Tax Type
Retail Sales and Use Tax
Description
Services; Repair and installation; Software support services
Topic
Taxability of Persons and Transactions
Date Issued
05-01-1996
May 1, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This is in response to your letter of June 29, 1995, in which you seek correction of a sales and use tax assessment to your client, ****(the "Taxpayer") for the period June 1993 through November 1994.
FACTS
The Taxpayer entered into a franchise agreement granting the Taxpayer the right to operate a restaurant unit with several locations within the Commonwealth. Under the terms of the contract, the Taxpayer will lease a licensed software program from the franchiser. For an additional charge, the Taxpayer will receive software support services for the licensed program.
The department conducted an audit and assessed the tax on the untaxed purchase of both the licensed software program and the support services. The Taxpayer maintains that the software license fee is for the right to use the software licensed program and that there is no transfer of tangible personal property. The Taxpayer further maintains that the charge for the software maintenance is for the provision of exempt services.
I will address each issue separately below.
DETERMINATION
Licensed Software Program: Under current law, the licensing of prewritten computer software constitutes a taxable lease or sale when the licensing agreement conveys not only the right to use the software but also the software itself in tangible form. See the enclosed Public Document (P.D.) 93-157 (7/23/93). The department's policy on computer programs transmitted by intangible means is set forth in the enclosed P.D. 94-12 (1/11/94). Computer programs transmitted by intangible means are deemed to be nontaxable services.
A review of the licensed software agreement reveals that the franchiser shall install the licensed program on the Taxpayer's computer system. The installation will be made via a modem. As the licensed software agreement does not provide tangible personal property, it is deemed a nontaxable service. Accordingly, the audit will be adjusted to remove the charge for the licensed software program from the assessment.
Maintenance agreements: Virginia Regulation (VR) 630-10-62.1 provides that the total charge for a computer software maintenance contract which provides for the furnishing of tangible enhancements or updates or any other tangible replacement property is taxable at the time of purchase. On the other hand, a maintenance contract providing only for the provision of labor is exempt.
A review of the contract with respect to software maintenance support indicates the Taxpayer will receive support services as deemed necessary to cause the licensed program to perform in accordance with the standards of the contract. Under this agreement, there is no indication that the service provides for any transfer of tangible personal property. Based on the information provided, the software support maintenance is a nontaxable service. Accordingly, the software support fee will be removed from the audit assessment.
I should note that effective January 1, 1996, maintenance contracts which provide for both repair or replacement parts and repair labor are taxed on one-half the total charge for such contracts as provided in Tax Bulletin 95-8.
If you have any questions regarding this letter, you may contact** of the department's Office of Tax Policy at******.
.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9755T
Rulings of the Tax Commissioner