Tax Type
Retail Sales and Use Tax
Description
Computer software; Rentals and leases of tangible personal property
Topic
Taxability of Persons and Transactions
Date Issued
11-29-1985
November 29, 1985
Re: Request for Ruling/Sales and Use Tax
Dear ****
This will reply to your letter of October 30, 1985, in which you, question the applicability of the sales and use tax to computer software.
You opine in your letter that Section 58.1-1101 of the Code of Virginia serves to exempt computer software from the sales and use tax. The applicable portion of that statute, which relates to the intangible personal property tax, reads:
The subjects of taxation classified by this section are hereby defined as intangible personal property.
Computer application software, except computer application software which is inventory...is defined as computer instructions, in any form, which are designed to be read by a computer and to enable it to perform specific operations with data or information stored by the computer.
A review of the history of this statute reveals that it was intended to exempt computer software from local tangible personal property taxes as the Attorney General had opined in a September 8, 1983 opinion that standard software in tangible form was subject to such taxes. The provision enacted in 1984 relating to software accomplished this goal by virtue of the provisions of Virginia Code Section 58.1-3500 which defines the property subject to local tangible personal property taxes:
Tangible personal property shall consist of all personal property not otherwise classified by § 58.1-1100 as intangible personal property or by § 58.1-3510 as merchants capital.
While the classification of certain software as intangible personal property under Virginia Code § 58.1-1100 exempts such software from local personal property taxes, it does not do so with respect to the sales and use tax, as was specifically noted in the department's 1984 legislative impact statement on the legislation (copy enclosed).
Virginia Code § 58.1-1101 is inapplicable to the Virginia Retail Sales and Use Tax Act as the tax is imposed in Virginia Code §§ 58.1-603 and 58.1-604 "in addition to all other taxes and fees now imposed by law." While the tax is applicable only, to tangible personal property, such property is defined, for purposes of the sales and use tax only, in 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." As computer software in tangible form meets this definition, it is subject to the sales and use tax notwithstanding the provisions of Virginia Code §58.1-1101.
Therefore, based upon the foregoing, your company is subject to the sales and use tax on computer software in tangible form that is purchased, leased or otherwise used to Virginia. It should be noted, however, that the department is presently considering a change in its policy relating to software through which "custom" software would be deemed nontaxable by virtue of the Virginia Code §58.1-608.2 exemption for "personal service transactions which involve sales as inconsequential elements for which no separate charges are made." If your company has acquired and paid tax on custom software I am willing to entertain a protective claim for refund under Virginia Code §58.1-1824 pending the promulgation of a retroactive regulation on the
subject.
Sincerely,
W.H. Forst
Tax Commissioner
Rulings of the Tax Commissioner