Tax Type
Retail Sales and Use Tax
Description
IT solutions and consulting firm assessed tax and interest on untaxed sales.
Topic
Collection of Tax
Records/Returns/Payments
Date Issued
05-11-2011
May 11, 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 April 2006 through March 2009. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer offers information technology solutions and consulting to its customers. The Taxpayer offers comprehensive technology solutions to include server, storage, software, application solutions, services and financing to its customers. The Department audited the Taxpayer and issued an assessment for additional tax and interest on untaxed sales. The Taxpayer disagrees with the exceptions included in the sales exceptions list. Each exception is addressed separately below.
DETERMINATION
*****
The Taxpayer maintains that all of the products included on the purchase order, including the classroom training, are exempt from the Virginia sales and use tax as sales to the federal government. The Taxpayer states that title to the equipment at issue vests with the federal government, and all work products are the sole and exclusive property of the federal government. The Taxpayer provides a purchase order for review.
Virginia Code § 58.1-609.1 4 provides that the retail sales and use tax does not apply to "[t]angible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States."
Virginia Code § 58.1-623 A states, "All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is exempt of the tax is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter."
Virginia Code § 58.1-205 states, "Any assessment of tax by the Department shall be deemed prima facie correct." The burden of proving that the assessment is incorrect rests with the taxpayer.
Pursuant to the cited authorities, the Taxpayer has not proven that the sale at issue was made directly to the federal government, nor has it proven that its customer purchased the property for resale to the federal government. The Taxpayer has not provided a valid resale exemption, and has not met its burden of proving that the sale was for resale. The statement on the purchase order indicating that the property ultimately becomes the property of the federal government is insufficient to prove that the property was ultimately sold to the federal government. Additionally, the purchase order demonstrates that the property is billed to the customer and shipped to another commercial entity, not an agency of the federal government. The Taxpayer has not met its burden of proving that the assessment of tax as issued with respect to this transaction is incorrect. Accordingly, the transaction is correctly included in the sales exceptions list and removal is not warranted.
*****
The Taxpayer states that the purchase order provided for review is for software maintenance renewal. The Taxpayer maintains that the order was made pursuant to a contract, and that the sale is to the federal government. The Taxpayer further states that there are no deliverables and no media are shipped to the end user. The Taxpayer states that the sale is for an update of technical support services. The Taxpayer contends that the sale is non-taxable as a sale to the federal government, and as a sale of services related to downloaded software.
Pursuant to the cited authorities, the Taxpayer has not proven that the sale at issue was made directly to the federal government, nor has it proven that its customer purchased the property for resale to the federal government. The Taxpayer has not provided a valid resale exemption, and has not met its burden of proving that the sale was for resale.
Virginia Code § 58.1-609.5 1 provides that the retail sales and use tax does not apply to "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made ... and 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 communication services, including software, data, content and other information services delivered electronically via the Internet."
In Public Document (P.D.) 05-44 (4/4/05), the taxpayer asked about the taxability of prewritten software and software maintenance (updates) when sold at retail and delivered to customers electronically. The Tax Commissioner ruled that "at a minimum, a sales invoice, contract or other sales agreement must expressly certify the electronic delivery of the software and that no tangible medium for that software has been or is to be furnished to the customer."
The purchase order provided by the Taxpayer states that property purchased will be shipped via Fed-Ex. The renewal quote provided by the Taxpayer indicates that phone and electronic services are provided under the maintenance agreement. The renewal quote also indicates that upgrades and update downloads will be provided under the maintenance agreement. However, the renewal quote does not provide how the upgrades and update downloads are to be delivered. During the performance of the audit, the Taxpayer was asked to provide a copy of either the sales agreement or contract entered into by the Taxpayer and its customer so that the maintenance terms could be reviewed. Neither document was provided. The Taxpayer has provided electronic mail correspondence stating that there is no deliverable, and that no media is shipped or e-mailed.
The documentation provided by the Taxpayer does not support its contention that no deliverables and no media were shipped to its customer with respect to the purchase order at issue. The e-mail correspondence provided is insufficient to prove that an exempt transaction took place because it is not the type of documentation required by P.D. 05-44 for such proof. The Taxpayer has not met its burden of proof. Accordingly, this transaction will not be removed from the sales exceptions list.
The Taxpayer provides a purchase order and contract addendum in support of its contention that the transaction at issue should be removed from the audit exceptions list. The Taxpayer maintains that the addendum certifies the electronic delivery of the items purchased, and that no tangible medium was furnished to the customer. The Taxpayer further maintains that the purchase order is the sales agreement between the Taxpayer and its customer. Relying on P.D. 05-44, the Taxpayer contends that the contract addendum is the minimum documentation required to demonstrate that the software at issue was delivered electronically.
It is the Department's long-standing policy that the sale of prewritten software delivered electronically to customers does not constitute the sale of tangible personal property and is, therefore, generally not subject to sales and use taxation. This policy is conditioned on the fact that no disc, tape or other tangible medium is subsequently provided to the customer (by mail or other means) before or after the electronic download of the software. The same general policy applies to electronic software updates furnished to customers.
In this instance, the purchase order provided by the Taxpayer lists its customer's physical address as the location for delivery of the items purchased. During the audit, the Taxpayer was instructed that the purchase order was insufficient to prove that the property at issue had been delivered electronically. The Taxpayer was provided a copy of P.D. 05-44, which lists the type of documents that can be used to certify electronic delivery. The purchase order at issue is dated January 23, 2009. The audit was assessed on August 5, 2009. On July 16, 2009, a representative from the Taxpayer's customer signed a "contract addendum" that had been added to the bottom of the purchase order, stating that the purchase order is the sales agreement between the two parties and that items purchased would be delivered electronically to the purchaser. The "contract addendum" further states that no tangible medium has been or is to be furnished with respect to the property at issue.
The Virginia Supreme Court held in Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 198 S.E.2d 619 (1973), "[s]tatutes granting tax exemptions are construed strictly against the taxpayer." Furthermore, "[e]xemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption." Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1972).
Pursuant to P.D. 05-44, "a sales invoice, contract, or sales agreement" can be utilized to certify electronic delivery of software. In this instance, doubt exists as to whether the exemption for the electronic delivery of software is applicable. The validity of the "contract addendum" is more closely evaluated because this signed statement was dated and received after the transaction at issue took place, and after the audit at issue began. As such, I find that the "contract addendum" is insufficient to prove that the property purchased was delivered to the customer electronically. Accordingly, the transaction at issue will not be removed from the sales exceptions list.
*****
The Taxpayer states that the statement of work (SOW) provided for review lists all the services that are provided to its customer. The Taxpayer maintains that the transaction at issue is for services only, and that no tangible personal property is provided to its customer. The Taxpayer further maintains that the invoice and SOW at issue are for installation services only.
The Deliverable Tasks in the SOW indicate, in part, that the Taxpayer is to upgrade certain property and that the Taxpayer is to install certain property. The Taxpayer maintains that the term "upgrade" used in the SOW, can be substituted with the term "install". The Taxpayer further states that all relevant hardware was purchased on separate invoices, and that all relevant hardware and software to be installed was to be onsite before the work required by the invoice at issue was to begin. During the audit, the Department's audit staff requested a Job Cost Detail Report from the Taxpayer to assist in determining the correct application of the tax in this instance. The Taxpayer asserts that the Job Cost Detail Report is not applicable because the SOW provides the detail for the services provided. The Taxpayer maintains that the transaction at issue is for exempt installation services.
Based upon the language in the SOW, it is unclear whether the SOW is for installation only, as stated by the Taxpayer. The Project Assumptions portion of the SOW states, "All relevant hardware and software must be onsite at the time of the project." Relying on this statement, the Taxpayer makes the assertion that the SOW and the transaction at issue are not for the sale of property to the Taxpayer's customer. However, this statement is insufficient to deem the SOW and the transaction at issue for the provision of labor only. The language included in the Deliverable Tasks portion of the SOW calls for the upgrade and installation of certain property, without specifically stating whether the Taxpayer is to provide the property that is to be used for the upgrades and installation. The Taxpayer was given the opportunity to provide the Job Cost Detail Report to clarify the transaction, but has chosen not to provide this information. Accordingly, the transaction will not be removed from the sales exceptions list.
*****
The Taxpayer provides a SOW and purchase order for review. The Taxpayer states that the SOW lists all the services that are provided to its customer. The Taxpayer maintains that the transaction at issue is for services only, and that no tangible personal property is provided to its customer. The Taxpayer states that the words used in the SOW, installation, connecting, cabling, configuring, creation and connection, are descriptions of the steps taken in the process of installing and connecting the new hardware and software components purchased by the customer to the existing hardware and software components belonging to the customer. The Taxpayer states that the Knowledge Transfer listed among the services provided does not include any formal training. The Taxpayer states that the Knowledge Transfer is the provision of information regarding the items being installed, during the installation process. The Taxpayer further states that all relevant hardware and software to be installed was to be onsite before the work required by the invoice at issue was to begin. During the audit, the Department's audit staff requested a Job Cost Detail Report from the Taxpayer to assist in determining whether the tax had been correctly applied in this instance. The Taxpayer asserts that the Job Cost Detail Report is not applicable because the SOW provides the detail for the services provided. The Taxpayer maintains that the transaction at issue is for exempt installation services.
Based upon the language in the SOW, it is unclear whether the SOW is for installation only, as stated by the Taxpayer. The Project Assumptions portion of the SOW states, "All relevant hardware and software must be onsite at the time of the project." Relying on this statement, the Taxpayer makes the assertion that the SOW and the transaction at issue are not for the sale of property to the Taxpayer's customer. However, this statement is insufficient to deem the SOW and the transaction at issue for the provision of labor only. Additionally, the purchase order provided includes what appears to be tangible personal property in addition to installation services. The Taxpayer was given the opportunity to provide the Job Cost Detail Report to clarify the transaction, but has chosen not to provide this information. Accordingly, the transaction will not be removed from the sales exceptions list.
Based on the foregoing, the Taxpayer has not provided sufficient documentation to warrant any adjustment to the assessment. Accordingly, the assessment is correct as issued and remains due and payable. A revised 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, 600 E. Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections and public document 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 *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-3954935052.P
Rulings of the Tax Commissioner