Tax Type
Retail Sales and Use Tax
Description
Purchase/Leaseback Transactions
Topic
Exemptions
Date Issued
06-28-1991
June 28, 1991
Re: Request for Ruling: Retail Sales and Use Tax
Dear***************
This will reply to your letter of December 21, 1990 requesting a ruling on the applicability of the sales and use tax to various purchase/lease-back transactions engaged in by************* (the "Taxpayer").
I will address each of the transactions presented in your letter individually below:
Equipment lease-back: You ask if the department allows a tax credit on equipment upon which the sales tax was paid at the time of purchase that has been used prior to the sale and lease-back arrangement.
I have enclosed a copy of a Ruling of the Tax Commissioner dated May 12, 1986 which addresses this situation. As the letter indicates, while a taxpayer who intends to resell equipment recently purchased could provide a vendor with a resale exemption certificate even after having purchased equipment in order to obtain a refund of the sales tax previously paid, once the equipment is used by the taxpayer, the resale exemption is negated.
Va. Code §58.1-623 provides that "[i]f a taxpayer who gives a certificate of (exemption)...makes any use of the property other than an exempt use or retention, demonstration or display while holding property for resale, distribution, or lease in the regular course of business, such use shall be deemed a taxable sale by the taxpayer as of the time the property...is first used by him." Thus, in the instant case, since the equipment was used by the Taxpayer prior to the lease-back, no tax credit is allowed for the tax paid at the time of purchase on the tax included in the lease charge.
Computer Software: For sales tax purposes, Virginia law distinguishes between a "prewritten program" and "custom program." A "custom program" is defined in Va. Code §58.1-602 as "a computer program which is specifically designed and developed only for one customer." A "prewritten program" is defined in the same Code section as "a computer program that is prepared, held or existing for general or repeated sale or lease, including a computer program developed for in-house use and subsequently sold or leased to unrelated third parties." Sales of custom programs are exempt from the sales tax pursuant to Va. Code §58.1-608(5)(g); however, since rewritten programs are deemed to be tangible personal property, they are subject to the tax.
In your letter you ask if any credit for taxes paid at the time of purchase is allowed against the lease for software which is prohibited from resale or assignment by the licensing agreement and thus subject to taxation at the time of purchase. Since any resale or assignment is prohibited by the licensing agreement, regardless of the type of computer software involved, the question is moot.
However, if a licensing agreement allows for the resale or assignment of software and such software will subsequently be leased, the software, whether prewritten or custom, may be purchased exempt from the tax. The sales tax, however, must be charged on the gross proceeds of the lease of rewritten software. Virginia Regulation (VR) 630-10-57, copy enclosed, sets forth the applicability of the sales tax to leases or rentals.
If a vendor refuses to accept a resale exemption certificate, to avoid double taxation a customer may seek refund of the sales tax paid to the vendor directly from the department. I have enclosed a copy of VR 630-1-1820 which explains the procedure for applying for a refund from the department.
If you have any further questions regarding this matter, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner