Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; Computer purchased under contract
Topic
Taxability of Persons and Transactions
Date Issued
02-14-1997
February 14, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This is in reply to your letter in which you seek correction of a retail sales and use tax assessment on behalf of your client, ********(the "Taxpayer") for the period September 1992 through June 1995.
FACTS
The Taxpayer entered into a subcontract for the purchase of a miniature signal processing computer. The auditor assessed tax on the entire cost of the computer as stated in the subcontract. You contend that the subcontract is in part a contract for design and development services and in part a procurement contract, with the major portion of the subcontract being the services portion. You state that no tangible personal property was actually produced or delivered during the audit period, and payments made by the Taxpayer during the audit period were solely for development and design services, which are not taxable. Furthermore, you indicate the department is attempting to impose tax before the occurrence of a taxable event; during the period at issue, there was no certainty that any tangible property would be created or delivered.
DETERMINATION
The department has previously ruled that in considering the tax treatment of a contract, the "true object" test, set out in Virginia Regulation (VR) 630-10-97.1 is used to determine whether the contract is for the sale of tangible personal property or for the provision of services.
A review of the contract's statement of work reveals that the true object of the contract at issue is the provision of tangible personal property. The reason the Taxpayer entered into the contract was to obtain a miniaturized signal processing computer. Consequently, the sale of the computer to the Taxpayer is subject to the sales tax.
Code of Virginia § 58.1-602 defines "sales price" as the total amount for which tangible personal property or services are sold, including any services that are a part of the sale. The law specifically provides that sales price is computed without a deduction for cost of the property sold, cost of materials used, or cost of labor or services. Based on this statutory language, the total amount for which the computer system was sold, which may include labor and service costs incurred in designing and developing the system, is subject to the sales and use tax. This is true even if the seller separately stated in the contract charges for various services and items of tangible personal property provided.
You maintain that the proper incidence of taxation is the actual sale and delivery of the tangible personal property, i.e., the computer system. The design and development services are the true object of the contract until such time as production and delivery of the product occur. Payments made during the audit period were for services only and are not subject to the tax.
I cannot agree with your analysis. As previously stated, the contract is for the delivery of a tangible product. The services you seek to exempt (design and development services) represent the cost of labor and services incurred in the production of that product. Therefore, the services were properly held taxable as a component of the total amount for which the computer system was sold. Any other interpretation is inconsistent with the definition of "sales price" under Code of Virginia § 58.1-602.
Accordingly, there is no basis to revise the audit. The Taxpayer will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest. If you have any questions regarding this matter, you may contact*******at*********** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11058F
Rulings of the Tax Commissioner