Tax Type
Retail Sales and Use Tax
Description
Computer hardware and software subscription and support agreements
Topic
Taxability of Persons and Transactions
Date Issued
09-15-1987
September 15, 1987
Re: Request for Ruling/Sales and Use Tax
Dear ***************
This will reply to your letter of June 11, 1987, in which you request a ruling on the application of the sales and use tax to four types of transactions involving the leasing of computer hardware and software.
As described in your letter, the transactions in question will involve your client, a car rental franchiser, and various car rental businesses operating under franchises granted by your client. The franchisees will be leasing computer hardware and licensed computer software from your client, which will be used by the franchisees in the operation of their businesses.
Below, I will describe the four types of transactions and set forth the application of the tax to each:
Equipment Lease and Software Sublicense Agreement
This transaction involves the leasing of computer hardware over a period of sixty months. The hardware may be purchased at fair market value by the franchisee at the conclusion of the lease or it may be returned by the franchisee to your client. In addition, your client will sublicense to the franchisee the use of licensed computer software to be used only in the operation of the franchise.
The leasing of computer hardware constitutes a taxable lease or rental of tangible personal property under §58.1-603 of the Code of Virginia. As such, your client should register and collect the 4 1/2 % state and local sales tax on all such leases. The tax is to be computed based upon the "gross proceeds" from the lease. "Gross proceeds" is defined in §58.1-602.4 of the Code of Virginia as "the charges made or voluntary contributions received for the lease or rental of tangible personal property." Enclosed is a copy of Virginia Regulation 630-10-57, which describes in greater detail the application of the tax to leases.
The sales tax will also apply to any sales of computer hardware made by your client, including sales made to franchisees at the conclusion of their leases. The tax is to be computed based upon the sales price of the property (see Virginia Regulation 630-10-95, copy enclosed).
In addition, the tax will apply when a computer software licensing or sublicensing agreement provides the licensee with prewritten computer software in tangible format (diskette, tape, etc.). Therefore, leases of licensed software to your client's franchisees will also be subject to the tax.
Equipment Replacement Agreement
This is an annual renewable agreement whereby the manufacturer of the leased computer hardware will provide to franchisees, through your client, a telephone consultation service and the replacement of defective or inoperative equipment.
Virginia Regulation 630-10-62.1 (copy enclosed) specifically Provides:
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- The tax applies to charges for extended warranty plans which provide for the provision of repair parts and labor.
- The tax applies to charges for extended warranty plans which provide for the provision of repair parts and labor.
Software Subscription Agreement
For a monthly fee, your client will provide its franchisees with one copy of the latest revisions and enhancements to its licensed computer software. Such revisions and enhancements will be provided in the form of diskettes, along with related documentation.
The service provided by your client constitutes the taxable sale of a maintenance contract under Virginia Regulation 630-10-62.1. The regulation defines the term "maintenance contract" as follows:
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any agreement whereby a person agrees to maintain and/or repair an item of tangible personal property over a specified period of time for a fee which is determined at the time the agreement is entered into. A maintenance contract may provide for provision of labor only, parts only, or labor and parts.
Hot Line Support Agreement
This is an annual renewable agreement whereby the software manufacturer will provide, through your client, a telephone consultation service to licensees through which the franchisees may correct problems in the software.
Based upon the information presented, this transaction does not involve in any way the furnishing or sale of tangible personal property. As such, the sale of hot line support agreements is not subject to the sales tax.
I trust that this will answer all of your questions; however, please feel free to contact the department if you require any additional information.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner