Tax Type
Retail Sales and Use Tax
Description
Cloud-based and hosted phone and other telecommunication services
Topic
Internet Sales
Date Issued
10-18-2013
October 18, 2013
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you request a ruling on the application of certain Virginia taxes to cloud-based services offered by ***** (the "Taxpayer"). I apologize for the delay in responding to your request.
FACTS
The Taxpayer will acquire, operate and maintain all of the hardware and software necessary to provide its cloud-based and hosted phone and other telecommunication services that support voice processing and routing, video processing, storage and transmission, voice messaging, presence applications for instant messaging, audio conferencing, web conferencing and wireless/mobile communications. The hardware and software required for these services is installed on the Taxpayer's servers located outside Virginia. The Taxpayer's onsite employees maintain such equipment and software, and the Taxpayer's employees at another site outside Virginia monitor the performance of the hosted system and perform modifications and troubleshooting as needed. The Taxpayer does not resell, lease, license or otherwise transfer use or possession of its or third party hardware and software to its customers.
To receive the cloud-based services, customers contract with the Taxpayer and are charged a monthly fee that covers charges for accessing the Taxpayer's hardware, software and servers and for the provision of storage, rack space, power and cooling, monitoring and management, and most modifications and upgrades needed to provide the Taxpayer's services. Customers will be charged additional fees for add-on services. For an additional fee, the Taxpayer may also host and deploy customer-owned software applications that enhance communication functionalities. In addition, the Taxpayer will charge a separately stated fee for maintenance and management of any customer-owned software application.
The customer does not download or otherwise possess the software that is hosted by the Taxpayer. Nor does the Taxpayer provide the telecommunication, Internet or network connections necessary for the customer to utilize the Taxpayer's services.
The Taxpayer requests rulings regarding the application of the retail sales and use tax and the communications sales and use tax.
RULING
Retail Sales and Use Tax
Because no tangible personal property is furnished, the transactions described in the Taxpayer's ruling request are strictly for the provision of professional services. Pursuant to Va. Code § 58.1-609.5 1, an exemption from the retail sales and use tax applies to:
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- Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made; services rendered by repairmen for which a separate charge is made; and services not involving an exchange of tangible personal property which provide access to or use of the Internet and any other related electronic communication service, including software, data, content and other information services delivered electronically via the Internet.
Accordingly, transactions for the cloud-based or hosted services are exempt from the retail sales and use tax. Because no tangible personal property is transferred to customers, add-on services and maintenance services charged by the Taxpayer are also not subject to the tax.
The Taxpayer is generally liable for the Virginia retail sales or use tax on the cost price of computer equipment, software, hardware and any other tangible personal property used in Virginia in providing services to its customers. See Title 23 of the Virginia Administrative Code 10-210-4040 E. The facts presented indicate that the Taxpayer does not use any tangible personal property in Virginia and, therefore, does not incur any Virginia retail sales and use liability on its purchases of tangible personal property used in the provision of its services.
Communications Sales and Use Tax
A communications sales and use tax is imposed on the customers of communications services in the amount of 5% of the sales price of each communications service that is sourced to the Commonwealth in accordance with Va. Code § 58.1-649. A provider of taxable communication services must register to collect the communication services sales tax and report it to the Department. If a provider has insufficient activity with Virginia to require registration pursuant to Va. Code § 58.1-651 B, it will not be required to collect the communications sales tax. In such an event, its customers will be liable for the payment and reporting of it. For further information, such as the tax consequences of bundling taxable and exempt service charges into a single charge, see Public Document 06-138 (11/1/06).
The term "communication services" is broadly defined by Va. Code § 58.1-647 to mean the following:
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- "Communications services" means the electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including cable services, to a point or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for the transmission or conveyance. The term includes, but is not limited to, (i) the connection, movement, change, or termination of communications services; (ii) detailed billing of communications services; (iii) sale of directory listings in connection with a communications service; (iv) central office and custom calling features; (v) voice mail and other messaging services; and (vi) directory assistance. [Emphasis added.]
Based on the foregoing authorities and the facts presented, it appears that the Taxpayer provides taxable communication services to customers in Virginia when it electronically routes voice, data or audio signals and provides voice mail services. Notwithstanding, the facts presented are insufficient to render a ruling as to whether the Taxpayer has nexus with Virginia as to require registration for the collection and remittance of the communications sales and use tax. The Taxpayer should refer to the provisions of Va. Code §§ 58.1-651 B and 58.1-612 to determine whether it has sufficient activity with Virginia as to require such registration.
This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections and the public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this ruling, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5375477063.R
Rulings of the Tax Commissioner