Tax Type
Retail Sales and Use Tax
Description
Software programming modifications
Topic
Taxability of Persons and Transactions
Date Issued
03-04-1985
March 4, 1985
RE: §58-1118 Application/Sales & Use Tax
Dear ****
This will reply to your application of July 19, 1984 on behalf of ***** (Taxpayer), for correction of sales tax assessed in the above referenced case.
FACTS
In connection with its sales of computer hardware and software, taxpayer provides its customers with "custom programming services" to upgrade and adapt their existing computer programs to changed circumstances and conditions. Taxpayer contends that such programming changes are more in the nature of personal services than transfers of tangible personal property. Furthermore, taxpayer states that the medium used to effect such program changes, (paper tapes or cassettes), is incidental to the provision of the programming services. Therefore, taxpayer argues, such transactions should not be subject to the retail sales and use tax.
DETERMINATION
§58.1-608(2) of the Virginia Code; exempts from the Sales and Use Tax, "Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made, nor services rendered by repairmen for which a separate charge is made."
§630-10-97.1(2) of the Virginia Sales and Use Tax Regulations states, "In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or taxable retail sale, the "true object" of the transaction must be examined." The Regulations state further that, "if the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including services provided, will be taxable." Therefore, the determination of the "true object" of a transaction is a factual matter which must be resolved on a case by case basis.
Based on all the information presented and the sales and use tax law and regulations cited above, the total charge for taxpayers services in connection with its programming modifications is subject to the retail sales and use tax.
While taxpayers computer programming experience and knowledge were essential to the successful completion of the transactions in question, the "true object" of such transactions was the modified computer software itself, and not the rendition of the services required to effect such modifications.
Furthermore, the tangible personal property transferred by taxpayer to its customers, namely paper tapes or cassettes, were critical to the successful completion of the entire transaction.
Therefore, I find no legal basis to grant the relief requested by taxpayer, and the application for correction of the audit assessment is hereby denied.
However, the department is considering the adoption of new regulations which would exempt from the sales and use tax, the sale of custom software, and modifications to custom software. If adopted, such regulations would be retroactive in effect. Therefore, taxpayer may pay the assessment and file a protective claim for refund, pursuant to §58.1-1824 of the Code, as to any modifications of custom software which are included in this audit, and which come within the language of the proposed regulations. I have enclosed a copy of the proposed regulations for your convenience.
Sincerely,
W. H. Forst
Tax Commissioner
RE: §58-1118 Application/Sales & Use Tax
Dear ****
This will reply to your application of July 19, 1984 on behalf of ***** (Taxpayer), for correction of sales tax assessed in the above referenced case.
FACTS
In connection with its sales of computer hardware and software, taxpayer provides its customers with "custom programming services" to upgrade and adapt their existing computer programs to changed circumstances and conditions. Taxpayer contends that such programming changes are more in the nature of personal services than transfers of tangible personal property. Furthermore, taxpayer states that the medium used to effect such program changes, (paper tapes or cassettes), is incidental to the provision of the programming services. Therefore, taxpayer argues, such transactions should not be subject to the retail sales and use tax.
DETERMINATION
§58.1-608(2) of the Virginia Code; exempts from the Sales and Use Tax, "Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made, nor services rendered by repairmen for which a separate charge is made."
§630-10-97.1(2) of the Virginia Sales and Use Tax Regulations states, "In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or taxable retail sale, the "true object" of the transaction must be examined." The Regulations state further that, "if the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including services provided, will be taxable." Therefore, the determination of the "true object" of a transaction is a factual matter which must be resolved on a case by case basis.
Based on all the information presented and the sales and use tax law and regulations cited above, the total charge for taxpayers services in connection with its programming modifications is subject to the retail sales and use tax.
While taxpayers computer programming experience and knowledge were essential to the successful completion of the transactions in question, the "true object" of such transactions was the modified computer software itself, and not the rendition of the services required to effect such modifications.
Furthermore, the tangible personal property transferred by taxpayer to its customers, namely paper tapes or cassettes, were critical to the successful completion of the entire transaction.
Therefore, I find no legal basis to grant the relief requested by taxpayer, and the application for correction of the audit assessment is hereby denied.
However, the department is considering the adoption of new regulations which would exempt from the sales and use tax, the sale of custom software, and modifications to custom software. If adopted, such regulations would be retroactive in effect. Therefore, taxpayer may pay the assessment and file a protective claim for refund, pursuant to §58.1-1824 of the Code, as to any modifications of custom software which are included in this audit, and which come within the language of the proposed regulations. I have enclosed a copy of the proposed regulations for your convenience.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner