Tax Type
Retail Sales and Use Tax
Description
Application of sales and use taxes; Out-of-state vendors
Topic
Taxability of Persons and Transactions
Date Issued
01-31-1997
January 31, 1997
Re: § 58.1-1821 Application: Sales & Use Tax
Dear***********
This will reply to your most recent letter in which you seek a correction of the department's use tax assessment issued to ***************(the "Taxpayer"), for the period June 1991 through February 1994. I apologize for the delay in our response.
FACTS
The Taxpayer is in the business of developing, modifying, selling and supporting point of sale computer software packages for retail chain stores. The department's audit disclosed that the Taxpayer's lump sum charges for software packages included prewritten software. The department's auditor, unable to distinguish modification costs versus tangible personal property costs, assessed tax on the lump sum charge for the product. The Taxpayer contends that the charges in question are for modification services and are not subject to the tax under Code of Virginia § 58.1-609.5(6).
Additionally, the Taxpayer contends that it did not establish nexus with Virginia prior to April 1992. The Taxpayer states that, although it did do business with Virginia customers, the solicitation of Virginia business occurred out-of-state, and any work performed by the Taxpayer was also done outside Virginia. The Taxpayer states that it had no payroll or property within Virginia. Accordingly, the Taxpayer states that the department's assessment establishing June 1991 as the beginning date of tax liability is in error.
Based on these issues, the Taxpayer requests waiver of the department's assessment.
Determination
Development Fees
Code of Virginia § 58.1-602 defines the term "sale" as "any transfer of title or possession ... of tangible personal property and any rendition of a taxable service for a consideration ...." Code of Virginia § 58.1-609.5(6), however, provides an exemption for amounts separately charged for labor or services rendered in connection with the modification of prewritten software.
While the Taxpayer contends that the invoices included in the audit are composed entirely of modification charges, the department's auditor was unable to verify that the charges were actually related to the modification of prewritten software. Accordingly, on the basis that the charges in the invoices may have been composed of prewritten software as well as modification fees to such software, and no proof was submitted to define the makeup of the charges, or to show that such charges were indeed exclusively modification fees, the auditor was correct in including the charges in the audit.
Code of Virginia § 58.1-205 provides that tax assessments issued by the department are deemed prima facie correct. The burden of proving that an assessment is erroneous is on the taxpayer. I will have the department's auditor return to the Taxpayer's location to determine the value of any prewritten software versus modification fees. If the Taxpayer can provide information which will detail the amount related to modification fees, l will agree to remove such fees from the audit. In the absence of such proof, l must conclude that the assessment is valid for this portion of the department's audit.
Nexus
Comments by the department's auditor indicate that during the audit, in a discussion with the Taxpayer's Assistant Controller and other personnel, the auditor was told that the Taxpayer's personnel visited a specific Virginia entity in June 1991, for the purposes of soliciting business. The auditor, on the basis of this information, related to the Assistant Controller that June 1991 would be used as the beginning date of the audit liability.
Based on this information, it appears the Taxpayer established nexus in Virginia in June 1991. Since the department's auditor will be revisiting the Taxpayer to review documentation regarding the modification fees related to prewritten software, l will also have the auditor review any documentation the Taxpayer may wish to present relating to nexus in Virginia.
With regard to the Taxpayer's letter concerning taxes self-assessed by its customers, and based upon a discussion with the auditor, l will allow an adjustment to the department's audit for tax and interest based on the listed measure of ********** .
The department's auditor will review all available records relating to the issues discussed, and make the appropriate adjustments to the department's audit. If, after a review of the revised audit, the Taxpayer wishes to further protest the results, the Taxpayer may file an application for correction to the Tax Commissioner. If you should have any questions regarding this matter, please contact ******** of the department's Office of Tax Policy at****************
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8828Q
Rulings of the Tax Commissioner