Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; R &D; Resale of government data
Topic
Manufacturing
Taxability of Persons and Transactions
Date Issued
11-29-1999
November 29, 1999
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear**************:
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer') for the period January 1995 through December 1997. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is in the business of gathering information and data from various federal government agencies by way of tape, disk, hardcopy, etc., extracting certain information from these sources, and reselling the compiled information on CD-ROM disks. The conversion of selected information and data to CD-ROM disk is out-sourced to a separate related business.
The Taxpayer was audited and assessed tax on tapes, disks, manuals, price lists, parts catalogues and other items purchased from the federal government which the Taxpayer used in compiling information. The Taxpayer takes exception to the taxing of these purchases based on its belief that these items are used in producing a "high technology' or technically innovative product and should qualify for (1) the manufacturing exemption as explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-920, and (2) the research and development exemption for innovative high technology industries in accordance with VAC 10-210-765.
DETERMINATION
Title 23 VAC 10-210-765 (copy enclosed) addresses innovative high technology industries and research and sets out the department's policy with respect to the development of computer software and states the following:
In addition, the Taxpayer believes that the information sources purchased from federal government agencies actually become a part of the final product for resale, i.e., the CD-ROM disks. While some of the information contained on the information sources purchased is included in the final product sold, I cannot agree that the actual information sources become a component part of the final product.
The Taxpayer also believes that it qualifies for the research and development exemption set forth under VAC 10-210-3070-3074. Code of Virginia Sec. 58.1-609.3(5) provides an exemption from the tax for "tangible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense.' The department addresses this exemption in VAC 10-210-3070 and defines "basic research' as "a systematic study or search in a scientific or technical field of endeavor with the ultimate goal of advancing knowledge or technology in that field.' (Emphasis added). This regulation also defines "research and development' as a systematic study or search directed toward new knowledge or new understanding of a particular scientific or technical subject and the gradual transformation of this new knowledge or new understanding into a usable product or process.
Based on the department's established policy regarding exempt research, and research and development, I do not find that the Taxpayer's process of compiling information from various sources and transferring the information into a different medium qualifies as exempt research and development activities.
For all the reasons set forth above, I find no basis for revising the audit. The Taxpayer will be sent an updated bill with interest accrued through the date of its protest letter. The bill should be paid within 30 days to avoid the accrual of additional interest. If you should have any questions regarding this matter, please contact ***** Office of Tax Policy, at *****.
Sincerely,
Danny Payne
Tax Commissioner
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear**************:
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer') for the period January 1995 through December 1997. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is in the business of gathering information and data from various federal government agencies by way of tape, disk, hardcopy, etc., extracting certain information from these sources, and reselling the compiled information on CD-ROM disks. The conversion of selected information and data to CD-ROM disk is out-sourced to a separate related business.
The Taxpayer was audited and assessed tax on tapes, disks, manuals, price lists, parts catalogues and other items purchased from the federal government which the Taxpayer used in compiling information. The Taxpayer takes exception to the taxing of these purchases based on its belief that these items are used in producing a "high technology' or technically innovative product and should qualify for (1) the manufacturing exemption as explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-920, and (2) the research and development exemption for innovative high technology industries in accordance with VAC 10-210-765.
DETERMINATION
Title 23 VAC 10-210-765 (copy enclosed) addresses innovative high technology industries and research and sets out the department's policy with respect to the development of computer software and states the following:
-
- The production of computer software in tangible form for sale or resale generally constitutes industrial manufacturing. Therefore, the industrial manufacturing exemptions set forth in 23 VAC 10-210-920 are generally applicable to such production. However, the exemptions are not available for persons who produce computer software for purposes other than for sale or resale or computer software that does not constitute tangible personal property. However, as explained in 23 VAC 10-210-920, the industrial manufacturing exemption does not apply when the tangible personal property produced is not for sale or resale, such as the production of computer software for in-house use. The industrial manufacturing exemptions also do not apply to the production of computer software that does not constitute tangible personal property, i.e., custom computer programs.
Examples of exempt tangible personal property used directly in the production of computer software for sale or resale include, but are not limited to, computer hardware and software used to encode magnetic tapes or other storage medium or to otherwise produce finished software products. Also exempt is the tangible medium that the finished products will take (tapes, disks, etc.).
- The production of computer software in tangible form for sale or resale generally constitutes industrial manufacturing. Therefore, the industrial manufacturing exemptions set forth in 23 VAC 10-210-920 are generally applicable to such production. However, the exemptions are not available for persons who produce computer software for purposes other than for sale or resale or computer software that does not constitute tangible personal property. However, as explained in 23 VAC 10-210-920, the industrial manufacturing exemption does not apply when the tangible personal property produced is not for sale or resale, such as the production of computer software for in-house use. The industrial manufacturing exemptions also do not apply to the production of computer software that does not constitute tangible personal property, i.e., custom computer programs.
In addition, the Taxpayer believes that the information sources purchased from federal government agencies actually become a part of the final product for resale, i.e., the CD-ROM disks. While some of the information contained on the information sources purchased is included in the final product sold, I cannot agree that the actual information sources become a component part of the final product.
The Taxpayer also believes that it qualifies for the research and development exemption set forth under VAC 10-210-3070-3074. Code of Virginia Sec. 58.1-609.3(5) provides an exemption from the tax for "tangible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense.' The department addresses this exemption in VAC 10-210-3070 and defines "basic research' as "a systematic study or search in a scientific or technical field of endeavor with the ultimate goal of advancing knowledge or technology in that field.' (Emphasis added). This regulation also defines "research and development' as a systematic study or search directed toward new knowledge or new understanding of a particular scientific or technical subject and the gradual transformation of this new knowledge or new understanding into a usable product or process.
Based on the department's established policy regarding exempt research, and research and development, I do not find that the Taxpayer's process of compiling information from various sources and transferring the information into a different medium qualifies as exempt research and development activities.
For all the reasons set forth above, I find no basis for revising the audit. The Taxpayer will be sent an updated bill with interest accrued through the date of its protest letter. The bill should be paid within 30 days to avoid the accrual of additional interest. If you should have any questions regarding this matter, please contact ***** Office of Tax Policy, at *****.
Sincerely,
Danny Payne
Tax Commissioner
Rulings of the Tax Commissioner