Tax Type
Retail Sales and Use Tax
Description
Computers, services and software; Escrow fee charged by software seller
Topic
Taxability of Persons and Transactions
Date Issued
08-06-1996
August 6, 1996
Re: Ruling Request: Retail Sales & Use Tax
********* (the "Taxpayer")
Dear**************
This will reply to your letter of July 15, 1996 in which you request a ruling on the taxable status of a specific transaction involving computer software.
The Taxpayer's sale of software includes, within its design, a copyrighted calculation system identified for purposes of this response as the "code". This code is not accessible by the Taxpayer's customers. Each customer purchasing the software is given an option of paying an additional Escrow Fee, which entitles the customer to file a claim with an escrow company, in the event the seller ceases its business operations. The fee is separately itemized on the invoice and is annually renewable. If the customer declines to renew its claim rights and does not pay the renewal fee, the right to file a claim with the escrow company is forfeited.
With the foregoing in mind, I shall respond to the Taxpayer's questions in the manner in which they were presented.
Is the Escrow Fee an intangible or tangible personal property transaction?
Code of Virginia § 58.1-603, copy enclosed, imposes the sales tax upon "each item or article of tangible personal property ... sold at retail ... in this state.n The term "sale" is then defined in Code of Virginia § 58.1-602, copy enclosed, as "any transfer of title or possession ... of tangible personal property." In this case the possession of the software is transferred for a consideration, characterizing the sale of the software as the sale of tangible personal property.
Code of Virginia § 58.1-602, copy enclosed, further states that "Sales Price" shall "mean the total amount for which tangible personal property or services are sold...." I have enclosed a copy of a previous departmental ruling (P.D. 88-211, 07/26/88) which relates that such escrow fees are taxable as part of the tangible personal property transaction.
I would note that the medium in which the computer software is transferred is critical to the taxable status of the transaction. That is, if the software is provided in tangible form, such as a disk or tape, the sale and all charges in connection therewith are deemed to be a taxable sale of tangible personal property. Conversely, if the software is transmitted via electronic means, (e.g. modem) the transaction is deemed to be a nontaxable service, and any additional charges included in the electronic transfer take on the same nontaxable status. I have enclosed a copy of P.D. 88-20, 1/4/88, which helps to further explain the department's position.
Is the Escrow Fee subject to Sales or Use Tax when the customer is invoiced for their initial purchase?
Yes. As previously stated.
Is the annual renewal fee subject to Sales or Use Tax?
Yes, if the fee is a charge in connection with the original transfer of tangible personal property.
I trust that our response has been of some assistance. If you have any additional questions regarding the issues discussed herein, please contact **************of the department's Office of Tax Policy at*********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11462Q
Rulings of the Tax Commissioner