to the Virginia sales tax?

Pursuant to P.D. 01-61, the annual support contracts and updates would not be subject to the tax as long as the software updates, fixes or enhancements are transferred to the customers electronically.

Pursuant to P.D. 10-43, the additional training would not be subject to the tax, as long as the training is not sold in conjunction with tangible software. If tangible personal property is sold in conjunction with the training, the true object test would need to be applied to determine the correct application of the retail sales and use tax.

Question 4

The Taxpayer also has group training in which a customer will be the host. Other customers attend for a fee. The Taxpayer sends a trainer to the host site and provides the training to the group. Is this subject to the Virginia sales tax?

The group training as described is a service. Pursuant to Title 23 VAC 10-2104040, the group training is not subject to the retail sales and use tax.

Question 5

For the customers who are not able to purchase the Taxpayer's billing system, the Taxpayer has designed a product for these customers to use. The Taxpayer hosts the software and the customers are able to dial into the software to use it. The Taxpayer charges a monthly fee for the service. Is this item subject to the Virginia sales tax?

Based upon the facts provided, it appears that the Taxpayer's customer is accessing the Taxpayer's software electronically. Pursuant to P.D. 01-61, this transaction is not subject to the retail sales and use tax.

Question 6

What are the policies and procedures that must be followed for refund of the taxes paid in error? Is the Taxpayer to refund all customers for which taxes were collected for products and services that were deemed not taxable, and how far back do we go?

Virginia Code § 58.1-625 provides that a dealer must charge, collect and remit the tax to the Commonwealth. "Any dealer collecting the sales or use tax on transactions exempt or not taxable under this chapter shall transmit the same to the Tax Commissioner such erroneously or illegally collected tax unless or until he can affirmatively show that the tax has since been refunded to the purchaser or credited to his account."

Title 23 VAC 10-210-3040 provides:

- A dealer may request a refund for taxes erroneously or illegally collected. The dealer must show that the tax erroneously or illegally collected was paid by him and not passed on to the consumer, or the tax was collected from the consumer as tax and subsequently refunded to the consumer. Refunds cannot be authorized unless the request is made within three years from the due date of the return. The amount refunded will be the net amount of state and local tax remitted to the state on the transaction(s) generating the refund. Thus, if a dealer filed a timely return and deducted dealer's discount for the period for which the refund is claimed, the amount of the refund will be reduced by the dealer's discount taken.

Pursuant to the aforementioned references, the Taxpayer can provide refunds to its customers and request refunds from the Commonwealth as long as the terms of these references are met.

I hope the foregoing has responded to your inquiry. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

- - - - Craig M. Burns
        Acting Tax Commissioner

AR/1-3915359502.P

Rulings of the Tax Commissioner