11-60 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Maintenance contracts and software support

Topic

Records/Returns/Payments

Tangible Personal Property

Taxable Transactions

Date Issued

04-15-2011

April 15, 2011

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 for the period January 2007 through December 2009. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer sells new and used motorcycles and operates an in-house parts and repair facility. The Taxpayer also sells related goods, such as helmets, clothing and bike accessories. The Taxpayer contests the assessment of tax on the purchase of software support made during the audit period. The Taxpayer contends that the audit staff erroneously assumed a bill that listed a monthly software support fee was for a maintenance contract that provides parts and labor subject to the tax pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210-910. The Taxpayer maintains the bill is for remote software support, and the vendor never replaces tangible personal property as part of this support. The Taxpayer further maintains that the contract is for labor services only and provides a copy of the service agreement entered into with its vendor.

DETERMINATION

Virginia Code § 58.1-609.5 9 provides that "[b]eginning January 1, 1996, maintenance contracts, the terms of which provide for both repair or replacement parts and repair labor, shall be subject to tax upon one-half of the total charge for such contracts only . . . ."

Title 23 VAC 10-210-910 A defines maintenance contract as "an agreement whereby a person agrees to maintain or repair an item of tangible personal property over a specified period of time for a fee that is determined when the agreement is made. A maintenance contract may provide for labor only, parts only, or labor and parts."

Title 23 VAC 10-210-910 B 3 provides, in pertinent part:

- Maintenance contracts that provide for the furnishing of both repair or replacement parts and repair labor are a combination of taxable sales and nontaxable services. As it is impossible to determine in advance the percentages of labor and parts that will be provided under the contract, the contract will be deemed to be a contract for one-half labor and one-half parts, regardless of the percentages of labor and parts actually provided under the contract. Thus, one-half of the total charge for such contract is subject to the tax.

In Public Document (P.D) 98-19 (2/9/98), the taxpayer was assessed use tax on amounts paid to a software vendor for maintenance agreements on tax preparation software. The taxpayer stated that the charges were for telephone support services only and that any tangible software updates provided by the vendor were billed separately. Relying on Title 23 VAC 10-210-910 and P.D. 96-49 (4/17/96), the Tax Commissioner ruled that charges for such agreements are taxable when tangible software updates are included in the agreements. Although a separate charge was billed for the update, the support agreement was considered taxable because the contract specifically stated that tangible updates would be provided.

I cannot agree with the Taxpayer's contention that its software support is a contract for labor services only. The service agreement submitted for review provides in section 3.5 for loaner equipment to be sent by the vendor to the Taxpayer, under specific circumstances, in order to resolve certain problems. According to the service agreement, a loaner agreement may be entered into by the parties before the equipment is issued and rental fees may apply. Consistent with P.D. 98-19, the service agreement at issue allows for the provision of loaner equipment in certain circumstances, which makes the service agreement taxable. Although a separate agreement and separate charges may be made with respect to the loaner equipment, the service agreement is considered taxable because it specifically states that tangible personal property, the loaner equipment, is provided. Accordingly, the tax assessed at 50% of the total charge of the service agreement is correct.

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 the bill. Please remit payment of the outstanding balance on the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *****, Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia section, regulation 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 determination, you may contact ***** at *****.

- - - - Sincerely,

- - - - Craig M. Burns
        Tax Commissioner

AR/1-4321544143.P

Rulings of the Tax Commissioner