Tax Type
Retail Sales and Use Tax
Description
Computer software production
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
04-23-1986
April 23, 1986
Re: §58.1-1821 Application/Sales and Use Tax
Dear ***************
This will reply to your letter of February 25, 1986, in which you submit an application for correction of sales and use tax assessed to ********************.
FACTS
*************** (Taxpayer) is engaged in the production of computer software for sale or resale. A recent audit of the taxpayer produced an assessment for its failure to remit the sales and use tax on computers used in the production of computer software and its failure to collect the sales tax from a customer on license fees for the use of computer software. In addition, office furniture purchased by the taxpayer was held taxable in the department's audit at a value of $********* as was posted in the taxpayer's books. The taxpayer contends, however, that the furniture was purchased for $ *********.
DETERMINATION
I will address the issues raised by the taxpayer below on basis:
Computers Used in Production
Emergency Virginia Retail Sales and Use Tax Regulation §630-10-49.2, a copy of which is enclosed, provides "[t]he production of computer software in tangible form for sale or resale constitutes industrial manufacturing." Therefore, computer hardware used directly in the manufacturing of computer software for sale or resale is generally exempt from the tax. The key to the exemption in this case is to what extent the taxpayer's computers are "used directly" in producing computer software.
The term "used directly" is defined in § 58.1-602.22 of the Code of Virginia as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing...process, but not including ancillary activities such as ...administration." Based upon the above definition, the computers in question will be exempt if used exclusively in production activities such as the encoding of magnetic tapes or other storage medium. However, if also used in administrative functions such as payroll, record keeping, budgeting, and similar activities, the application of the tax will be determined on the basis of the "preponderance of use" test set forth in Virginia Code § 58.1-608.1 and §630-10-63.D of the Virginia Retail Sales and Use Tax Regulations. Regulation §630-10-63.D provides the following:
-
- When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the items will be totally exempt from tax if the preponderance of its use is in exempt production activities.
- When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the items will be totally exempt from tax if the preponderance of its use is in exempt production activities.
Licensing Fees
The sales tax is imposed in Virginia Code §58.1-603 upon the sale, lease or rental of tangible personal property. While the granting of a license often does not entail the passage of tangible personal property to the licensee, the licensing of computer software generally conveys the right to use certain software in addition to the actual conveyance of the software itself. The department has been furnished no evidence in this case to indicate that the license in question did not include the transfer of tangible personal property. Therefore, unless tangible computer software was not transferred under the license in question, the licensing fee was properly included in the department's audit.
Office Furniture
At issue here is used office furniture purchased from another firm. As the sales and use tax was not paid at the time of the purchase, the transaction was included in the department's audit. For purposes of the audit, the purchase price of the furniture was deemed to be $ ******* the amount listed in the taxpayer's records as the value of the furniture. The taxpayer asserts, however that only $******* was paid for the furniture. If the taxpayer can demonstrate that $********* was the only consideration paid for the furniture, the department will revise its audit accordingly. Copies of sales invoices, receipts, or other documentation to support the taxpayer's contention on this issue should be directed to the department's Technical Services Section at P. O. Box 6-L, Richmond, Virginia 23282 within the next sixty (60) days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner