Tax Type
Retail Sales and Use Tax
Description
Use of trading software to facilitate individual stock trading
Topic
Basis of Tax
Property Subject to Tax
Date Issued
07-28-2004
July 28, 2004
Re: Request for Ruling: Retail Sales and Use Tax
Dear *********:
This is in response to your letter requesting a ruling on the application of the retail sales and use tax to various charges made by ********* (the "Taxpayer") to Virginia customers. I apologize for the delay in responding to your letter.
FACTS
Located in ********* (“State A”) with no offices (in Virginia), the Taxpayer develops software that is licensed to brokers and other end users in Virginia and elsewhere. These licenses generally grant authority to end users to use trading software to facilitate individual stock trading on various national stock exchanges. You present a number of factual scenarios, which are addressed below.
RULING
Software licenses
You present copies of three software license agreements. In regard to the broker software site license agreement, a broker is granted a license to use software "designed for sending orders and trading on the exchanges" via Internet connection upon payment of an initial license fee. Subsequent license fees are charged based on a fixed monthly amount or on a per order basis if the fixed monthly amount is exceeded. The software "also possesses the capability to supply charts, graphs and analytics" for additional monthly license fees. If a broker enters into an amendment to the broker software site license agreement (i.e., the Internet Amendment) to allow the broker's customers to execute and send trades via the Internet from a customer's remote location, such customer must enter into a sublicense agreement with respect to the customer's use of the software. You indicate that all software is "shipped to the customer's location via common carrier, Internet or personally delivered by an employee of the Taxpayer."
The Department has long held that the sale of computer software transferred in tangible form (e.g., CD-ROM) is the taxable sale of tangible personal property. In contrast, computer programs transmitted electronically (e.g., over telephone lines, keyed directly into a computer through its keyboard or downloaded from the Internet) are deemed to be nontaxable transactions because there is no transfer of tangible personal property. The application of the retail sales and use tax to the various facts and questions presented is as follows:
- · Initial and monthly license fees for prewritten software transferred on a tangible medium (e.g., CD-ROM) and charged to a broker or sublicense:
o Standard package fees – taxable-
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- • Initial fee - taxable
• Minimum monthly fee or per order fee – taxable
- • Initial fee - taxable
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o Optional island book package fee - taxable
o Optional back office (reconciler) fee - taxable
o Optional historical data updates fee - taxable
· Initial and monthly license fees for prewritten software downloaded from the Internet or otherwise electronically transferred to the customer and no tangible software medium is furnished to the customer:
o Standard package fee - exempt
§ Initial fee – exempt
§ Minimum monthly fee or per order fee - exempt
o Optional trade chart package fee – exempt
o Optional island book package fee – exempt
o Optional back office (reconciler) fee – exempt
o Optional historical data updates fee - exempt
· Charge for quote server or other computer hardware sold, leased or rented for use in connection with downloaded (exempt) software - taxable
· Charge for accessing real-time quotes via third party lines - exempt
· In the event a broker sublicenses the software to an end user, the fee is generally taxable unless transferred electronically. No resale exemption applies because the broker is authorized to use the software in its business. If a registered dealer, the Taxpayer should collect and remit the tax on the sublicense fee if there is a transfer of tangible property.
· Electronic information service charges - generally exempt
o Island book fee - follow above tax treatment for license fees
o Exchange fee - exempt, if separately stated on the customer's invoice
o Market data feeds combined with a taxable license fee – taxable
o Market data feeds combined with an exempt license fee – exempt
o Charts and graphs fee - follow above tax treatment for license fees
o Internet workstation fee - follow above tax treatment for license fees
· Miscellaneous fees for services - taxability generally depends upon whether charged in connection with the sale, lease or rental of tangible personal property:
o Regardless of whether separately stated or not, the following fees are taxable [unless charged in connection with electronically downloaded software only]:
§ Internet order fee
§ Late count charge
§ Late payment fee
§ Administrative information tracking fee
§ Communication server connectivity fee
§ Order fee
§ Minimum order fee
§ Back office license fee
§ Contract change fee
o Installation labor or service fee - exempt if separately stated on the customer's invoice -
Resale certificates
The trading software site license grants a license to a licensee "to use the Software solely for the purposes set forth in Exhibit "B" for Licensee's customers at Licensee's principal office." A licensee is generally a broker. Exhibit B lists the different software packages available, such as the standard package and other packages for trade charts, island book pricing, back office (reconciler), and historical data updates. Although the broker may not use the software to execute trades, it does use the software in its operations in the provision of access services to its customers. The taxability of the software will depend upon the method of delivery to the licensee. If electronically delivered to the broker and no tangible medium is transferred, the software is exempt. If delivered by tangible means to the broker, the software is taxable.
Subsection A of Title 23 of the Virginia Administrative Code ("VAC") 10-210-5010 sets out that "[c]harges made by stockbrokers for providing consultation, trading stocks, securities and commodities and similar transactions are charges for professional services and are not subject to the tax." Subsection B of the above regulation provides that "[s]tockbrokers are the consumers of all tangible personal property used in their operations and must pay the tax on all such property at the time of purchase."
The Taxpayer's Internet Amendment agreement sets out that a broker "may allow its customer, in the ordinary course of business, to download the Software from a web site." As set out above, the electronic transfer of software is not taxable provided no tangible medium is furnished. The Taxpayer may also provide computer hardware via its sublicensing agreement. The charges for such hardware made to customers are taxable. The Taxpayer may use the resale exemption certificate, Form ST-10, when purchasing such hardware for subsequent sale, lease or rental purposes only.
Nexus
Under Va. Code § 58.1-612, the sales tax is collectible from all persons who are dealers. That same section defines the term "dealer" to include every person who "[i]mports or causes to be imported into this Commonwealth tangible personal property from any state or foreign country, for sale at retail, for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth." The Taxpayer clearly qualifies as a "dealer" under Va. Code § 58.1-612.
The same statute also sets out the activities sufficient to require a dealer to register for the collection and remittance of the Virginia retail sales and use tax. The statute provides in part that a dealer shall be deemed to have sufficient activity in Virginia if the dealer solicits business in Virginia by employees, independent contractors, agents or other representatives. Nexus is also established if the dealer makes deliveries into Virginia more than twelve times during a calendar year by means other than common carrier. In addition, nexus is established if the dealer owns tangible personal property that is rented or leased to consumers in Virginia or offers tangible personal property, on approval, to consumers in Virginia.
In response to the issues you raise about nexus:
- · If the Taxpayer sells licensed software to Virginia customers exclusively via Internet download and does not establish sufficient activity within Virginia pursuant to the provisions of Va. Code § 58.1-612(C), sufficient nexus to require use tax registration is not established in Virginia.
· The lease or rental of computer hardware (e.g., quote servers, routers, dongles, etc.) to Virginia customers establishes sufficient nexus as to require use tax collection registration. See 23 VAC 10-210-840(A).
· An employee based in State A who occasionally or frequently travels to Virginia to provide technical assistance only, has no authority to propose or negotiate sale, and does not solicit business in any manner from Virginia customers does not establish nexus with Virginia as to require the Taxpayer to register for use tax collection.
· An employee based in State A who occasionally or frequently travels to Virginia to install trading software only, has no authority to propose or negotiate sale, and does not solicit business in any manner from Virginia customers does not establish nexus with Virginia as to require the Taxpayer to register for use tax collection.
· An employee based in State A who occasionally or frequently travels to Virginia to make sales calls and proposals, take sales orders, or otherwise solicit business from customers in any other manner in Virginia does establish nexus with Virginia so as to require the Taxpayer to register for use tax collection.
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- Sincerely,
Kenneth W. Thorson
- Sincerely,
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AR/39899R
Rulings of the Tax Commissioner