Tax Type
Retail Sales and Use Tax
Description
Software production
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
08-26-1986
August 26, 1986
Dear ***************************
This will reply to your letter of June 9, 1986, in which you request a ruling on the applicability to ************** of the sales and use tax exemptions described in Emergency Regulation 630-10-49.2 on Innovative High Technology Industries and Research.
From the information enclosed with your letter, I understand that your firm is engaged in the development and production of prewritten computer application software. As such, your firm will generally be entitled to the industrial manufacturing and research exemptions from the sales and use tax that are briefly explained in the emergency regulation. To help you understand the parameters of those exemptions, I have enclosed copies of Virginia Regulation 630-10-63, which explains the industrial manufacturing exemption in detail, and Virginia Regulation 630-10-92, which explains the research exemption in detail.
While the manufacturing and research exemptions are very broad when compared to other states, you will see in reading the enclosed regulations that certain constraints are placed on the exemptions. Therefore, if you have any questions regarding the application of the tax to specific activities or specific items of equipment or materials used in your work, you should contact the department to determine the correct application of the tax. Such inquiries may be forwarded to the department's Technical Services Section at P.O. Box 6-L, Richmond, Virginia 23282.
As you are likely aware, the sale, lease or licensing of computer software in tangible form is generally subject to the sales tax. However, it is useful here to point out recent changes to the sales and use tax law with respect to the sale of custom software and modifications to prewritten software. Under the law change, "custom" software was excluded from the definition of "tangible personal property" subject to the tax. In addition, effective July 1, 1986, separately stated labor or service charges in connection with the modification of prewritten computer software were excluded from the definition of "sales price" upon which the tax is computed. To help you understand these changes, I have enclosed a copy of House Bill 245, which sets forth the changes, and a copy of the department's legislative impact statement on the bill.
In the event that your firm produces custom software for a specific customer, that sale would not be subject to the tax under this law change. However, the production of custom software does not qualify for the industrial manufacturing exemption as does the production of prewritten software. Nonetheless, the research exemption would apply to the development of new custom software.
To further assist you, I have enclosed a copy of the draft revisions to the emergency regulation that were recently submitted under the Administrative Process Act. These revisions (which are underlined in the document) generally reference the recent law changes with respect to computer software.
I trust that this will answer the questions posed in your letter. If any further questions arise after reviewing the enclosed information, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner