Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; Intangible software rights
Topic
Taxability of Persons and Transactions
Date Issued
10-29-1996
October 29, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to your letter in which you seek correction of the department's assessment issued to ************* (the Taxpayer) for the period September 1991 through August 1994. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a network communications services company that provides an electronic claims transmission service to physicians and hospitals in Virginia. The Taxpayer contracts for the right to market and sublicense prewritten software products used in providing network access services. At issue is the tax imposed on the purchase of two separate software licensing agreements used in connection with the Taxpayer's operation.
DETERMINATION
License Agreement "A"
The Taxpayer entered into an agreement with a computer company for the right to market and sublicense certain prewritten computer software products. Under the terms of the agreement, the Taxpayer paid a fee of ********** to the software company for the rights to market the products that included a copy of the software products for training and marketing purposes. The Taxpayer contends that the******** represents two separate and distinct items, (i) the tangible copy of the software products, and (ii) the acquisition of an intangible "licensing right" to market and sublicense the software products. The Taxpayer maintains that***** of the*********represents an intangible right to market and sublicense the software products and is not subject to the tax.
The department determined that the "true object" of the standard software packages used by the Taxpayer in connection with the provision of access network services was the rendering of an exempt service. As a service provider, the Taxpayer is liable for the use tax on the purchase of all tangible personal property used in connection with such service.
The retail sales tax is imposed on the gross sales price of tangible personal property when sold at retail or distributed in Virginia. Code of Virginia § 58.1-602 (also see Virginia Regulation (VR) 630-10-95, copy enclosed) defines "sales price" to be... the total amount for which tangible personal property or services are sold... without 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. (Emphasis added).
The licensing agreement furnished by the Taxpayer clearly states that the marketing rights would be provided by the software company in connection with the sale of the software products. The agreement contains the price of ***********under "Fees and Payments" which specifically references the intangible right to use the software and one copy of the software products. Because the licensing agreement includes the rights to market the software products as part of the sale of the tangible software, the sale and all charges in connection therewith are deemed to be a taxable sale of tangible personal property. I find that the auditor properly assessed the tax on the licensing agreement in this case.
Licensing Agreement "B"
The Taxpayer entered into a contract with a vendor for the right to market and distribute medical industry software. The agreement provided that the vendor modify existing computer software to the Taxpayer's specifications. You indicate that before the Taxpayer took possession of the completed software, the software had become obsolete. As a result, the Taxpayer withdrew from the agreement without taking possession of the software. You protest the taxing of the licensing agreement and maintain that no transfer of tangible personal property was made; therefore, no taxable transaction occurred.
Based on the information provided by the Taxpayer, the Taxpayer did not receive any tangible personal property under this licensing agreement. Accordingly, the audit will be adjusted to remove the charge for the licensed software agreement from the assessment.
Summary
The audit will be revised in accordance with the determination in this letter. The Taxpayer will shortly receive a revised notice of assessment, with updated interest to the date of the Taxpayer's protest letter. If you have any questions regarding this letter, please contact**********in my Office of Tax Policy at **********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10054T
Rulings of the Tax Commissioner