Document Number
Tax Type
Retail Sales and Use Tax
Computers, services, and software; Maintenance contracts
Taxability of Persons and Transactions
Date Issued
October 14, 1999


This is in reply to your letter of August 27, 1999, in which you request a ruling regarding the application of the retail sales and use tax to maintenance contracts sold to customers in Virginia.


***** (the "Taxpayer'), sells software and maintenance contracts to customers in the Commonwealth. The Taxpayer states that it currently collects and remits the 4.5% retail sales tax on its initial sales of software licenses and maintenance fees. The Taxpayer questions the application of the tax to maintenance contracts sold to its Virginia customers. Included in the maintenance contracts are telephone hotline services available to the customer on a 24-hour basis, entitlement to receive new releases of licensed software products, all generally available updates and revisions to licensed software products, the correction or replacement of licensed software, the provision of services necessary to remedy programming errors attributable to the Taxpayer, and the availability of the Taxpayer's staff to answer technical questions.


Custom and Prewritten Software: The sale, lease, or rental of a customized computer program is exempt from the tax. Code of Virginia Sec. 58.1-602 (copy enclosed) defines a custom program as "a computer program which is specifically designed and developed only for one customer.' The combining of two or more programs does not constitute a custom computer program. Prewritten software is subject to the tax and is also defined in Code of Virginia Sec. 58.1-602 as "a computer program that is prepared, held or existinq for general or repeated sale or lease.'

Maintenance Contracts: The application of the tax to maintenance contracts is set forth in Code of Virginia Sec. 58.1-609.5(9), which states that, effective January 1, 1996, maintenance contracts which provide for both tangible personal property and labor are subject to the tax based on one-half of the total charge for such contracts. A maintenance contract providing only for the provision of labor is exempt. See Virginia Tax Bulletin 95-8 (09/27/97), copy enclosed.

Based on information furnished to a member of my staff, the Taxpayer's maintenance contracts provide for the furnishing or replacement of tangible personal property and for the provision of services. Accordingly, the tax will apply to one-half of the sales price of the contracts at issue. I have enclosed Public Document 97-459 (11/18/97), which further illustrates the department's position.

With regard to the sale of software and maintenance services by electronic means, the department has traditionally held that information transferred electronically is a nontaxable service. See 23 VAC 10-210-4040, copy enclosed. While the charge for software and maintenance services provided by electronic means is not taxable, the Taxpayer must pay tax on its purchases of tangible personal property used in providing the service.

Based on thle foregoing, the Taxpayer is correctly charging the tax on the full sales price of licensed software, but must collect and remit the tax on only 50% of the total maintenance fees, which include the provision of tangible personal property and services.

I trust that our response addresses your concerns. If you should have any additional questions, please contact ***** of the department's Office of Tax Policy at *****.

Last Updated 08/25/2014 16:46