Tax Type
Retail Sales and Use Tax
Description
Penalties and Interest; Waiver of penalty
Topic
Collection of Delinquent Tax
Date Issued
08-09-1996
August 9, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This will reply to your letter of December 19, 1994, seeking correction of an assessment issued to*******(the "Taxpayer"), for the period July 1991 through September 1994. I apologize for the delay in responding to you. I note that the department's***** District Office has resolved most of the issues raised in your letter and the audit assessment has been revised accordingly.
FACTS
The Taxpayer was assessed use tax on its purchase of computer software. The sales agreement for the software includes charges for consulting services, on-site training, and travel time. The sales agreement provides for separate invoicing of these items to the Taxpayer as the services are rendered. The Taxpayer agrees that the purchase of the software is taxable but maintains that the consulting services, on-site training, and travel time charges are exempt services related to the installation and modification of the software.
The Taxpayer also seeks waiver of use tax compliance penalty. The penalty was assessed because the Taxpayer's compliance ratio was zero percent in its second audit. Virginia Regulation (VR) 630-10-80, § 2(A)(2) (copy enclosed), requires the assessment of the penalty in a second audit unless a taxpayer's use tax compliance ratio meets or exceeds 60 percent. The Taxpayer seeks waiver of the penalty because it experienced corporate and organizational changes during the audit period which affected its ability to report Virginia use tax.
DETERMINATION
Code of Virginia § 58.1-602 (copy enclosed) defines "sales price" to be "... the total amount for which tangible personal property or services are sold ... without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever." The sales agreement furnished by the Taxpayer clearly states that certain services would be provided by the software vendor in connection with the sale of the software. The software sales agreement contains an estimated price of $40,000.00 under "Other Charges" which specifically references training classes, consulting services, and technical services and states that the services would be billed monthly and paid as utilized. The department's policy of taxing services in connection with the sale of tangible personal property is longstanding. I have enclosed copies of P.D. 93-237 (12/21/93) and P.D. 96-143 (6/20/96) which illustrate the department's position on this issue. Because the software sales agreement included services as part of the sale of the software, the services were properly included in the "sales price" of the software.
Code of Virginia § 58.1-609.5(6) (copy enclosed) provides an exemption for amounts separately charged for labor or services rendered in connection with the modification of prewritten software. I understand that the Taxpayer's audit was revised to remove labor charges related to the modification of prewritten software and the installation of the software on the Taxpayer's computers. If the Taxpayer can provide documentation of any remaining charges in the assessment that are directly related to installing or modifying the software, the audit will be adjusted accordingly. Without such documentation, I must conclude that the remainder of the assessment is correct.
VR 630-10-80, § 2(A)(6), provides that penalty assessments in second and subsequent audits are waived only in cases where exceptional mitigating circumstances are present. While I am sympathetic with your situation, organizational changes do not qualify as exceptional mitigating circumstances; therefore, the penalty was properly assessed.
I will allow the Taxpayer 60 days to furnish any additional documentation related to exempt services provided in connection with its purchase of the software. A refund of ******* as computed in the revised audit, plus applicable interest, has been issued to the Taxpayer due to its overpayment of the original assessment. You may send any documentation to ***** in the Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880 or you may contact ******** at *********if you have any questions.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9303S
Rulings of the Tax Commissioner