Tax Type
Retail Sales and Use Tax
Description
Services; Professional or personal; Conversion of software
Topic
Taxability of Persons and Transactions
Date Issued
10-01-1996
October 1, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This is in reply to your letter, in which you seek correction of sales and use tax assessed to *************(the "Taxpayer"), resulting from an audit for the period February 1990 through October 1995. I apologize for the delay in responding to your letter.
FACTS
As a result of the department's audit, the Taxpayer was assessed tax on the purchase of a computer system and related software conversion services. During the audit, the Taxpayer obtained a breakdown of the computer transaction which separately stated the charges for the computer and the conversion services. The auditor viewed the conversion services as services in connection with the sale of tangible personal property and assessed tax on the total invoice amount. The Taxpayer protests the tax on the services portion of the invoice and believes the charge for software conversion represents exempt labor and service charges.
DETERMINATION
The taxpayer asserts, in part, that the charge for conversion services represents exempt labor charges. Code of Virginia § 58.1-609.5(2) provides an exemption from the sales and use tax for separately charged labor. The exemption, however, is limited to charges for labor rendered in installing, applying, remodeling or repairing property sold. This exemption does not apply in this instance.
According to the Taxpayer, the purchase of the computer system required software conversion to enable the new system to read the Taxpayer's existing software program. The vendor of the computer system previously sold the Taxpayer the existing software and performed the conversion via modem. The conversion process involved format changes to the existing software.
The department has consistently held charges for software conversion to be taxable. See P.D. 94-12 (1/11/94) and its attachments. In the rulings, the department deemed software conversion to be a taxable transaction when the conversion involves the exchange of tangible diskettes. That is not the case here. The vendor provided a hardware system and then reformatted the Taxpayer's existing software to be compatible with the new system. Because the conversion process was performed via modem, it did not involve the exchange of tangible personal property and the tax would not apply. I agree with the Taxpayer that the portion of the charge attributable to the conversion services represents nontaxable labor and service charges. As such, the tax assessed upon the charge for the conversion services will be removed from the audit.
In accordance with the determination in this letter, the assessment **********will be abated. If you have additional questions, please contact ********** at ************** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10947J
Rulings of the Tax Commissioner