Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; Prewritten software
Topic
Taxability of Persons and Transactions
Date Issued
09-13-1996
September 13, 1996
Re: Request for Ruling: Retail Sales and Use Tax
Dear**********
In your letter, you request a ruling concerning the application of the retail sales and use tax to software development fees charged by********** (the Taxpayer). I apologize for the delay in responding to your letter.
FACTS
A telephone company (the Company) requests a cost estimate from the Taxpayer for the development of computer software for an optional calling plan. Upon acceptance of this estimate, the Taxpayer develops the software for release to participating Virginia telephone companies (Each Enterprise) to load onto their computer systems for billing. By contract, the Taxpayer agrees to separately bill Each Enterprise for the software development costs, rather than directly bill the Company. In turn, Each Enterprise is reimbursed for these charges by the Company.
The Taxpayer asks whether the software development fee is subject to the retail sales and use tax. If the fee is taxable, the Taxpayer also wants to know how to invoice the tax to Each Enterprise.
RULING
Code of Virginia § 58.1-609.5(7) provides an exemption from the retail sales and use tax for custom programs as defined by Code of Virginia § 58.1-602. Under that section, a custom program is defined as:
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- ...a computer program which is specifically designed and developed only for one customer. The combining of two or more prewritten programs does not constitute a custom computer program. A prewritten program that is modified to any degree remains a prewritten program and does not become custom. [Emphasis added.]
There is no statutory exemption for prewritten programs as defined by Code of Virginia § 58.1-602. Under that section, a prewritten program is defined as:
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- ...a computer program that is prepared, held or existing for general or repeated sale or lease, including a computer program developed for in-house use and subsequently sold or leased to unrelated third parties. [Emphasis added.]
Although the software sold by the Taxpayer for the transactions in question is for use by a particular industry, the facts clearly show that the software is developed for more than one customer, i.e., for repeated sale. Based on the above statutes, the software development fees charged by the Taxpayer to Each Enterprise constitutes the sale of prewritten programs. If such prewritten programs are transferred to customers via magnetic tape, disc or other tangible medium, the entire transaction is generally subject to the retail sales and use tax. If the programs are transferred to customers via electronic means (e.g., over telephone lines, by satellite, or other electronic transmittal or intangible means), the transaction is not subject to the retail sales and use tax.
Since Each Enterprise is a telephone company, the sale or lease of prewritten software may qualify for the limited exemption applicable to public utilities. This exemption is granted under Code of Virginia § 58.1-609.3(3), copy enclosed, and is restricted to tangible personal property purchased by a public service corporation (e.g., a public telephone utility) when used or consumed directly in the rendition of its public service. Accordingly, for the transactions in question, the exemption would be available only if the prewritten computer software is used for certain exempt purposes as set out in Virginia Regulation (VR) 630-10-87 (copy enclosed). For instance, computer software used immediately in the transmission of telephone communications to the public is used directly in the rendition of a utility's public service and would thus be exempt of the tax. If the software is used solely for exempt purposes, then the public telephone utility is required to submit a completed and signed exemption certificate, Form ST-20 (copy enclosed), to the Taxpayer with the first block checked on the form. With this in the Taxpayer's possession, this would relieve the Taxpayer from charging and collecting the retail sales and use tax on the invoice. Also, see VR 630-10-20, copy enclosed, which discusses the seller's responsibilities when accepting an exemption certificate.
Prewritten computer software used by a public telephone utility is taxable when purchased for managerial or administrative purposes. For example, prewritten computer software used for billing, collections, payroll, accounting, legal, insurance, general or specific office applications, instructional, engineering, survey plotting, construction, pension accounts, or any other administrative or managerial purposes is taxable. Even if the Taxpayer has in its possession an exemption certificate from the purchaser, the Taxpayer is required to charge the retail sales and use tax on those transactions in which the software is clearly to be used for any of the above taxable purposes. As provided by VR 630-10-24 (copy enclosed), the Taxpayer must separately state the amount of the tax on the invoice presented to Each Enterprise and add the tax to the sales price or charge for each taxable transaction.
When prewritten computer software is used for dual purposes, i.e., taxable and exempt purposes, the tax due on the transaction is prorated between the percentage of time the property is used in a taxable manner and the percentage of time used in an exempt manner. Absent a written statement from the purchaser as to the proper proration to apply for such type of transaction, the total charge should be taxed at the full rate of tax, i.e., at 4.5%. If proper proof is obtained from the purchaser to allow the tax to be prorated, the face of the invoice should show the computation of the full amount of tax multiplied by the percentage of taxable use with the result stated as the tax owed. In addition, a reference to the written statement provided by the purchaser requesting the tax proration should be cited on the invoice. For example, "the tax proration is based on your letter of (state the date)." The Taxpayer is required by law to retain a copy of the invoice and any other documentation supporting the tax proration for at least 3 years. See VR 630-10-30, copy enclosed.
I trust that the foregoing has answered your questions. If you have any questions about this ruling, please contact********at ************* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10281R
Rulings of the Tax Commissioner