Tax Type
Retail Sales and Use Tax
Description
Resales; Food purchases for resale at party exempt
Topic
Taxability of Persons and Transactions
Date Issued
02-13-1998
February 13, 1998
Dear**************:
This will reply to your letter in which you seek correction of the retail sales and use tax audits of your clients, ***** (the "Taxpayers'), for the various audit periods between July 1994 and April 1997. There are four issues the Taxpayers feels have been assessed in error.
FACTS
The Taxpayers are franchisees of ***** facilities. ***** is a high-tech, live-action laser game played in an enclosed arena. The first issue of contention is the purchase of computer game equipment and computer software to run the laser games. The software is licensed to each Taxpayer and is installed in the computer equipment prior to delivery. The computer equipment and software license is itemized separately on the invoice to the Taxpayers. The Taxpayers are of the opinion that since they do not receive the software in tangible form, the software license fee is not subject to the tax.
The Taxpayers are also taking exception to the application of tax to the purchase of graphic art used by the Taxpayers in flyers, invitations, postcards, and other promotional items. The Taxpayer takes the position that they are purchasing advertising and the seller, i.e. graphic artist, is acting as an advertising agency and is liable for the tax on all of their purchases.
The Taxpayers also offer the provision of food and cakes for parties as a service to their customers. The Taxpayers claim that they paid the sales tax on the food at the time of purchase. The Taxpayers treat the payment by the customer for these services as a reimbursement only, which includes the sales taxes paid to the food vendor. The Taxpayers request that these sales be removed from the audit findings.
The Taxpayers are also requesting waiver of penalty assessed on the sales portion of the audits.
DETERMINATION
Software Licensing
The auditor assessed the tax on the software license agreement based on Title 23 Virginia Administrative Code (VAC) 10-210-763, which explains that the tax applies to sales and leases of prewritten software. Under current law, the department treats license fees for prewritten software as a taxable lease or sale when the licensing agreement conveys the right to use the software and the software is transferred to the customer in tangible form. On the other hand, computer programs transmitted by intangible means, i.e. telephone lines, are deemed to be nontaxable services.
In the present case, the Taxpayers contends that the licensed software in question is not delivered in tangible form and therefore is not taxable. The software is installed on the computer equipment purchased by the Taxpayer prior to delivery. It is the department's position that the software is delivered to the Taxpayers in tangible form in this case. For this reason, the department finds that the software is delivered to the Taxpayers in tangible form and is therefore taxable.
Graphic Art
VAC 10-210-41 addresses advertising businesses and provides that the tax does not apply to charges by an advertising business for professional services in the planning, creating, or placing advertising in the media. VAC 10-210-40 defines an advertising business to mean "any person or group of persons providing advertising' as defined herein.' "Advertising' is defined in VAC 10-210-40 as:
Food Provisions
As understood by this office, the Taxpayers purchase food to serve at parties on their premises. According to the auditor, the food purchase invoices reviewed indicated that no tax was paid on the food at the time of purchase. The auditor also indicates that the Taxpayers marks up the food for sale to the customer. This transaction falls within the definition of "retail sale' provided in Code of Virginia ***** Sec. 58.1-602, copy enclosed. If the Taxpayers can provide records showing that the sales tax was paid on the food at the time of purchase, the department will be glad to credit the sales tax paid against the sales tax assessed in the audit. In the future, the Taxpayers should purchase all food for resale tax exempt using Form ST-10, copy enclosed, and collect the tax on all sales to customers.
Penalty
The Taxpayers are requesting waiver of audit penalty on the sales portion of the audit liability. Generally, absent indication of fraud, penalty will be waived on first audit of all Taxpayer. Due to the fact the Taxpayers have demonstrated that there is no evidence of fraud, I will agree to waive all penalties assessed.
If you should have any questions concerning this determination, please call ***** Office of Tax Policy, at *****.
Dear**************:
This will reply to your letter in which you seek correction of the retail sales and use tax audits of your clients, ***** (the "Taxpayers'), for the various audit periods between July 1994 and April 1997. There are four issues the Taxpayers feels have been assessed in error.
FACTS
The Taxpayers are franchisees of ***** facilities. ***** is a high-tech, live-action laser game played in an enclosed arena. The first issue of contention is the purchase of computer game equipment and computer software to run the laser games. The software is licensed to each Taxpayer and is installed in the computer equipment prior to delivery. The computer equipment and software license is itemized separately on the invoice to the Taxpayers. The Taxpayers are of the opinion that since they do not receive the software in tangible form, the software license fee is not subject to the tax.
The Taxpayers are also taking exception to the application of tax to the purchase of graphic art used by the Taxpayers in flyers, invitations, postcards, and other promotional items. The Taxpayer takes the position that they are purchasing advertising and the seller, i.e. graphic artist, is acting as an advertising agency and is liable for the tax on all of their purchases.
The Taxpayers also offer the provision of food and cakes for parties as a service to their customers. The Taxpayers claim that they paid the sales tax on the food at the time of purchase. The Taxpayers treat the payment by the customer for these services as a reimbursement only, which includes the sales taxes paid to the food vendor. The Taxpayers request that these sales be removed from the audit findings.
The Taxpayers are also requesting waiver of penalty assessed on the sales portion of the audits.
DETERMINATION
Software Licensing
The auditor assessed the tax on the software license agreement based on Title 23 Virginia Administrative Code (VAC) 10-210-763, which explains that the tax applies to sales and leases of prewritten software. Under current law, the department treats license fees for prewritten software as a taxable lease or sale when the licensing agreement conveys the right to use the software and the software is transferred to the customer in tangible form. On the other hand, computer programs transmitted by intangible means, i.e. telephone lines, are deemed to be nontaxable services.
In the present case, the Taxpayers contends that the licensed software in question is not delivered in tangible form and therefore is not taxable. The software is installed on the computer equipment purchased by the Taxpayer prior to delivery. It is the department's position that the software is delivered to the Taxpayers in tangible form in this case. For this reason, the department finds that the software is delivered to the Taxpayers in tangible form and is therefore taxable.
Graphic Art
VAC 10-210-41 addresses advertising businesses and provides that the tax does not apply to charges by an advertising business for professional services in the planning, creating, or placing advertising in the media. VAC 10-210-40 defines an advertising business to mean "any person or group of persons providing advertising' as defined herein.' "Advertising' is defined in VAC 10-210-40 as:
-
- "Advertising' means the planning, creating, or placing of advertising in newspapers, magazines, billboards, broadcasting or other media, including without limitation, the providing of concept, writing, graphic design, mechanical art, photography and production supervision.
- "Advertising' means the planning, creating, or placing of advertising in newspapers, magazines, billboards, broadcasting or other media, including without limitation, the providing of concept, writing, graphic design, mechanical art, photography and production supervision.
Food Provisions
As understood by this office, the Taxpayers purchase food to serve at parties on their premises. According to the auditor, the food purchase invoices reviewed indicated that no tax was paid on the food at the time of purchase. The auditor also indicates that the Taxpayers marks up the food for sale to the customer. This transaction falls within the definition of "retail sale' provided in Code of Virginia ***** Sec. 58.1-602, copy enclosed. If the Taxpayers can provide records showing that the sales tax was paid on the food at the time of purchase, the department will be glad to credit the sales tax paid against the sales tax assessed in the audit. In the future, the Taxpayers should purchase all food for resale tax exempt using Form ST-10, copy enclosed, and collect the tax on all sales to customers.
Penalty
The Taxpayers are requesting waiver of audit penalty on the sales portion of the audit liability. Generally, absent indication of fraud, penalty will be waived on first audit of all Taxpayer. Due to the fact the Taxpayers have demonstrated that there is no evidence of fraud, I will agree to waive all penalties assessed.
If you should have any questions concerning this determination, please call ***** Office of Tax Policy, at *****.
Rulings of the Tax Commissioner