03-37 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Patent and Software license, selling vision correction equipment

Topic

Basis of Tax

Property Subject to Tax

Date Issued

04-15-2003

April 15, 2003

Re: § 58.1-1821 Reconsideration: Retail Sales and Use Tax

Dear *************:

This is in response to your letter requesting reconsideration of the Department's determination of May 15, 2000, upholding the retail sales and use tax assessment issued to *************** (the "Taxpayer") for the period July 1996 through March 1999. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer requests reconsideration of the tax applied to the royalties (hereinafter, the "license fee") that it receives each time one of its patented ophthalmic surgical methods is used to perform laser vision correction surgery using the laser system and software (the "System") manufactured and sold by the Taxpayer.

You maintain that the Taxpayer operates two separate lines of business: one for the sale of equipment and the other for licensing patented surgical methods. You also indicate that separate legal agreements are completed for the System sales and the license fees. You rely upon the tax treatment set out in Public Documents (P. D.) 00-102 (5/25/00) and 01-116 (9/11/01) to support your position.

DETERMINATION

In the Department's original determination, the Tax Commissioner stated that:

- 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, Section 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.

Based on my review of the facts in this case, I find no basis to overturn the prior determination. Notwithstanding that the license fees are separately stated on the invoice and written on a separate agreement, the language used in the sales agreement directly links the license with the sale of tangible personal property.

As provided in P.D. 00-102, "the department looks to the structure of the transactions. If there are two or more contracts which are separately negotiated and can stand alone, the department recognizes these as separate contracts and taxes them accordingly." [Emphasis added.] In the instant case, the license fees do not stand alone. Again, in P.D. 01-116, the Department noted that "[s]eparate agreements which are independent of each other and any sale of prewritten computer software may be treated as separate transactions." [Emphasis added.] In the instant case, the license fees are not independent of the sale of the Systems.

You also indicate that the patent license fees are for use of surgical methods from persons that do not own the vision correction equipment. You have failed to show, however, that any of the assessed license charges were not billed in connection with the sale of tangible personal property. In regard to your "same pricing structure" argument for "selling vision correction equipment both in the U.S. and abroad," it is of no relevance to this issue that "no license fees for surgical procedures/methods are collected from customers outside the U.S." In this case, the sales agreement establishes that a Patent and Software license is required in order to use the System and, therefore, constitutes a part of the sale of the System.

Conclusion

Based on this determination, the assessment is again found to be correct. Because the assessment is paid in full, no further action is required.

The Code of Virginia sections, regulations and public documents cited are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this final determination, you may contact *********** in the Department's Office of Policy and Administration, Appeals and Rulings, at ***********.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

Rulings of the Tax Commissioner