Tax Type
Retail Sales and Use Tax
Description
Computer software maintenance contract
Topic
Taxability of Persons and Transactions
Date Issued
02-20-1987
February 20, 1987
Re: §58.1-1821 Application/Sales and Use Tax
Dear*********************
This will reply to your letter of May 6, 1986, in which you submit an application for correction of sales and use tax assessed to *************** as the result of an audit. I apologize for the delay in responding to your letter.
FACTS
A recent audit of the taxpayer produced an assessment for the corporation's failure to remit the sales and use tax on its purchase of a computer software maintenance agreement in connection with a government contract being performed by the taxpayer. The taxpayer contests this assessment, noting that it has never received any tangible personal property under the contract, except for a semi-monthly status bulletin in which the software manufacturer provides documentation of known problems in the software product line.
DETERMINATION
The taxpayer questions in its appeal the applicability of the sales and use tax to a computer software maintenance agreement purchased by your firm in connection with a federal contract. The application of the tax to maintenance contracts is set forth in Virginia Regulation 630-10-62.1, a copy of which is enclosed. Under the regulation, contracts calling only for the provision of repair service by the seller of the contract are not subject to the tax; however, those contracts that provide in whole or in part for the provision of repair parts or replacements for the covered property are subject to the tax based upon their full selling price.
The taxpayer notes that it has never received any tangible personal property under the contract, except for a semi-monthly status bulletin in which the software manufacturer provides documentation of known problems in the software product line. In addition, the taxpayer notes that the software manufacturer makes available under the maintenance contract a telephone consultation service with software specialists in an out-of-state office.
I must note, however, that the tax applies to a maintenance contract regardless of whether repair parts or replacements are actually received so long as the contract entitles the purchaser to receive the tangible personal property. Yet in the event that the contract indeed does not call for an entitlement to tangible repair parts or replacements, such as enhancements contained on disks or tapes, the tax does not apply. Thus, a maintenance contract that only provides for the purchaser to receive status bulletins, documentation on changes, or a telephone consultation service is not taxable.
A review of the contract in question reveals that the taxpayer is entitled to receive status bulletins, documentation on changes, and telephone consultation service; however, the contract also provides for the furnishing of updated software when improvements are made to a program by the manufacturer. As such, the maintenance contract entitles the holder to replacements for the covered property and is taxable.
Based on the foregoing, I do not find basis for the revision of the department's audit. Therefore, the assessment issued to the taxpayer will be deemed correct and payable.
I would also like to note that the department is in the process of developing a comprehensive regulation on the issue of computer software. Such a 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 the next several months. Please advise me if you would like to receive a copy of the draft regulation when developed or if you desire to become involved in the regulation development process. Your input into this process would be greatly appreciated.
In the event that any further questions or concerns relative to the taxation of computer software arise or if you would like to participate in the regulation development process, please feel free to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner