Tax Type
Corporation Income Tax
Description
Charges for access to computer database
Topic
Allocation and Apportionment
Date Issued
09-08-1988
September 8, 1988
Re: Request for Ruling; Corporation Income Tax
§58.1-416 Sales Factor; Database Access Charges
Dear******************
This is in response to your letter of July 5, 1988, in which you requested a ruling as to the proper methodology of including in the numerator of Virginia's sales factor three types of charges for access to a computer database.
Fixed Monthly Fee
Your client charges a fixed monthly fee for leasing hardware, access to the software network, and maintenance of the hardware. A breakdown of the lump sum fee is not available.
A rental or other fee for the use of tangible personal property must be included in the numerator of the sales factor if the property is located in Virginia. In this case the fee is for both rental of tangible personal property and intangible services. Since the charge to the customer for hardware, access, and maintenance is not broken down, it is presumed that the greater portion of the costs of performance is associated with the hardware and maintenance at the customer's location. Therefore, the entire fixed monthly fee must be included in the numerator if the hardware is located in Virginia.
If a separate charge is made for access to the computer network then the charge would be included in the numerator if more of the income producing activity is located in Virginia than in any other state. Based on the limited facts provided in your letter, it would appear that more of the income producing activity is located where the database is maintained (1,000 employees) than at the telephone center (500 employees) or at the customer's location.
However, if it appears that the costs associated with the database must be apportioned to many sources of income (see database access charges below) while the majority of costs associated with customer access relate to telephone charges, then the greater portion of the income producing activity could be at the location of the telephone center.
Fee For Hard Copies
Your client charges a variable fee when the customer physically abstracts and prints data from the software network. Since the charge is for providing hard copies, i.e., tangible personal property, the fee must be included in the numerator if the hard copies are delivered to a location in Virginia or printed on the customer's hardware located in Virginia.
Database Access Fee
The information in your client's database relates to various "participating corporations" and a fee is charged to each participating corporation whenever a customer accesses information relating to the participating corporation. (The participating corporation receives revenue directly from the customer.) As a charge for an intangible service the fee must be included in the numerator of Virginia's sales factor if more of the income producing activity occurred in Virginia than in any other state. Based on the limited facts provided in your letter, this would appear to be the state in which the database operations are located.
It should be noted that this ruling is based on the limited facts provided in your letter, particularly as to the state in which the greatest portion of the income producing activity is performed. We have assumed that all costs of performance are in proportion to the number of employees at a given location. If this is not so then the determination as to inclusion of database access fee in the numerator may be affected.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner