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
Re: Request for Ruling/Sales and Use Tax
Dear ********************
This will reply to your letter of May 6, 1986, in which you submit several questions relating to the taxation of computer software and related services in Virginia.
To answer your first two questions relating to sales of prewritten and custom software, I have enclosed a copy of House Bill 245 enacted by the 1986 session of the Virginia General Assembly as well as a copy of the department's legislative impact statement thereon. As you will see, House Bill 245 excludes "custom programs" from the definition of "tangible personal property" subject to the sales and use tax and effective July 1, 1986, excludes separately stated labor or service charges in connection with the modification of "prewritten programs" from the definition of "sales price," upon which the tax is computed. As is noted in the department's impact statement, however, House Bill 245 did not exempt from the tax in any way the sale of unmodified, prewritten software.
To answer your third question relating to software maintenance services, I have enclosed a copy of Virginia Regulation 630-10-62.1. In essence, this regulation provides that maintenance contracts which provide in whole or in part for the provision of tangible personal property are subject to the tax. Therefore, a computer software maintenance agreement that provides for the furnishing of tangible enhancements or updates or any other tangible personal property would be subject to the tax. on the other hand, an agreement providing only for the provision of labor would be exempt.
As to your last question, the application of the tax to data processing services will depend in great part upon whether tangible personal property is furnished to the customer. When one merely manipulates data and produces or furnishes no tangible product, the transaction would be exempt from the tax. In addition, some essentially service transactions which involve the inconsequential sale of tangible personal property are exempt from the tax as is explained in enclosed Virginia Regulation 630-10-97.1. The determination whether such transactions are exempt or taxable must be based upon the "true object" test described in the regulation.
Lastly, I would note that "computer application software" was in effect exempted from local tangible personal property taxes by virtue of House Bill 211, enacted by the 1984 session of the General Assembly. I have enclosed a copy of that bill and the department's legislative impact statement thereon.
I trust that this will answer the questions posed in your letter: however, please do not hesitate to contact the department if further questions arise or if you would like to determine the application of the tax to certain specific computer software transactions.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner