Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; Data recovery charges
Topic
Taxability of Persons and Transactions
Date Issued
07-12-1996
July 12, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This is in reply to your letter of May 3, 1995, in which you seek correction of sales and use tax assessed to ********* (the "Taxpayer"), for the period October 1991 through December 1994. The Taxpayer has paid the assessment.
FACTS
The taxpayer operates as a non-profit hospital and as a result of the department's audit, was assessed sales tax in several areas. The Taxpayer protests the tax assessed on purchases of human blood, alarm monitoring services, publications, music license fees, a data recovery charge, and miscellaneous purchases. In addition, the Taxpayer requests credit in the audit for tax paid on purchases exempt from the sales tax. Waiver of the audit penalty is also requested. I will address the issues individually.
DETERMINATION
Blood
The Taxpayer protests the tax assessed on its purchases of blood from the Red Cross based on P.D. 89-108 (3/24/89). The ruling addressed the application of the sales tax to purchases of freeze dried bone for human transplantation in light of Code of Virginia § 32.1--289.1, which prohibits the sale of any natural body part. The statute, while prohibiting sales of body parts, does allow for recovery of fees associated with removal and preservation of the body part for medical and scientific purposes. The Tax Commissioner ruled that because organs and tissues are never purchased or sold, the fees charged for preparing such for human transplantation represent nontaxable service charges. In this case, the Taxpayer asserts that whole blood is donated to the Red Cross and is tested and processed into usable blood products for sale to the Taxpayer for treatment of its patients. The Taxpayer contends that blood is human tissue, as contemplated under the statute, and that the Red Cross cannot legally purchase or sell blood. Because of this, the Taxpayer believes the fees charged for the provision of blood products by the Red Cross represent nontaxable service charges similar to the recovery fees related to the removal and preservation of a body part. As such, the charge by the Red Cross is exempt from the sales tax consistent with the ruling.
The Taxpayer's assertion that blood as human tissue cannot be legally purchased or sold is inaccurate. The statute lists hair, ova, and blood and other bodily fluids as exceptions which are subject to sale in Virginia. Notwithstanding, it is the department's understanding that blood is generally accepted in the medical community as human tissue and that the fees charged in connection with the sale of blood are for testing and processing whole blood into usable blood products. Because of this and the fact that the statute allows for the recovery of fees associated with the processing of human tissue for medical and scientific purposes, the department deems the charges by the Red Cross for blood and blood products as nontaxable service charges similar to the exempted charges in the ruling. These charges will be removed from the audit.
Alarm-monitoring charges
Virginia Regulation (VR) 630-10-17.1 provides that charges for alarm systems furnished, installed, and monitored by the same person constitute charges for a service exempt from the tax. The Taxpayer's alarm system is not a monitored system as described under the regulation because the system is monitored by the local police department. It is my understanding that the contested charges represent the lease of the transmitter that sends the signal to the police department and a maintenance contract for services and parts. Pursuant to VR 630-10-57 (Leases and rentals) and VR 630-10-62.1 (Maintenance contracts and warranty plans), these charges constitute sales of tangible personal property and are subject to the tax.
Publications
Code of Virginia § 58.1-609.6(3) provides an exemption from the sales tax for "[a]ny publication issued daily, or regularly at average intervals not exceeding three months ..., except that newsstand sales of the same are taxable." A publication is defined as "a newspaper, magazine or other periodical which is available for general distribution to the public." Jefferson Publishing Corporation v. W.H. Forst, State Tax Commissioner, 217 Va. 988, 234 S.E.2d 297 (1977).
Based on the information provided, the materials are publications as defined in Jefferson and satisfy the criteria in Code of Virginia § 58.1-609.6(3). The materials are available for general distribution to the public, meet the interval test provided in the statute, and are purchased on a subscription basis. Accordingly, the publications will be removed from the audit.
Music license fees
The auditor assessed tax on an invoice that stated charges for broadcast music relating to television and stereo equipment. According to the Taxpayer, the equipment was not provided by the vendor providing the music, but the invoice lists the equipment because the licensing fee is calculated based on the number of equipment items through which the music is broadcast. As such, the Taxpayer contends that the invoice represents exempt licensing fees attributable to royalties paid to music artists.
The department has consistently held that licensing fees and royalties are subject to the sales tax when the charge involves the provision of tangible personal property. In this case, the charge does not include the provision of the television and stereo equipment and therefore the tax does not apply.
The Taxpayer also disputes the assessment of the tax on an invoice for broadcast music that states a charge without an explanation. The auditor was not able to determine nor is it evident from the information provided whether the charge also includes the provision of tapes or discs. If such is included, the charge represents the exchange of tangible personal property subject to the tax. Otherwise, the provision of piped-in music only, constitutes a nontaxable service exempt from the sales tax. The Taxpayer will need to clarify this with the auditor before an adjustment can be made to the audit.
Data recovery
The Taxpayer protests the tax assessed on a charge for the recovery of computer data provided via a Taxpayer-owned disk. The Taxpayer indicates that it purchased the disk elsewhere and provided it to the vendor. As such, the Taxpayer believes that the charge is for exempt labor associated with data recovery services and not the exchange of tangible personal property.
The Tax Commissioner has previously ruled in P.D. 82-33 (3/29/82), copy enclosed, that the charge for the encoding of a program on a customer-owned disk is subject to the tax under the definition of "sale" as the fabrication of tangible personal property. See Code of Virginia § 58.1-602, copy enclosed. VR 630-10-37, copy enclosed, defines fabrication as "an operation which changes the form or state of tangible personal property." The ruling deems the transformation of a blank disk to a usable program disk via the encoding process as a change in the state of the property.
In this case, the encoding onto a disk of computer data recovered and transferred to the Taxpayer, via a disk provided by the Taxpayer, is deemed the fabrication of tangible personal property and, consistent with the ruling, the entire charge for such is subject to the tax.
Miscellaneous Purchases
Advertisement placement: VR 630-10-3 provides that charges for placing or running advertising in the media are not subject to the tax. The regulation defines "media" to include newspapers, magazines, billboards, direct mail, radio, television, and other modes of communication. The invoice for placement of advertising in a magazine will be removed from the audit pursuant to the regulation.
Installation: This invoice is listed in the audit as relating to the purchase of a cash register. The Taxpayer will need to provide a copy of the invoice to the auditor. If the invoice separately states the installation charge from the charge for the cash register, then the audit will be adjusted to remove the tax from the installation charge.
Credit - exempt purchases
The Taxpayer accrued and remitted use tax on certain purchases which are exempt from the sales tax. The auditor credited the use tax in the audit for certain exempt purchases. The Taxpayer has provided information on additional exempt purchases on which the use tax was paid and requests a credit in the audit for the tax paid on these purchases. The auditor will credit the audit for the additional invoices provided by the Taxpayer.
Penalty waiver
The Taxpayer's compliance ratio for sales was 100% and 80% for purchases in this third generation audit. Based on the demonstrated high levels of compliance, the department will waive the penalty in this instance. The Taxpayer is expected to achieve compliance levels of 85% for both sales and purchases in the next audit to avoid the application of the penalty.
The auditor will adjust the audit and issue a revised audit report. The Taxpayer will receive a refund of the tax and interest attributable to the items removed and the full amount of the penalty. If you have additional questions, please contact****** at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9734J
Rulings of the Tax Commissioner