Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; licensing, maintenance, and training
Topic
Taxability of Persons and Transactions
Date Issued
04-18-1997
April 18, 1997
Re: Request for Ruling: Retail Sales and Use Tax
Dear****************
This is in response to your letter of December 27, 1996, in which you seek information on the application of the sales and use tax to software licensing agreements involving an out-of-state client (the Taxpayer).
FACTS
The Taxpayer, an out-of-state dealer, is engaged in the licensing of computer software. The software licensing agreement entitles the user to a non-exclusive, non-transferrable license to use computer software and related materials. The Taxpayer retains title to and ownership of all the software and related materials. The Taxpayer will also provide for a separate fee, software development, maintenance and training services. As you indicate in your letter, training services may be performed either within or without Virginia.
You request a ruling on the applicability of the tax to the above described transactions. You have also requested a ruling with respect to whether the Taxpayer has nexus in Virginia.
RULING
Custom and Prewritten Software: The sale, lease, or rental of a customized computer program is exempt from the tax. Code of Virginia § 58.1-602 (copy enclosed) defines a custom program as "a computer program which is specifically designed and developed only for one customer. The combining of two or more programs does not constitute a custom computer program. A prewritten program that is modified to any degree remains a prewritten program and does not become custom." Prewritten software is subject to the tax and is also defined in Code of Virginia § 58.1-602 as "a computer program that is prepared, held or existing for general or repeated sale or lease." Separately stated labor or service charges associated with modifying prewritten software is exempt from the tax. See Public Document's (P.D.) 96-225 (9/13/96) and 96-143 (6/20/96) which further address the department's policy on this issue.
Licensing Agreement: Code of Virginia § 58.1-603 imposes the tax on the sale, distribution, or lease of tangible personal property in Virginia. As set out in the enclosed P.D.'s 86-147 (7/31/86), 88-211 (7/26/88), and 87-209 (9/15/87), the tax applies to the sale or lease of computer software which is provided to customers in tangible form. Similarly, the tax applies to the licensing of prewritten computer software if the license agreement permits the customer not only the right to use the software, but a copy of the software itself in some tangible form. On the other hand, computer programs transmitted by intangible means are deemed to be nontaxable services. See the enclosed P.D. 94-12 (1/11/94).
Maintenance Contracts: The application of the tax to maintenance contracts is set forth in Title 23 of the Virginia Administrative Code (VAC) 10-210-910. The regulation provides that contracts which provide both repair or replacement parts and repair labor represent a sale of tangible personal property and are subject to the tax. Code of Virginia § 58.1-609.5(9) provides that effective January 1, 1996, maintenance contracts which provide for both repair or replacement parts and repair labor are subject to tax based on one-half of the total charge for such contracts. See P.D.'s 91--102 (6/28/91) and 95-286 (11/7/95). A maintenance contract providing only for the provision of labor is exempt.
Computer Software Training: Code of Virginia § 58.1-609.5(1 ) provides an exemption for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charge is made...." Generally, the total charge for tangible personal property, including services such as consulting, training, etc. provided in connection with the sale of tangible personal property, is subject to the tax when such services are included in the price of the tangible personal property sold or leased. The tax does not apply to the charge for training which involves only the provision of a service. See P.D. 84-257 (12/28/84).
Nexus: Code of Virginia § 58.1-612, copy enclosed, sets forth the requirements which give the Commonwealth the authority to require dealers to register for the collection and remittance of the retail sales tax. This same section defines dealer to include every person who "Leases or rents tangible personal property for a consideration, permitting the use or possession of such property without transferring title thereto...."
Based on the limited information provided in your letter I am unable to determine at this time whether the Taxpayer will have nexus with Virginia. For example, if the Taxpayer sends an independent sales agent, employee, or other representative into Virginia to solicit business, sufficient activity will be established to require registration for sales and use tax. Likewise, if the Taxpayer delivers tangible personal property into Virginia more than twelve times per year by means other than common carrier, it is required to register to collect the Virginia sales tax. Therefore, I have enclosed a copy of Code of Virginia § 58.1-612 which sets forth the requirements which give the Commonwealth the authority to require dealers to register for the collection and remittance of the retail sales tax.
I am enclosing a registration form and instructions should your client be required to register for tax collection. I trust the copies of prior department rulings and the cited statutes and regulations will address your concerns. However, if you need further assistance, please contact ******** in my Office of Tax Policy at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12014T
Rulings of the Tax Commissioner