Tax Type
Retail Sales and Use Tax
Description
Computer hardware and software maintenance contracts; Software upgrades
Topic
Taxability of Persons and Transactions
Date Issued
06-23-1986
June 23, 1986
Re: Protective Claim for Refund/Sales and Use Tax
Dear ******************
This will reply to your letter of February 11, 1986, in which you submit a protective claim for refund of sales and use tax assessed to ************* on its purchase of computer software, computer maintenance agreements, and software and systems upgrades.
The department is now in the process of promulgating a regulation on the application of the sales and use tax to computer software. As noted in ************** January 24, 1986 letter to *********** contemplated in the regulation development process is the retroactive exemption of custom computer software from the tax. Because of this possible policy change, a protective claim for refund is certainly in order if custom software and related services were included in the department's recent audit of your company.
Based upon my review of the department's audit, it is my understanding that transactions involving custom computer software were not included in the assessment issued to your company. If this is indeed the case, I will be unable to accept your protective claim. However, if any of the transactions included in the department's audit involved custom software, please advise within 45 days and I will hold your claim pending the publication of a regulation addressing the subject.
As used in this letter, the term "custom software" means a computer program which is specifically designed and developed only for one customer. The combining of two or more prewritten programs to meet a customer's particular needs 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.
As to non-custom computer software, computer maintenance and software and systems upgrades, it is my understanding that all such transactions entailed the provision of tangible personal property by the seller. While some or all of the transactions also involved a substantial service element on the part of the seller, this alone does not negate the tax as is noted in Section 630-10-97.1 of the Virginia Retail Sales and Use Tax Regulations. I find in this case that the true object of the transactions was to obtain tangible personal property in the form of usable computer software, parts to enable computers to operate properly, and enhancements to computer programs and equipment.
Furthermore, the application of the tax to maintenance agreements is set forth in Section 630-10-62.1 of the Virginia Retail Sales and Use Tax Regulations, which provides:
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- Maintenance contracts, the terms of which provide both repair or replacement parts and repair labor, represent a sale of tangible personal property. The total charge for such contracts is subject to the tax since at the time the contract is entered into it is impossible to ascertain what portion of future repair transactions will represent parts and what portion will represent labor.
- Maintenance contracts, the terms of which provide both repair or replacement parts and repair labor, represent a sale of tangible personal property. The total charge for such contracts is subject to the tax since at the time the contract is entered into it is impossible to ascertain what portion of future repair transactions will represent parts and what portion will represent labor.
Lastly, it should be noted that legislation was enacted during the 1986 session of the General Assembly to exempt custom software from the sales and use tax as well as labor or service charges in connection with the modification of prewritten programs. This legislation, which takes effect on July 1, 1986, would have no impact upon sales of unmodified prewritten software, however. For your information, I have enclosed copies of the legislation and the department's legislative impact statement.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner