Tax Type
Retail Sales and Use Tax
Description
License fees charged in connection with the use of laser systems
Topic
Appropriateness of Audit Methodology
Property Subject to Tax
Date Issued
10-27-2003
October 27, 2003
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ************** (the "Taxpayer") as a result of an audit for the period October 1997 through September 2000. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer provides laser corrective surgery. As a result of the audit, the Taxpayer was assessed tax on various purchases of tangible personal property and licenses used in the provision of its medical services.
The Taxpayer contests the tax assessed on license fees charged for the right to perform patented laser vision corrective ("LVC") surgical procedures using an authorized laser system. The Taxpayer maintains that these LVC license fees are only for an intangible right and should not be taxed in connection with the sale of the laser system to the Taxpayer. As additional support for not taxing those license fees, the Taxpayer cites the exempt status given to the author royalties set out in Public Document (P.D.) 98-194 (11/24/98).
According to the Restrictions clause of the sales agreement presented, the Taxpayer's use of the laser system is subject to the Taxpayer's "agreement to the terms of the separate . . . Patent License (the ‘License Agreement’). The License Agreement must be executed prior to installation of the System." The face of the sales agreement also sets out that "use of the system is prohibited in the absence of a valid . . . patent license."
According to the Intellectual Property Rights clause of the License Agreement provided, the "Patents cover apparatus and methods for performing ophthalmic laser surgery. Use of the System to perform any procedure by the Patents is prohibited unless such use is authorized by a valid . . . Patent License." As stated in the Ownership of Intellectual Property Rights clause of the License Agreement, the "use by Licensee of any of these intellectual Property rights is permitted only for the purposes authorized in this License and only in connection with use of the System, and upon termination of this License for any reason such authorization shall cease." [Emphasis added.]
DETERMINATION
Pursuant to Va. Code § 58.1-603, the sales tax is imposed upon the gross sales price of tangible personal property sold, leased or rented at retail. Virginia Code § 58.1-602 defines the term "sales price" to mean "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale . . . without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever." [Emphasis added.] Therefore, a required license charged in connection with the retail sale or lease of software or hardware is part of the sales price of the tangible personal property and is taxable.
The issue in this case is analogous to the issue addressed in P.D. 00-76 (5/15/00) and reaffirmed in P.D. 03-37 (4/15/03). In that case, the seller of laser systems is paid royalty fees from customers that use its patented ophthalmic surgical methods to perform LVC surgery using its laser systems. The Department concluded from the language of the agreements that the license or "royalty fees are paid in connection with the provision of software and the System. Therefore, in keeping with departmental policy with respect to royalty fees, such fees are taxable."
For the same reasons cited above for P.D. 00-76, I find that the contested license fees in the instant case are taxable. Notwithstanding that the License Agreement is set out as a separate document, the language of that agreement requires the patent license to be directly linked to the laser system sales agreement. Likewise, as demonstrated above, the language used in the sales agreement requires the laser system to be directly linked to the patent license. Clearly, because the System cannot be operated without a patent license and the patent license is useless without the System, both agreements are intertwined and thus dependent upon each other.
In regard to P.D. 98-194, authors were paid for professional services rendered in updating and revising legal manuscripts. Those payments, however, did not constitute taxable royalties for the use of tangible personal property. Accordingly, they are demonstrably different from the patent license fees at issue in the instant case because the contested license fees are charged in connection with the use of laser systems.
Based on this determination, the assessment is correct. A consolidated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of this letter. Please remit your payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *********************. If you have any questions concerning payment of the assessment, you may contact ************** at ************.
The Code of Virginia sections and public documents cited are available on-line 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 determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Kenneth W. Thorson
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AR/41453R
Rulings of the Tax Commissioner