Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; Modified prewritten programs
Topic
Taxability of Persons and Transactions
Date Issued
12-21-1993
December 21, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This will reply to your letter of October 28, 1992 in which you seek correction of a retail sales and use tax assessment for**********(the "Taxpayer").
FACTS
The Taxpayer writes and sells computer software, primarily for the medical and insurance industries. The department audited the Taxpayer's records and assessed tax on sales of computer software. You contend that the Taxpayer is producing custom software, exempt from Virginia's sales tax. The auditor maintains that the Taxpayer is selling or leasing modified canned software and should be registered to collect the tax. You also assert that the Taxpayer has not "transferred the ownership of said programs to the end user" and, therefore, no tangible personal property has been transferred. Finally, you protest the assessment of tax on "hot line support services."
DETERMINATION
Computer software: Va. Code §58.1-609.5(7) (formerly Va. Code §58.1-608(A)(5)(g)) provides an exemption from the tax for custom programs, as defined in Va. Code §58.1-602. Under that section, a custom program is defined as:
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- a computer program which is specifically designed and developed only for one customer. The combining of two or more prewritten programs does not constitute a custom computer program. A prewritten program that is modified to any degree remains a prewritten program and does not become custom.
Va. Code §58.1-602 also defines a prewritten program as "a computer program that is prepared, held or existing for general or repeated sale or lease..." A review of the audit report leads me to conclude that the programs sold by the Taxpayer are modified prewritten programs for general sale or lease.
The sales agreement between your firm and a customer states that the "Seller has developed a computer software program for use in the medical industry, known as [Name of program] and a operating procedures manual for such program." This language strongly suggests that the program is not "specifically designed and developed only for one customer" as required in Va. Code §58.1-602 to qualify as a custom program. It is my understanding that when a doctor or insurance agent purchases the rights to the software, the Taxpayer modifies the program to fit the specific needs of the customer. I also note that one operating manual can be used for the medical or insurance programs sold, indicating that each program is not totally unique, but instead is prewritten with changes or modifications made to satisfy the needs of a specific customer. is not sufficient to render the software "custom." Therefore, the sale of the software at issue is not eligible for the exemption for custom programs.
Transfer of Ownership: You contend that the computer programs remain the property of the Taxpayer. Because ownership of the programs never passes to the customer, no "tangible personal property" has been transferred for the tax to apply.
The Virginia retail sales and use tax is imposed on the sale, lease or rental of tangible personal property. Under Va. Code §58.1602, "sale" is defined to mean "any transfer of title or possession, or both,...in any manner or by any means whatsoever, of tangible personal property..." In this case, the fact that the Taxpayer retains ownership of the program does not alter the taxable nature of the software.
Tangible vs. Intangible Property : You maintain that computer programming should be considered intangible property and, therefore, not subject to the tax. As the rulings you previously received indicate, the department has consistently held that a computer program provided in tangible form, such as a disk or tape, is deemed to be tangible personal property subject to Virginia sales and use tax.
Exemption for Labor or Services: While the software does not qualify for the exemption for custom programs, Va. Code §58.1609.5(6) (formerly Va. Code §58.1-608(A)(5)(f)) provides an exemption for an amount separately charged for labor or services rendered in connection with the modification of prewritten programs. I will allow you to submit documentation relating to the cost of labor or services incurred in modifying the programs in question. If the Taxpayer can provide such documentation, the audit will be revised accordingly.
Hot Line Support Services: You claim that the Taxpayer provides an 800 number to its clients for "Hot Line Support" which is labor intensive and should not be subject to the tax.
Va. Code §58.1-602 states that sales price means the total amount for which tangible personal property or services are sold, including any services that are a part of the sale. Page five of the sales agreement does not specifically title the support as "Hot Line Support." The wording of the agreement suggests that such support is rendered in connection with the sale of the program. Unlike the situation in P.D. 87-209, which you cite, it appears that in this case the support is not a separate agreement but is rendered in connection with the sale of tangible personal property (the computer software on disk). Therefore, the charges for support services are subject to the tax.
Finally, you request a list of names and addresses of the department's correspondence contacts in the computer software area. The department has previously forwarded a number of public documents, with such information required by Va. Code §58.1-204 to be deleted to preserve confidential taxpayer information, regarding the tax treatment of computer software and related applications.
Based on the above, I find that the sale of the computer software programs at issue are subject to the Virginia sales and use tax. However, if you can provide the requested information relating to labor or services for modifying the prewritten programs, the assessment will be adjusted accordingly. The information should be sent to the department's Office of Compliance, Audit Review Unit, P.O. Box 615, Richmond, Virginia 23205-0615, within 30 days.
Offer in compromise: Va. Code §58.1-105 authorizes the Tax Commissioner to accept an offer in compromise of taxes if it is determined that the assessment is based upon a doubtful or disputed claim or that the tax liability is of doubtful collectibility. In this case, the application of the law is clear. However, you have indicated payment of the assessment would have a drastic impact on the Taxpayer's financial stability. If the Taxpayer wishes to submit an offer in compromise, it should be mailed to the department's Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23282-1880. In accordance with Virginia Regulation (VR) 630-1-105 (copy enclosed), an offer based on doubtful collectibility must include signed financial statements in sufficient detail to indicate the financial condition of the Taxpayer.
If an offer and the required financial information, or the labor/services information for modifying prewritten programs, are not submitted within 30 days, the department will resume collection action.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6663F
Rulings of the Tax Commissioner