Tax Type
Retail Sales and Use Tax
Description
Computer program modifications
Topic
Taxability of Persons and Transactions
Date Issued
04-03-1985
April 3, 1985
Re: §58.1-1821 Application: Sales and Use Tax
Dear ****
This will reply to your letter of February 11, 1985 requesting abatement of tax and interest assessed in the above referenced case.
FACTS
***** (Taxpayer), in connection with its fuel oil distribution business, utilizes certain computer hardware and software. In order to upgrade and adapt its computer payroll programs to changed circumstances and conditions Taxpayer employed *****. Taxpayer argues that such program changes, necessitated by changes in the withholding laws, should not be considered sales of tangible personal property. In support of this argument, Taxpayer notes that it was invoiced for such program changes, by *****, for labor charges only.
It is our understanding however, that computer cards were exchanged to make the necessary program changes, and that none of such program changes were performed at Taxpayer's place of business.
DETERMINATION
§58.1-608(2) of the Virginia Code, exempts from the Sales and Use Tax, "Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made, nor services rendered by repairmen for which a separate charge is made."
§630-10-97.1(2) of the Virginia Sales and Use Tax Regulations states, "In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or taxable retail sale, the "true object" of the transaction must be examined." The Regulations state further that, "if the object of the transaction is to secure a service, and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including services provided, will be taxable." Therefore, the determination of the "true object" of a transaction is a factual matter which must be resolved on a case by case basis.
Based on the information presented and the sales and use tax law and regulations cited above, the total charge for **** services in connection with the program changes is subject to the retail sales and use tax, notwithstanding the label used to describe such services on Taxpayer's invoices. While **** programming experience and knowledge were essential to the successful completion of the transactions in question, the "true objects" of such transactions were the new payroll programs themselves, and not the rendition of services required to make such program changes. Furthermore, the tangible personal property transferred from ***** to Taxpayer, namely computer cards, were essential to the successful completion of the entire transaction.
Therefore, I find no legal basis to grant the relief requested by Taxpayer, and the application for correction of the audit assessment is hereby denied.
However, the department is considering the adoption of new regulations which would exempt from the sales and use tax, the sale of custom software, and modifications to custom software. If adopted, such regulations would be retroactive in effect. Therefore, Taxpayer may file a protective claim for refund, pursuant to §58.1-1824 of the Code, as to any modifications of custom software which are included in this audit, and which come within the language of the proposed regulations. However, you will note that if the modifications in question were made to prewritten programs, they would remain taxable under the proposed regulation. I have enclosed a copy of the proposed regulations for your convenience.
Sincerely,
W. H. Forst
Tax Commissioner
Re: §58.1-1821 Application: Sales and Use Tax
Dear ****
This will reply to your letter of February 11, 1985 requesting abatement of tax and interest assessed in the above referenced case.
FACTS
***** (Taxpayer), in connection with its fuel oil distribution business, utilizes certain computer hardware and software. In order to upgrade and adapt its computer payroll programs to changed circumstances and conditions Taxpayer employed *****. Taxpayer argues that such program changes, necessitated by changes in the withholding laws, should not be considered sales of tangible personal property. In support of this argument, Taxpayer notes that it was invoiced for such program changes, by *****, for labor charges only.
It is our understanding however, that computer cards were exchanged to make the necessary program changes, and that none of such program changes were performed at Taxpayer's place of business.
DETERMINATION
§58.1-608(2) of the Virginia Code, exempts from the Sales and Use Tax, "Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made, nor services rendered by repairmen for which a separate charge is made."
§630-10-97.1(2) of the Virginia Sales and Use Tax Regulations states, "In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or taxable retail sale, the "true object" of the transaction must be examined." The Regulations state further that, "if the object of the transaction is to secure a service, and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including services provided, will be taxable." Therefore, the determination of the "true object" of a transaction is a factual matter which must be resolved on a case by case basis.
Based on the information presented and the sales and use tax law and regulations cited above, the total charge for **** services in connection with the program changes is subject to the retail sales and use tax, notwithstanding the label used to describe such services on Taxpayer's invoices. While **** programming experience and knowledge were essential to the successful completion of the transactions in question, the "true objects" of such transactions were the new payroll programs themselves, and not the rendition of services required to make such program changes. Furthermore, the tangible personal property transferred from ***** to Taxpayer, namely computer cards, were essential to the successful completion of the entire transaction.
Therefore, I find no legal basis to grant the relief requested by Taxpayer, and the application for correction of the audit assessment is hereby denied.
However, the department is considering the adoption of new regulations which would exempt from the sales and use tax, the sale of custom software, and modifications to custom software. If adopted, such regulations would be retroactive in effect. Therefore, Taxpayer may file a protective claim for refund, pursuant to §58.1-1824 of the Code, as to any modifications of custom software which are included in this audit, and which come within the language of the proposed regulations. However, you will note that if the modifications in question were made to prewritten programs, they would remain taxable under the proposed regulation. I have enclosed a copy of the proposed regulations for your convenience.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner