Tax Type
Retail Sales and Use Tax
Description
Printing; Photocopier
Topic
Taxability of Persons and Transactions
Date Issued
07-19-1996
July 19, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your letter of April 3,1996 in which you seek correction of the retail sales and use tax audit of ***********(The "Taxpayer") for the period of November 1989 through March 1995.
FACTS
The Taxpayer is in the business of producing software for sale or resale. The Taxpayer was recently audited and assessed tax on computers, monitors and printers used in the production of computer software and copiers used to copy software manuals for distribution with their software packages. The Taxpayer is also taking exception to the tax application to publication used as reference materials by employees.
DETERMINATION
Virginia Regulation (VR) 630-10-49.2 (copy enclosed) addresses innovative high technology industries and research. Subsection 6.A of this regulation provides for the department's position with respect to the development of computer software and states the following:
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- The production of computer software in tangible form for sale or resale generally constitutes industrial manufacturing. Therefore, the industrial manufacturing exemptions set forth in § 630-10-63 are generally applicable to such production. However, the exemptions are not available to persons who produce computer software for purposes other than for sale or resale or computer software that does not constitute tangible personal property. However, as explained in § 630-10-63, the industrial manufacturing exemptions do not apply when the tangible personal property produced is not for sale or resale, such as the production of computer software for in-house use. The industrial manufacturing exemptions also do not apply to the production of computer software that does not constitute tangible personal property, i.e., custom computer programs.
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- Examples of exempt tangible personal property used directly in the production of computer software for sale or resale include, but are not limited to, computer hardware and software used to encode magnetic tapes or other storage mediums or to otherwise produce finished software products. Also exempt is the tangible medium that the finished products will take (tapes, disks, etc.).
It should be noted that the exemption set forth above is only applicable to the development of canned computer software programs for sale or resale. The exemption is not available for the packaging of pre-existing software, nor is it available for the development of custom software.
It is noted in the audit work papers that the majority of the audit liability resulted from the lease of computers and the purchase of various computer related equipment. Provided the Taxpayer can provide documentation that this equipment is used directly in the development of canned software programs, I find basis for removing the equipment from the audit findings. I would like to point out that the manufacturing exemption afforded under VR 630-10-49.2 is subject to the same restriction as the department's interpretation of the industrial manufacturing exemption set forth in VR 630-10-63. In the event computer equipment is used in a dual capacity, i.e., directly in manufacturing (exempt) and administratively (taxable), the preponderance of use test set forth in VR 630-10-63.D (copy enclosed) will apply.
In regard to the lease of copiers used in reproducing the software manual included with the software packages distributed by the Taxpayer, Code of Virginia § 58.1-609.3(11) provides a retail sales and use tax exemption for "high speed electrostatic duplicators or any other duplicators which have a printing capacity of 4,000 impressions or more per hour purchased or leased by persons engaged primarily in the printing or photocopying of products for sale or resale". Unless the copiers in question qualify for the exemption set forth above, the department finds no basis for removing the lease of the copiers from the audit findings.
Finally, the Taxpayer takes exception to reference materials used by employees in daily operations. The Taxpayer takes the position that reference materials should be exempt under the research and development exemption set forth under Code of Virginia § 58.1-609.3(5). Code of Virginia § 58.1-609.3(5) provides an exemption for, "tangible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense." (Emphasis added). Based on the exclusive nature of this exemption, and doctrine of strict construction adopted by the Virginia courts, the department takes the position that reference materials would not qualify for the research and development exemption.
Based on all of the foregoing, I will ask that a representative from our ***District Office contact the Taxpayer in order to determine if any of the computer equipment and accessories held taxable in the audit are used directly in producing canned software for sale or resale, and make any adjustment to the audit finding as deemed necessary. If you should have any questions concerning this determination, please contact ****, Office of Tax Policy, at ****** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11121K
Rulings of the Tax Commissioner