Tax Type
Retail Sales and Use Tax
Description
Computer software
Topic
Collection of Delinquent Tax
Date Issued
01-15-1987
January 15, 1987
Re: §58.1-1821 Application/Sales and Use Tax
Dear******************
This will reply to your letter of September 10, 1986, in which you submit an application for correction of sales and use tax assessed to**********as the result of a recent audit.
FACTS
************** (Taxpayer) is engaged in the sale of computer hardware, the licensing of computer software, and the sale of computer software maintenance agreements. As the result of an audit conducted by the department, the taxpayer filed a use tax return with the department and paid tax associated with previous taxable sales to Virginia customers. In filing the return, the taxpayer took advantage of the dealer's discount provided for the timely remittance of tax. After filing the return, the taxpayer received an assessment for the dealer's discount claimed on the return, as well as interest on the tax paid.
The taxpayer requests relief of the tax (dealer's discount) and interest assessed subsequent to the filing of its return. The taxpayer contends that the assessment is improper as the department has not published regulations on the subject of computer software and because computer software would be considered nontaxable under existing regulations.
DETERMINATION
With respect to the dealer's discount, §58.1-622 of the Code of Virginia specifically provides that the discount shall be allowed only "if the amount due was not delinquent at the time of payment." As the taxpayer's payment represented tax due for prior periods, the discount is therefore not available in this case. In addition, §58.1-1812 of the Code of Virginia specifically mandates the addition of interest to all past due taxes.
Although the taxability of prewritten computer software has not been specifically set forth up to now in a regulation, the department's policy with respect to software has been set forth on numerous occasions. This policy is grounded on concepts contained now in Virginia Regulations 630-10-97.1 and 630-10-102.1 and has been published nationally on a number of occasions, for instance in the Commerce Clearing House State Tax Reporter and the ADAPSO Tax Survey published by the Association of Data Processing Service Organizations. Notwithstanding this fact, Virginia Regulation 630-10-2 affords persons the opportunity to request a written ruling from the Tax Commissioner when the application of the law to a transaction is unclear.
Furthermore, the department's policy on maintenance contracts which provide for the furnishing of repair or replacement parts or materials was previously set forth in §1-90 of the Virginia Retail Sales and Use Tax Regulations published on January 1, 1979 and is now set forth in Virginia Regulations 630-10-62.1 and 630-10-90.
Based upon the foregoing, I find no basis for relief of the assessment issued to the taxpayer, which will remain due and payable. I am willing, however, to consider a protective claim for refund under the provisions of §58.1-1824 of the Code of Virginia for any tax paid with respect to sales of custom software. Such a claim would be considered inasmuch as custom software may retroactively be deemed nontaxable in the comprehensive computer software regulation now under development by the department. I must note, however, that a protective claim would be limited only to custom software and not to prewritten software, modifications to prewritten software, or to maintenance contracts.
The comprehensive computer software regulation will discuss in depth the law changes enacted by the 1986 regular session of the General Assembly with respect to custom computer software and modifications to prewritten computer software (see enclosed copies of House Bill 245 and the department's impact statement on the bill), as well as other issues relating to the production and sale of software. The department is being assisted in the regulation development process by a number of software producers and a national computer and data processing association and we anticipate producing a rough draft in early 1987. Please advise me if you would like to receive a copy of the draft regulation or to become involved in the regulation development process. Your input into this process would be greatly appreciated.
In the event that further questions or concerns arise relative to the taxation of computer software, please feel free to contact the department.
Sincerely.
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner