Tax Type
Retail Sales and Use Tax
Description
Services; Repair and installation; Maintenance contracts
Topic
Taxability of Persons and Transactions
Date Issued
11-20-1996
November 20, 1996
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**************
In your letter, you seek correction of the retail sales and use tax assessment issued to **********(the Taxpayer). I apologize for the delay in responding to your letter. Copies of all references are enclosed.
FACTS
The Taxpayer is located outside Virginia and offers full service computer systems and media software and services for the broadcasting industry. An audit for the period February 1992 through January 1995 resulted in an assessment of sales tax on untaxed sales made prior to and after the effective date of its use tax registration.
The department's auditor determined that the Taxpayer established nexus with Virginia prior to its use tax registration since the Taxpayer had sent its personnel into Virginia on several occasions to install and test custom software sold to its Virginia customers. The Taxpayer takes exception to the use tax assessed prior to its effective date of registration on April 1, 1993, and maintains that it has no nexus with Virginia to require it to register for the collection and remittance of the use tax. According to the Taxpayer, its use tax registration was purely voluntary as it does not maintain an office in Virginia, solicit business in Virginia, advertise in Virginia, make regular deliveries in Virginia, or perform other activities in Virginia requiring a use tax registration. The Taxpayer also takes exception to certain sales held taxable in the audit and maintains that the fees represent exempt sales or leases of custom software or updates and enhancements thereof.
DETERMINATION
Nexus. Although the Taxpayer is clearly a "dealer" as defined in Code of Virginia § 58.1-612(B), the Taxpayer must also have "sufficient activity" within Virginia as set out in Code of Virginia § 58.1-612(C) before it would be required to register for collection and remittance of the use tax. The fact that the Taxpayer sends its personnel into Virginia to install and test its custom software for its Virginia customers does not, by itself, create nexus with Virginia. Accordingly, absent evidence that the Taxpayer had sufficient activity within Virginia as set out in the above cited statute, the facts presented do not support a conclusion that the Taxpayer was required to have been registered prior to the effective date of its use tax registration.
For these reasons, I find basis to remove all of the tax and interest assessed prior to April 1, 1993 from the department's audit assessment.
Custom Software. According to the auditor, no tax was assessed in connection with custom software in the department's audit. Rather, tax has been assessed on maintenance agreements which provide for the furnishing of repair or replacement parts for covered equipment. As set out in Virginia Regulation 630-10-62.1, the total charge for "parts only" contracts and "parts and labor" contracts is taxable. Accordingly, the assessment of tax on untaxed maintenance agreements sold on or after the effective date of the Taxpayer's use tax registration is proper.
Please note that, effective January 1, 1996 and thereafter, parts and labor maintenance contracts are subject to the tax based on one-half of the total charge for such contracts. See Tax Bulletin 95-8 (9127195).
Under separate cover, the Taxpayer will receive a revised bill for the balance owed of ******************The payment and the revised bill should be sent to Department of Taxation, ATTN:*************Post Office Box 1880, Richmond, Virginia 23218-1880,
within the next 30 days.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/1 0829R
Rulings of the Tax Commissioner