Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; Licensing agreement
Topic
Taxability of Persons and Transactions
Date Issued
07-23-1993
July 23, 1993
Re: §58.1-1821 Appeal: Sales & Use Tax
Dear********************
This will respond to your letter of February 17, 1993 in which you seek correction of a sales and use tax assessment issued to your company, the "Taxpayer," for the period August 1988 through May 1991, and to your follow up letter of March 22, 1993 providing additional information.
FACTS
The Taxpayer, a computer hardware and software dealer, contests the tax assessed on a licensing agreement with a computer software company which authorizes it to use the software (1) as an end user, (2) as a DP Service Supplier, and (3) as a DP Professional which sublicenses end users and DP Service Suppliers. While you are authorized to use the software in the above three manners, you maintain that you only resell the software. Further, you contest the tax assessed on maintenance contracts which entitle purchasers to software updates.
DETERMINATION
I will address the two issues individually below:
License Agreement
Under Virginia law, the licensing of prewritten computer software constitutes a taxable lease or sale when the licensing agreement conveys not only the right to use computer software but also the software itself in tangible form. Since the Taxpayer's license agreement includes the software, various computer programs and related documentation, and authorizes the Taxpayer to make copies of the software for sublicensing purposes, the lease for such software is subject to the tax.
The resale exemption is inapplicable since the licensed software does not pass directly to the sublicensee; rather, it is being used by the Taxpayer to make the copies. Such a transaction is analogous to a situation in which a dealer purchases photographs and makes duplicate copies of such for resale to others. In the Taxpayer's case and the example provided, both the original purchase and subsequent sales of copies are taxable. Accordingly, the license agreement was properly included in the assessment.
Maintenance Contracts
The department has consistently held the provision of tangible enhancements or other tangible personal property to licensees under computer software maintenance support agreements as taxable under Virginia Regulation (VR) 630-10-62.1. I have enclosed copies of a few of the rulings on this issue and the tax treatment of computer software in general.
You maintain that since in the prior audit, the auditor did not assess the tax on software maintenance agreements, the Taxpayer should not be charged the tax on sales of software maintenance agreement provide, in part, tangible updates. The department's position on this issue is very clear through the enclosed regulation and numerous public documents. A reading of such would have indicated that the Taxpayer's maintenance contract were taxable. Further, the Taxpayer has presented no direct evidence that the Taxpayer's tax treatment of maintenance contracts was explicitly or implicitly approved by the prior audit.
Accordingly, the assessment is correct and due and payable. A revised Notice of Assessment with accrued interest will be mailed to the Taxpayer as soon as practicable and should be paid within 30 days to avoid the accrual of additional interest and collections activities.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/676OH
Rulings of the Tax Commissioner