Tax Type
Retail Sales and Use Tax
Description
Royalty fees; Laser vision correction software
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
05-14-2000
May 15, 2000
Re: § 58.1-1821 Application: Retail Sales and 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 of July 1996 through March 1999. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is in the business of developing patented ophthalmic surgical methods to correct refractive vision disorders. The Taxpayer also manufactures and sells the laser systems and software (the "System") used by customers to perform the surgical methods developed by the Taxpayer. The Taxpayer sells its laser systems and software worldwide. The Taxpayer also receives a royalty fee each time one of its patented ophthalmic surgical methods is used to perform laser vision correction surgery with the System. The System may also be used, without utilizing the Taxpayer's surgical methods, to repair damaged corneas.
The Taxpayer was audited and assessed tax and interest on all royalty fees collected from Virginia vision centers. The Taxpayer is taking exception to the audit finding based on its belief that the royalty fees collected by the Taxpayer are not connected to the System sold by the Taxpayer, but rather represent the intangible right to utilize the Taxpayer's surgical methods.
DETERMINATION
The term "sale" is defined in Code of Virginia § 58.1-602 to mean:
Any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration....
The department traditionally has held that royalties paid by a taxpayer which provide not only the intangible or intellectual rights, but also the provision of tangible personal property are analogous to a lease of tangible personal property. Under this situation, the royalty payments are taxable. While the department's regulations do not expressly address the sales tax application to royalties, the department's policy with respect to this issue has been addressed in numerous rulings issued prior to the audit period in question. See, for example, Public Document (P.D.) 94-209 (7/6/94), copy enclosed.
In the present situation, the Taxpayer's customers pay a royalty fee each time they use one of the Taxpayer's surgical procedures, or methods, to perform ophthalmic laser surgery. The surgical procedures cannot be conducted except with the System and software sold by the Taxpayer. The Taxpayer's sales agreement states that "use of the . . . System is prohibited in the absence of a valid . . . Patent and Software License." In addition, § B(1) of the license agreement provides "Use of the System to perform any procedure covered by the Patents is prohibited unless such use is authorized by a valid . . . Patent and Software License. Such license may only be granted by the execution and delivery . . . of a . . . Patent and Software License." Based on the language in the agreements, the royalty fees are paid in connection with the provision of the software and the System. Therefore, in keeping with departmental policy with respect to royalty fees, such fees are taxable.
Based on all of the above, l find the department's audit assessment correct as issued. Please forward your payment in the amount of $**** to the department's Office of Tax Policy, P. O. Box 1880, Richmond, Virginia, 23218-1880, within 30 days from the date of this letter. If payment is not received within the allotted time, interest will accrue on the outstanding balance. If you should have any questions, please contact *****, Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25503K
Re: § 58.1-1821 Application: Retail Sales and 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 of July 1996 through March 1999. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is in the business of developing patented ophthalmic surgical methods to correct refractive vision disorders. The Taxpayer also manufactures and sells the laser systems and software (the "System") used by customers to perform the surgical methods developed by the Taxpayer. The Taxpayer sells its laser systems and software worldwide. The Taxpayer also receives a royalty fee each time one of its patented ophthalmic surgical methods is used to perform laser vision correction surgery with the System. The System may also be used, without utilizing the Taxpayer's surgical methods, to repair damaged corneas.
The Taxpayer was audited and assessed tax and interest on all royalty fees collected from Virginia vision centers. The Taxpayer is taking exception to the audit finding based on its belief that the royalty fees collected by the Taxpayer are not connected to the System sold by the Taxpayer, but rather represent the intangible right to utilize the Taxpayer's surgical methods.
DETERMINATION
The term "sale" is defined in Code of Virginia § 58.1-602 to mean:
Any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration....
The department traditionally has held that royalties paid by a taxpayer which provide not only the intangible or intellectual rights, but also the provision of tangible personal property are analogous to a lease of tangible personal property. Under this situation, the royalty payments are taxable. While the department's regulations do not expressly address the sales tax application to royalties, the department's policy with respect to this issue has been addressed in numerous rulings issued prior to the audit period in question. See, for example, Public Document (P.D.) 94-209 (7/6/94), copy enclosed.
In the present situation, the Taxpayer's customers pay a royalty fee each time they use one of the Taxpayer's surgical procedures, or methods, to perform ophthalmic laser surgery. The surgical procedures cannot be conducted except with the System and software sold by the Taxpayer. The Taxpayer's sales agreement states that "use of the . . . System is prohibited in the absence of a valid . . . Patent and Software License." In addition, § B(1) of the license agreement provides "Use of the System to perform any procedure covered by the Patents is prohibited unless such use is authorized by a valid . . . Patent and Software License. Such license may only be granted by the execution and delivery . . . of a . . . Patent and Software License." Based on the language in the agreements, the royalty fees are paid in connection with the provision of the software and the System. Therefore, in keeping with departmental policy with respect to royalty fees, such fees are taxable.
Based on all of the above, l find the department's audit assessment correct as issued. Please forward your payment in the amount of $**** to the department's Office of Tax Policy, P. O. Box 1880, Richmond, Virginia, 23218-1880, within 30 days from the date of this letter. If payment is not received within the allotted time, interest will accrue on the outstanding balance. If you should have any questions, please contact *****, Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25503K
Related Documents
Rulings of the Tax Commissioner