Tax Type
Retail Sales and Use Tax
Description
Resales; License fee
Topic
Taxability of Persons and Transactions
Date Issued
09-17-1997
September 17, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This will reply to your letter in which you seek correction of an assessment issued to your client, ********(the "Taxpayer"), for the period January 1993 through April 1995. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a business consultant that also sells computer software. An audit of the Taxpayer resulted in an assessment that includes use tax on license fees paid to another party (the "Licensor") under a joint marketing agreement. The license fees are paid for the use of material from a book published by the Licensor. The material from this book is incorporated into a software package developed by the Taxpayer and its use is governed by terms contained in the joint marketing agreement.
The Taxpayer states that it did not actually purchase a book from the Licensor for use in developing the software. Rather, the Taxpayer maintains that it pays the license fees for the right to use intellectual material contained in the Licensor's book. Since there was no transfer of tangible personal property from the Licensor to the Taxpayer, the Taxpayer feels that a taxable "sale" did not occur. The department's auditor indicates that the Taxpayer received a book from the Licensor which was used by the Taxpayer to develop the software. Since a transfer of tangible personal property took place, the license fees are taxable.
DETERMINATION
The language in the joint marketing agreement between the Taxpayer and the Licensor indicates that the Licensor grants the Taxpayer an exclusive license "to use, copy, modify, market, support and sublicense end-users to use (internally) the TSG/SRM (including all updates, enhancements, modifications, improvements, conversions, add-ons and future releases ...) in paper-based and computer software formats and all other electronic formats, now existing or existing in the future .....
The joint marketing agreement clearly entitles the Taxpayer to tangible personal property in exchange for a consideration (the license fees). The Taxpayer states in its letter that it developed software "to automate the execution of the procedures contained in the Book." The Taxpayer also states that the intellectual property owned by the licensor was textual in nature. However, the license agreement does not restrict the Taxpayer's use of the book to resale activities. The language in the agreement allows the Taxpayer a much broader use of the book that includes activities that are considered taxable for sales and use tax purposes. Based on the information provided, the Taxpayer possessed the book or portions of the book in tangible form for use in developing the software. The joint marketing agreement provides for the payment of license fees by the Taxpayer to the Licensor for the use of tangible personal property.
Code of Virginia § 58.1-602 defines "Sale" as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, ... of tangible personal property ... for a consideration...." "Retail sale" is defined in Code of Virginia § 58.1-602 as "a sale to any person for any purpose other than for resale in the form of tangible personal property..." Based on the fact that the Taxpayer was entitled to use of the book, I find that a "sale" of tangible personal property occurred and the resale exemption is not available. Accordingly, the assessment is correct.
Due to the length of time taken to respond to your appeal, l will waive the accrual of interest on the outstanding balance if paid within sixty days. Your payment for the current balance of the assessment of ***** may be mailed to******** in the Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions concerning this determination, please contact ******* at ******** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11555S
Rulings of the Tax Commissioner