Tax Type
Retail Sales and Use Tax
Description
Industrial Materials; Equipment Used in Production of Maps
Topic
Taxability of Persons and Transactions
Date Issued
06-28-1991
June 28, 1991
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**********************
This will reply to your letter of November 28, 1990 in which you contest a sales and use assessment to your company, ************** (the "Taxpayer") for the period March 1987 through February 1990.
FACTS
The Taxpayer provides a variety of services, including, but not limited to, various types of mapping services, photography services, data conversion, map and record maintenance, etc., for utilities and municipalities. A portion of its work results in a map or some other tangible document which records and pinpoints a customer's outside plant facilities which are used by a telephone utility when making repairs, providing services, maintaining property and for other purposes requiring the efficient location of telephone facilities. Such maps or documents are generally provided in the form of computer-aided drawings made on mylar sheets or computer tapes which contain the mapping information. The mapping information comes from a variety of sources; in some instances, from the Taxpayer's customer.
While the assessment has been revised, the Taxpayer continues to contest the inclusion of charges for the development and sale of maps and the conversion of existing customer records onto computer tapes in the assessment. In addition, the Taxpayer contest the assessment on the purchases of fixed assets associated with the production of maps and related maintenance.
DETERMINATION
I will address the areas contested by the Taxpayer individually below:
Development and sale of maps: Va. Code §58.1-608(5)(a) provides an exemption from the sales and use tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made...." Virginia Regulation (VR) 630-10-97.1 provides that in determining whether a particular transaction involving both the provision of services and the sale of tangible personal property is taxable, the "true object" of the transaction must be examined. 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 Taxpayer maintains that it is not merely "making maps" and that its business parallels engineering and survey firms. It creates and updates maps sometimes using the same methods as such firms, for similar clients and purposes, and under similar contractual arrangements. It further maintains that it is providing a nontaxable service for its customers and that any tangible personal property which is provided in connection with the sales is negligible compared to the total cost of the project.
However, in the instant case, while the Taxpayer is providing professional services in the rendition of its operations, the "true object" of the transactions involving the development and sale of maps is the end product of the Taxpayer's services - the maps themselves. Without a suitable finished product, it is not likely that customers would seek the services of the Taxpayer. Therefore, the sales tax was properly applied in the audit.
Conversion of existing customer records: While the assessment was revised to remove those instances in which the Taxpayer's customer provided a map, either in mylar or computer form, for updating or other changes, as the Taxpayer was merely providing a service, charges for the conversion of customer-owned records into a computerized map remained taxable.
VR 630-10-97.1 provides that the sales tax applies to charges for the fabrication of tangible personal property for users or consumers who furnish, either directly or indirectly, the materials used in the fabrication work. The department, in a previous ruling, P.D. 86-22 (1/16/86), copy enclosed, determined that the conversion of data from one medium to another is a taxable transaction. The true object of the transaction, as in the development and sales of maps above, is the tangible personal property - the computer tape. Again, such charges were properly held in the audit.
Purchases of fixed assets: The Taxpayer maintains that it should not be liable for the tax on equipment associated with the production of maps as it was related to the production of computer software for resale during the audit period which would qualify for exemption under VR 630-10-49.2(6)(A). While the software was used in-house for production purposes it was offered for sale, although without success, to potential clients.
VR 630-10-49.2(6)(A) provides that the production of computer software in tangible form for sale or resale generally constitutes industrial manufacturing, thus the industrial manufacturing exemption would apply. It states, however, that "the exemptions are not available for persons who produce computer software for purposes other than for sale or resale... the industrial manufacturing exemption does not apply [to]...the production of computer software for in-house use." Additionally, VR 630-10-63(D) provides that:
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- when a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities.
In the instant case, it appears that the computer software was primarily designed for in-house use and not for resale. Thus, the equipment used in developing such is subject to the tax based on the above, and accordingly, was properly treated in the audit.
Purchase of maintenance on fixed assets: The final item the Taxpayer contests is the inclusion of purchases of maintenance for its fixed assets in the assessment. VR 630-10-62.1 sets forth the applicability of the sales tax to maintenance contracts. Maintenance contracts which provide only for the furnishing of repair labor are contracts for the provision of services and thus are nontaxable. However, maintenance contracts which provide only for the furnishing of parts and those which provide both parts and labor are taxable as they represent sales of tangible personal property.
While no mention is made as to the type of maintenance contract for the Taxpayer's computer equipment, maintenance contracts for computer equipment generally are for both parts and labor and thus taxable. However, if the contracts in the instant case are for labor only, and upon receipt of proper documentation to that effect, I will be willing to revise the audit.
Based on the foregoing, I find no basis for revision of the assessment, unless the Taxpayer can provide documentation indicating that the maintenance contracts are for labor only. Such documentation should be provided to the department's Office Services Division, Technical Services Section, P. O. Box 6-L, Richmond, Virginia, 23282 within 30 days of the date of this letter. If it is not received within the allotted time period, the unadjusted assessment will become due and payable in full.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner