Tax Type
Retail Sales and Use Tax
Description
Tangible personal property; Computer software
Topic
Taxpayers' Remedies
Date Issued
02-08-1985
February 8, 1985
Dear ****
This will reply to your letter of October 1, 1984 in which you submit an application for correction of sales and use tax assessed to * ****** * as the result of a recent audit.
FACTS
********* * (hereinafter ****** * *) is engaged as a distributor of refrigeration and heating parts. A recent audit of ******* * * revealed the failure to remit the sales and use tax upon its purchase of a computer software program used in processing internal financial transactions. * * * contests such assessment, contending that its purchase of computer software was a purchase of intangible personal property exempt from the sales and use tax.
* * **** assertion that the program in question is intangible personal property is based upon three points: (1) the application instructions contained in the purchased software cannot be seen, heard or touched by the human senses without the use of special equipment; (2) taxation of computer software is widely opposed by writers by business articles on property taxation; and (3) Virginia Code §58-405 defines computer software as intangible personal property. In addition, * ****** * asserts that the computer software it purchased is exempt from the sales and use tax under the "true object' test.
DETERMINATION
§§ 58-441.4 and 58-441.5 of the Code of Virginia (recodified as Virginia Code §§ 58.1-603 and 58.1-604 effective January 1, 1985) impose a comprehensive tax upon the sale or use of tangible personal property in Virginia. The term tangible personal property' is defined in Virginia Code §58-441.3(1) (now Virginia Code §58.1-602.19) as "personal property, which may be seen, weighed, measured, felt, or touched, or is in any other manner perceptible to the senses.'
The department has traditionally held that computer software in tangible form, i.e., discs, tapes, punched card, etc., is subject to the tax. Obviously software in such form can be seen, weighed, measured, felt, or touched and is therefore tangible personal property. Based upon the information before me, the software purchased by * ******* * was in tangible form and such software must therefore be deemed subject to the tax unless specifically exempted.
You note that computer software is classified as intangible personal property segregated for and exempted from state taxation under the provisions of Virginia Code §58-405. Accordingly, you state that computer software is exempt from the sales and use tax as that tax is applicable only to tangible personal property. However, a closer reading of the Virginia statutes reveals otherwise. Virginia Code §58-405 (now Virginia Code §58.1-1101), effective July 1, 1984, classifies software as intangible personal property for purposes of the intangible personal property tax only.
In addition, you note that the instant software should be exempt from tax under the "true object' test. This test was set forth by the Virginia Supreme Court in WTAR Radio TV Corporation v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977). The court adopted the true object test in interpreting the exemption for "[p]rofessional . . . or personal service transactions which involve sales as inconsequential elements for which no separate charges are made "found in Virginia Code §58-441.6(a). The sale of computer software is not purely a service transaction; rather, it involves the rendition of personal services by a programmer and a sale of tangible personal property. In examining such a mixed transaction in WTAR, the court adopted this specific test:
If the "true object' of the buyer is the services per se, the exemption is available, but if the true object of the buyer is to obtain the property produced by the service, the exemption is not available.
217 Va. at 883.
Based upon the information before me, I must conclude that the true object of * * * was to obtain the end product of programming services, a saleable consumer product adaptable to * * *, computer system.
The department has recently submitted for public comment a proposed sales and use tax regulation on computer software, a copy of which is attached. Pursuant to that proposed regulation, custom software would be exempted from the tax as the true object of the buyer is the personal service of programmers in developing a program to accomplish a task. Standard or "canned' software would continue to be taxable as the true object of the buyer is to obtain the end project of programming services. While this regulation has not been adopted and is therefore inapplicable to * * * if the regulation were in effect as the program in question is a standard business application program not designed specifically for * * *.
Therefore, based upon the foregoing, I can find no basis for the relief of tax assessed to * * * on its purchase of a computer software. Accordingly, the assessment issued to * * *, remains due and payable.
Sincerely,
W. H. Forst,
Tax Commissioner
Rulings of the Tax Commissioner