Tax Type
Retail Sales and Use Tax
Description
licenses computer software; Taxable renewal fee; Exemptions
Topic
Exemptions
Tangible Personal Property
Taxable Transactions
Date Issued
02-23-2012
February 23, 2012
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you request a ruling with respect to the application of the retail sales and use tax to computer software licensed by the ***** (the "Taxpayer") to customers in Virginia. I apologize for the delay in responding to your request.
FACTS
The Taxpayer licenses computer software to a variety of customers with diverse needs. The software has many applications, including data management, statistics, graphing, programming, arithmetic functions and on-screen editing. The Taxpayer negotiates all license agreements directly with the customer. The software licenses are billed annually and allow the customer to use the software for a period of one year. Licenses are extended or renegotiated annually. Support services and upgrades are not separately billed but are granted as a part of the standard license agreement.
In most instances, the computer software is initially transmitted to the customer by tangible means, either by CD or DVD. Renewals are made either by e-mail or through an on-line portal code when, once entered, allows the software to run for another year. Delivery of the software is site specific, e.g., when adding a new product, it is delivered in the same manner as the existing products.
The Taxpayer seeks answers to a number of questions that it has presented.
RULING
Question 1
When the initial transfer of the software is made via tangible means are the renewals subsequently taxable?
A renewal fee is taxable when it allows the user to continue to use a prewritten program that was originally conveyed to the user by tangible means. This is consistent with Public Document (P.D.) 96-192 (8/6/96). A prewritten program is defined in Va. Code § 58.1-602 as "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."
A renewal fee is exempt when it allows the user to continue to use a custom program that was originally conveyed to the user by tangible means. A custom program as defined in Va. Code § 58.1-602 is exempt from the retail sales and use tax pursuant to Va. Code § 58.1-609.5 7 regardless of whether conveyed electronically or by tangible means (i.e., by disk, tape, etc.). A custom program is defined in Va. Code § 58.1-602 as "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 prewritten program and does not become custom."
A renewal fee is also exempt when it allows the user to continue to use a prewritten computer program that was originally conveyed to the user by electronic means, provided no software program is transferred by tangible means to the user upon renewal. See P.D. 05-44 (4/4/05).
Question 2
Does the taxable status of the software apply when there is a substantial or complete replacement of currently installed software with a new version, update or other new software, which is made by electronic means, even though the initial software was transferred by tangible property?
The facts section of this ruling letter indicates that upgrades are not separately billed but are granted as a part of the standard license agreement. When a prewritten software license agreement includes upgrades conveyed electronically and the software was originally delivered by tangible means, the upgrades are considered part of the original transaction and thus do not alter the original taxable transaction.
In the event an upgrade is separately negotiated (e.g., it is a substantial or complete replacement of a prior version), constitutes a transaction independent of any prior sale of software (i.e., is not required to be furnished by the agreement for the original software delivered by tangible means), and is separately billed, the charge for such upgrade is not taxable if delivered by electronic means only.
Question 3
Once a ruling is received, is it retroactive, or is the ruling effective at the time issued?
Rulings are generally effective at the time issued but may be applied retroactively if the ruling does not constitute a change in tax policy. If an administrative change in tax policy occurs, a ruling generally takes effect on a prospective or going forward basis.
Because this ruling does not constitute a policy change, it may be applied retroactively. For further guidance on the effects of rulings, see Title 23 of the Virginia Administrative Code (VAC) 10-20-155. For amending returns, see Title 23 VAC 10-20-180. For refunds, see Title 23 VAC 10-210-3040.
This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this ruling, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
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- Tax Commissioner
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AR/1-4712198433.R
Rulings of the Tax Commissioner