Tax Type
Retail Sales and Use Tax
Description
Services; Repair and installation; System support services
Topic
Taxability of Persons and Transactions
Date Issued
04-17-1996
April 17, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**********
This will reply to your letter of July 19, 1995, in which you seek correction of a sales and use tax assessment to**** (the "Taxpayer") for the period May 1989 through February 1995.
FACTS
The Taxpayer, a physician, entered into an agreement with a vendor for system support services of its licensed medical programs. As a result of the department's audit, the Taxpayer was held liable for the untaxed purchase of the support service agreement which provides for program updates and modifications.
The Taxpayer protests the tax assessed on the contract and maintains that the contract is only for the provision of telephone support services and any such updates, enhancements, etc. are billed as a supplemental charge.
DETERMINATION
Virginia Regulation (VR) 630-10-62.1 defines "maintenance contract" as "any agreement whereby a person agrees to maintain and/or repair an item of tangible personal property over a specified period of time for a fee which is determined at the time the agreement is entered into." [Emphasis added].
The department has consistently held that the total charge for a maintenance contract which provides for the furnishing of tangible enhancements or upgrades or other tangible personal replacement property is taxable at the time of purchase. See P.D.'s 95-286 (11/7/95), 91-102 (6/28/91), and 91-20 (2/22/91), copies enclosed). A maintenance contract providing only for the provision of labor is exempt from taxation.
A review of the support service agreement indicates that the Taxpayer is provided with system support services for its licensed medical programs as well as program updates and modifications in tangible form. The tax applies because the agreement provides the Taxpayer with upgrades and enhancements on diskettes. The fact that the Taxpayer is billed separately for updates and enhancements is inconsequential, given that the contract specifically states that these items may be provided.
Although the assessment is correct as made, based upon the circumstances in this case and under the authority provided the Tax Commissioner by Code of Virginia § 58.1-105, I find basis for waiving the assessed penalty. Since the assessment is paid in full, a refund, with updated interest, will be issued.
Please note that effective January 1, 1996, maintenance contracts which provide for both repair or replacement parts and repair labor will be taxed at one-half of the total charge for such contracts. (See enclosed Tax Bulletin 95-8 (9/27/95).
If you should have any further questions regarding this letter, please contact ** at **** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10009T
Rulings of the Tax Commissioner