Tax Type
Retail Sales and Use Tax
Description
Maintenance and support contract; Software enhancements
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
11-07-1995
November 7, 1995
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************.
This will reply to your letter of April 7, 1995 and recent conversation with one of my staff, in which you seek correction of a sales and use assessment issued to******** (the "Taxpayer") for the period January 1992 through October 1994.
FACTS
The Taxpayer operates as a bank with several locations within the Commonwealth. As a result of the department's audit, an assessment was made for the untaxed purchase of an annual maintenance and support services contract. The contract provides for telephone support to the Taxpayer's staff in the case of problems due to operator error and hardware or software malfunctions. In addition, the contract further provides for software enhancements.
The Taxpayer protests the tax assessed on the contract and maintains that the true object sought by the Taxpayer is the telephone support services. Furthermore, you indicate that the software enhancements may occur only once every six to ten years.
DETERMINATION
As demonstrated by Virginia Regulations (VR) 630-10-62.1 and numerous rulings of the department [e.g., see P.D.'s 91-102 (6/28/91), 92-196 (9/30/92), and 91-20 (2/22/91), copies enclosed], the department has consistently held that the total charge for a computer software maintenance contract which provides for the furnishing of tangible enhancements or updates or any other tangible replacement property is taxable at the time of purchase. On the other hand, a maintenance contract providing only for the provision of labor would be exempt.
A review of the maintenance and support service contract indicates that the Taxpayer is entitled to receive software enhancements. As such, the maintenance contract at issue is subject to the tax. Although I am sympathetic, l find that the auditor correctly assessed the tax in this case.
However, you should note that 1994 General Assembly passed legislation (SB 28), effective January 1, 1996, to exempt from the sales and use tax one-half of the total charge for maintenance contracts when such contracts provide for both repair or replacement parts and repair labor. (See enclosed Tax Bulletin 95-8 (9/27/95).
The Taxpayer will shortly receive notice of assessment, with updated interest to the date of protest letter. If you have any questions regarding this letter, please contact***********of Tax Policy at***********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9561T
Rulings of the Tax Commissioner