Tax Type
Retail Sales and Use Tax
Description
Lease of computerized reservation systems; Related company
Topic
Taxability of Persons and Transactions
Date Issued
06-29-1988
June 29, 1988
Re: Request for Ruling/Sales and Use Tax
Dear*************
This will reply to your letter dated July 28, 1987 in which you seek a ruling on the applicability of the sales and use tax to the sale or lease of computerized reservation systems. I apologize for the delay in responding to your inquiry.
FACTS
********** (taxpayer) provides computerized reservation system terminals to customers in Virginia. Taxpayer is registered as an out-of-state dealer in Virginia and did not pay the sales and use tax on its initial purchase of these systems which were intended for resale. Taxpayer contracts with customers in the state for the sale or lease of the necessary computer hardware, installation, maintenance and training, and for the right to use the software required for the system.
DETERMINATION
The key issue in determining the taxability of these transactions is whether they are essentially service transactions or whether the nature of the transaction is a sale of tangible personal property. It is my understanding that the cost to customers for the lease or sale of the system is a basic charge for computer equipment and does not include the furnishing of reservation services by the taxpayer. Therefore, the sale or lease of the system would be considered a sale of tangible personal property as provided in §58.1-602.16 of the Code of Virginia.
The Virginia sales and use tax would apply to the monthly lease charge and the total purchase price. However, installation and repair labor charges associated with a sale or lease that are separately stated on customers' invoices would not be taxable.
In addition, monthly equipment maintenance fees that entitle the customer to receive parts or other tangible personal property and charges for equipment repairs and parts made in connection with the maintenance and repair of customer owned equipment are taxable. Enclosed for your review is a copy of Virginia Regulation 630-10-62.1 which outlines the application of the tax to maintenance contracts and warranty plans.
You also raised several additional questions relating to the computerized reservation systems and I will address each one separately below.
First, you wish to know would the tax treatment differ if the purchaser or lessee of the system is a related company? No. Because a subsidiary, whether wholly owned or majority held, is a separate legal and business entity, there would be no change in the application of sales and use tax.
Second, would the tax treatment differ if each component of a sale or lease were broken out for separate identification for billing purposes? Installation and repair labor cost would have to be separately stated in order to be nontaxable. Other separately stated charges in connection with the sale or lease would be taxable, however.
Third, would the tax treatment differ between customized and "canned" software? As provided in Virginia Regulation 630-10-49.2, the sale, lease, or rental of a customized program is not subject to the tax. §58.1-602.24 of the Code of Virginia defines a custom program as "a computer program which is specifically designed and developed only for one customer. The combining of two or more prewritten programs does not constitute a custom computer program. A prewritten program that is modified to any degree remains a prewritten program and does not become custom." "Canned" or prewritten software is subject to the tax; however, separately stated labor or service charges in connection with the modification of prewritten software are excludable from the computation of the tax.
Lastly, does Virginia have city or county taxes that would apply to the sale or lease of the system? The rate of the sales and use tax is 4 1/2 % which is comprised of a 3 1/2 % state tax and a 1 % local tax applicable uniformly throughout the state.
I hope this information is helpful. However, if you have additional questions concerning the correct application of the Virginia sales and use tax, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner