86-22 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Fabricators of Tangible Personal Property;Conversion of Word Processing Diskettes

Topic

Taxability of Persons and Transactions

Date Issued

01-16-1986

January 16, 1986

Re: 58.1-1821 Application/Sales and Use Tax

Dear ********************

This will reply to your letter of November 27, 1985, in which you submit an application for correction of sales ant use tax assessed to*********** as the result of a recent audit.

FACTS

************* is engaged in the "conversion" of word processing diskettes for customers. Typically, the taxpayer will transfer the information contained on one diskette to another diskette. This procedure is generally performed when a diskette is incompatible with a particular system. Through conversion, the information on the incompatible diskette is transferred to a compatible diskette. A recent audit of the taxpayer produced an assessment for its failure to collect the sales tax from customers on charges for the conversion of software. The taxpayer contests such assessment, contending that it is engaged in providing a service rather than selling a product.

DETERMINATION

In general, the sales tax applies to the sale of any item of tangible personal property, including word processing software in tangible form, pursuant to Section 58.1-603 of the Code of Virginia. As defined in Virginia Code Section 58.1-602.17, the word "sale" means not only the "transfer of title or possession...of tangible personal property", but also includes "the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication."

One exception to the general rule of taxation is set forth in Virginia Code Section 58.1-608.2, which provides an exemption from the tax for "personal service transactions which involve sales as inconsequential elements for which no separate charges are made." In interpreting this exemption, the Virginia Supreme Court in WTAR Radio-TV Corporation v. Commonwealth, 217 Va. 8776, 234 S.E.2d 245 (1977) set forth the "true object" test:

- if the "true object" sought by the buyer is the services per se, the exemption is available, but if the true object of the buyer is to obtain the property produced by the service, the exemption is not available. 217 Va. at 883

In analyzing the taxpayer's sales in light of the above test, it is apparent that the true object of the taxpayer's customers is to obtain the end product of the taxpayer's services. In fact, without a suitable finished product, it is not likely that customers would seek the services of the taxpayer. Therefore, the sales tax was properly applied in this case to the taxpayer's sales, including those transactions in which the end product was a diskette provided by the customer.

In cases in which information is converted onto a diskette furnished by a customer, the taxpayer is engaged in the taxable fabrication of tangible personal property. Section 630-10-37 of the Virginia Retail Sales and Use Tax Regulations defines the word "fabrication" to mean any "operation which changes the form or state of tangible personal property." The transfer of data from one diskette onto a blank diskette constitutes a change in the form and state of the blank diskette, rendering the charge for the transaction taxable.

The taxpayer's transactions in this case are readily distinguishable from the exempt personal service transaction described in Section 630-10-97.1 of the Virginia Retail Sales and Use Tax Regulations. The exempt transaction described entails the electronic transmission of stock market quotations via a terminal. Unlike the transactions in this case, the transmission of stock market quotations represents a transaction in which the true object of the purchaser is the services of the seller. The key to such a transaction is the information furnished by the seller, not the tangible end product. Even without a tangible end product, it is apparent that customers would still seek the services provided by the seller so they might learn of the prices that various stocks bring on the market. As noted earlier, this contrasts with the taxpayer's sales in this case because it is highly unlikely that customers would seek the taxpayer's services without a suitable end product.

Based upon the foregoing, the assessment issued to the taxpayer in this case is proper and payable.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner