Tax Type
Retail Sales and Use Tax
Description
Computer software license and maintenance services
Topic
Taxability of Persons and Transactions
Date Issued
07-31-1986
July 31, 1986
Re: Request for Ruling/Sales and Use Tax
Dear *****************
This will reply to your letter of July 8, 1986, in which you request a ruling on the applicability of the sales and use tax to certain transactions involving an out-of-state client contemplating doing business in Virginia.
As noted in your letter, your client engages in the conversion of engineering drawings owned by customers into a computer readable electronic format. In addition, your client proposes to license, rather than sell, computer application software to Virginia customers. Your client also plans to offer monthly maintenance support services on the software, under which service and software enhancements would be offered to licensees. Lastly, your client proposes to sell computer hardware to Virginia customers.
Conversion services similar in nature to your client's operation were addressed in a recent determination by the department, a copy of which is enclosed for your review. As noted in that letter, the conversion of tangible personal property from one form to another constitutes a taxable sale or fabrication of tangible personal property under Section 58.1-602.17 of the Code of Virginia.
In addition, the department has traditionally held the licensing of computer software to constitute a taxable lease or sale when the licensing agreement conveys not only the right to use computer software, but also the software itself in tangible form. For your information, I have enclosed a copy of House Bill 245 enacted by the 1986 session of the Virginia General Assembly.
Also enclosed is a copy of the department's legislative impact statement on the bill. Under this act, the sale of custom computer programs will be exempted from the tax and labor or service charges in connection with the modification of prewritten computer programs will be excluded from the computation of the tax effective July 1, 1986. The act will have no impact upon the sale, lease or licensing of prewritten computer programs, however. The department is now in the process of developing a sales and use tax regulation on the subject of computer software, including the legislative changes referenced above. Any comments or suggestions that you might have on the subject would be appreciated and I will make sure that copies of future exposure drafts of the regulation are furnished to you.
The application of the tax to maintenance agreements is set forth in Section 630-10-62.1 of the Virginia Retail Sales and Use Tax Regulations, a copy of which is also enclosed. Under this regulation, the provision of tangible enhancements or other tangible personal property by your client to licensees under a maintenance support agreement would render the agreement subject to the tax. If only labor or services are furnished, the agreement would not be subject to the tax, however.
Lastly, the sale of computer hardware represents a taxable sale of tangible personal property. In order to determine whether your out-of-state client will be required to register and collect the tax from its Virginia customers, I have enclosed copies of Virginia Code Section 58.1-612 and Retail Sales and Use Tax Regulation Section 630-10-29.1, which sets forth registration requirements. In the event that registration is required, your client would collect a combined four percent sales tax (3% state and 1% local) from its Virginia customers. Also, I have enclosed a registration form and instructions should your client be required to register for tax collection or desire to do so voluntarily. It should be noted that if your client does not collect the tax on sales to Virginia customers, that such customers will themselves automatically become liable for the use tax.
I trust that this will answer the questions posed in your letter; however, please do not hesitate to contact the department if further information is required.
Sincerely
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner