Document Number
Tax Type
Retail Sales and Use Tax
Computer database service
Taxability of Persons and Transactions
Date Issued
October 31, 1988

Re: Request for Ruling/Retail Sales and Use Tax


This will reply to your letter dated August 2, 1988, in which you requested a ruling as to the application of the Virginia Retail Sales and Use Tax to ************* ("The Taxpayer ").

The Taxpayer owns and operates a multistate computer management company geared towards the used car department of new car dealerships. In connection with its user-initiated database service (computer accessed information retrieval system that provides such information as inventory, guide pricing, location, and availability of used automobiles), the Taxpayer sells, leases and rents computer equipment. In addition, the Taxpayer is able to make host-initiated database polling inquiries into its customers' databases for the purpose of gathering statistical information. The Taxpayer requests a ruling as to the application of the sales and use tax to these transactions.

In determining the taxability of these transactions, the key question is whether they are essentially service transactions or whether the true object of the transactions is the sale of tangible personal property.

User-initiated Database

Under this transaction, the user (customer) is provided with on-line access to a database located outside the state and the ability to retrieve information from the database. The charges for this service are made on a monthly subscription basis and the user/customer is provided with a hard copy of the information retrieved on-line during the month at the end of each month.

§58.1-608(2) of the Virginia Code provides that the sales and use tax does not apply to "[p]rofessional, insurance or personal service transactions which involve sales as inconsequential elements for which no separate charges are made."

In addition, §630-10-97.1(B)(2) of the Virginia Retail Sales and Use Tax Regulations provides in pertinent part 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.
The fact situation presented in this case is similar to a fact situation addressed in a previous determination letter dated January 25, 1982 (copy enclosed). There, a stock brokerage house subscribed to an on-line stock quotation reporting system. The Department held that the true object of the transaction was service of electronic information transmittal and not the leasing of tangible personal property. Similarly, the instant transaction is exempt from the tax even when equipment is leased or a hard copy of the accessed information is provided to the Taxpayer in connection with the service.

Host-initiated Database

The other database transaction that the Taxpayer provides is a host-initiated polling (inquiry) into the files of the customers who purchase the user-initiated data base system. The polling is not used for the Taxpayer's billing purposes; rather, it is used strictly for statistical purposes.

Here, the true object of the polling database system is to provide an exempt service. This transaction involves no transfer of tangible personal property (as distinct from the user-initiated system where reports are sent to the Taxpayer's customers). The true object is purely to obtain statistical information from the Taxpayer's customers.


For any sale of tangible personal property, the Taxpayer must register as a dealer (forms enclosed) in accord with Virginia Code §§58.1-612 and 58.1-613, and collect and remit the tax to the Commonwealth.

Lease and Rental of Equipment

Generally, a lease or rental of tangible personal property is considered a sale of tangible personal property under Virginia Code §58.1-602(16), and the Taxpayer must collect and remit sales tax.

However, as noted above when the Taxpayer leases or rents computer equipment, terminals, etc., in connection with the provision of its database information retrieval service, it will not be required to add the tax to such leases and rentals. Instead, the Taxpayer will be liable for Virginia use tax on the cost price of such computer equipment and any other tangible personal property used/purchased in Virginia in providing its database service to customers.

If you have any further questions, please contact us.


W. H. Forst
Tax Commissioner

Last Updated 08/25/2014 16:46