Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; Maintenance agreement.
Topic
Taxability of Persons and Transactions
Date Issued
02-09-1998
February 9, 1998
Dear**********:
This will reply to your letter in which you seek correction of an assessment issued to ***** (The "Taxpayer'), for the period August 1991 through June 1997.
FACTS
The Taxpayer, an accounting firm, was assessed use tax on amounts paid to a software vendor for maintenance agreements on tax preparation software. The Taxpayer states that the charges were for telephone support services only and that any tangible software updates provided by the vendor were billed separately. For this reason, the Taxpayer asserts that the maintenance agreements provide for labor only and are exempt under Title 23 of the Virginia Administrative Code (VAC) 10-210-910(B) (copy enclosed).
DETERMINATION
Title 23 VAC 10-210-910(A) defines "maintenance contract' as "any agreement whereby a person agrees to maintain or repair an item of tangible personal property over a specified period of time for a fee which is determined at the time the agreement is entered into.' This regulation explains that charges for maintenance agreements that call for the provision of labor only are exempt from sales and use tax. However, charges for maintenance agreements which provide for both labor and parts are taxable on one-half the total charge for the contract. Prior to January 1, 1996, the entire charge was taxable.
The department has published a number of public documents which address software maintenance agreements and state that charges for such agreements are taxable when tangible software updates are included in the agreements. The enclosed copy of P.D. 96-49 (4/17/96) discusses a case in which a taxpayer entered into a contract for telephone support services that also included the provision of tangible software updates. Although a separate charge was billed for the updates, the support agreement was considered taxable because the contract specifically stated that tangible updates would be provided.
The Taxpayer cites P.D. 87-209 (9/15/87) to support its argument that maintenance agreements that provide for telephone support services are exempt. While this is true, it is important to note that the agreement addressed in P.D. 87-209 provided for telephone support services only. There was no provision in the agreement for tangible personal property in the form of software updates. While I agree with the Taxpayer's interpretation of our policy, the Taxpayer has not provided copies of the maintenance contracts to support its position. I understand the department's ***** District Office previously requested these documents but the Taxpayer was unable to provide them. The Taxpayer's failure to provide the requested documentation means it has not met its burden to prove the assessment is erroneous. Under Code of Virginia Sec. 58.1-623, "[a]ll sales or leases are subject to the tax until the contrary is established.'
The Taxpayer will be allowed 90 days to provide this documentation to the department's ***** District Office. The Taxpayer may contact that office at when it has the necessary information. If the contracts clearly do not provide for software updates in tangible form, the disputed charges will be removed from the audit. If the contracts indicate that software updates may be provided in tangible form, the charges for the contracts will be taxable, regardless that a separate charge is invoiced for the updates, and the charges will remain in the audit assessment. If you have any questions, please contact ***** in the Office of Tax Policy at *****.
Rulings of the Tax Commissioner