Tax Type
Retail Sales and Use Tax
Description
Software; Modification of prewritten program; Maintenance and support fees
Topic
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
04-21-1999
April 21, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in response to your letter seeking correction of the retail sales and use tax audit assessment issued to ***** (the Taxpayer). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer provides payroll services and related services. An audit for the period May 1995 through May 1998 resulted in the assessment of use tax on various untaxed purchases of tangible personal property used in its operations.
The Taxpayer takes exception to the use tax assessed on monthly fees charged by a supplier for the license or right to use a certain computer software program and on fees charged for modifications, updates and enhancements to the program. The Taxpayer maintains that the restrictions placed on it by the software supplier regarding its possession and use of this program would classify it as "nontangible personal property.' According to the Taxpayer, it never took title to the software application. In addition, installation of the program was performed by the software supplier at the Taxpayer's premises on the Taxpayer's computer system. Moreover, no diskettes or other medium containing the program were furnished to the Taxpayer.
The Taxpayer claims that all customized applications acquired for the computer program were conveyed by electronic means only. The Taxpayer also claims that all updates and enhancements for maintaining the computer program are available only via modem from the supplier's bulletin board service. For these reasons, the Taxpayer contends that the contested charges for the prewritten computer program, updates, modifications, and enhancements are not subject to the sales and use tax.
DETERMINATION
Code of Virginia § 58.1-609.6(7) provides an exemption from the retail sales and use tax for custom programs as defined in § 58.1-602. A custom program is "a computer program which is specifically designed and developed only for one customer. The combining of two or more prewritten programs does not constitute a custom computer program. A prewritten program that is modified to any degree remains a rewritten program and does not become custom.' Emphasis added.
Code of Virginia § 58.1-602 also defines a "prewritten program' to mean "a computer program that is prepared, held or existing for general or repeated sale or lease, including a computer program developed for in-house use and subsequently sold or leased to unrelated third parties.' Thus, the computer program at issue in this case is clearly a prewritten computer program as it is held by the supplier for repeated sale.
The statute contains no exemption from the tax for the sale of a prewritten computer program transferred via a disc, CD, magnetic tape, or other tangible medium. Rather, such sales constitute the taxable transfer of tangible personal property. However, prewritten computer programs transmitted by intangible means, i.e., over telephone lines or keyed directly into a computer through its keyboard, have consistently been deemed by the department to constitute nontaxable services. See the enclosed Public Documents (P.D.) 83-90 (5/11/83), 96-72 (5/1/96) and 96-143 (6/20/96).
In this case, the Taxpayer purchased prewritten computer software which was transferred via installation by the software supplier, i.e., the supplier loaded the prewritten computer program onto Taxpayer-owned hardware. As no tangible medium was used to transfer the computer program to the Taxpayer, the sale constituted a nontaxable service. Accordingly, the monthly fees charged for the use of this prewritten computer program are not taxable.
In regard to customized applications purchased by the Taxpayer to change certain features of the prewritten computer program, this customization does not constitute a custom program as defined in § 58.1-602. Rather, the customized applications constitute modifications of prewritten programs and are therefore treated as part of such prewritten computer programs. Notwithstanding this, I would note that Code of Virginia § 58.1-609.6(6) provides an exemption from the retail sales and use tax for "[a]n amount separately charged for labor or services rendered in connection with the modification of prewritten programs....' As these modifications are separately charged on the supplier's invoices, the above cited exemption applies to such charges.
The last issue concerns the maintenance and support fees. Title 23 of the Virginia Administrative Code 10-210-910 defines a "maintenance contract' to mean "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.' Emphasis added.
Furthermore, the application of the tax to maintenance contracts will generally follow the same application of the tax to the property for which such contracts are intended. See the enclosed P.D. 95-49 (3/20/95). As the prewritten computer program in this case constituted the sale of a nontaxable service, maintenance and support performed on such program will also be considered exempt services regardless of whether the updates or enhancements are transferred using a tangible or intangible medium.
Based on the foregoing, the charges at issue constitute nontaxable charges and will be removed from the department's audit. Accordingly, the department will abate the contested bills, i.e.,
However, I must note that the Taxpayer has not paid the uncontested assessments. Currently, bill ***** has an outstanding balance of *****, and bill ***** has an outstanding balance of *****. To avoid further interest charges, the Taxpayer should pay the uncontested liabilities of ***** within 30 days of the date of this letter.
Please send such payment to the attention of ***** at the Department of Taxation, Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions about this response, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16943R
Rulings of the Tax Commissioner