Tax Type
Retail Sales and Use Tax
Description
Computer software.
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
03-29-1982
March 29, 1982
Re: §58-1118 Application/Sales and Use Tax
Dear *********************
This will reply to your application of August 27, 1980 and your subsequent correspondence of January 15, and August 11, 1981 in which you petition for relief of sales tax assessed against ********* as the result of a recent audit.
FACTS
***************** (hereinafter ***********) is engaged in the sale of computer software. Included in the provision of this software is the performance of accounting surveys, systems design, flow charting, program coding, program compiling, program debugging, system installation and implementation, and operator instruction. These functions are included in the total charges to the customer for the provision of computer software.
The software may be transferred to the customer in a variety of ways. An ********* employee may key machine instructions into the customer's system via the customer's keyboard; no tangible personal property is transferred to the customer. The software may be encoded on media (usually a disk) owned by the customer. Many customers purchase a bulk quantity of blank disks or diskettes which are used as the program media when a program is purchased. **********may also sell a new customer a diskette and transfer the program to this diskette, or the customer may purchase a diskette elsewhere and make this available as a "program diskette." Disks and diskettes are the primary program media, but magnetic ledger cards and magnetic tape cassettes may also be used for program storage.
DETERMINATION
Virginia Code §58-441.2(b) defines "sale" as:
-
- any transfer of title or possession...lease or rental ...of tangible personal property...and includes the fabrication of tangible personal property for customers who furnish, either directly or indirectly, the materials used in fabrication.
The transfer of computer programs in the form of disks, diskettes, punched tapes, and cards is the transfer of tangible personal property, thus falling within the statutory definition of a "sale." The sales tax applies to the total charge made to the customer for the software, including any services made in connection with the sale which are taxable under the provisions of Virginia Code §58-441.3(b).
The encoding of a program on a customer-owned diskette (or other media) is similarly subject to the tax under the definition of "sale" as the fabrication of tangible personal property. § 1-37 of the Virginia Retail Sales and Use Tax Regulations defines "fabrication" as "an operation that changes the form or state of tangible personal property." The transformation of a blank diskette to a usable "program diskette" via the encoding process is a change in the state of the property. Thus the entire charge for computer software which is furnished in this manner, including any conjunctory services included in the charge to the customer, is subject to the tax.
A program which is encoded into a customer's computer system via keying through the customer's keyboard involves neither the transfer or fabrication of tangible personal property and consequently is not a "sale" under the definition set forth in Virginia Code § 58-441.2(b). A transaction of this nature is the rendition of a non-taxable service, and charges to the customer are not subject to the tax.
You indicated in your January 15, 1981 letter that some amounts included in the audit deficiency represented charges for software encoded into a customer's system via the customer's keyboard. However in your August 11, 1981 letter you indicated that you are unable to identify such charges. Absent such verification, we are unable to remove any charges from the audit.
Based upon the facts presented, we have no alternative but to deny your application.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner