Document Number
88-211
Tax Type
Retail Sales and Use Tax
Description
Software licensing fees; Prewritten software
Topic
Taxability of Persons and Transactions
Date Issued
07-26-1988
July 26, 1988


Re: Request for Ruling/Sales and Use Tax


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

This will reply to your letter dated June 20, 1988 in which you request information on the application of the sales and use tax to an out-of-state company marketing computer software in the Commonwealth of Virginia.
FACTS

You represent a client who is planning to market computer software in Virginia. All business will be conducted from your client's office in Dallas, Texas. All sales people will be based in Dallas and there will be no office or employees residing in Virginia. However, sales activity will require that Dallas-based employees travel to the state to conduct business. The software will be licensed under a long term license agreement. Title to the software will remain with your client. The customers will have no right to sell, license, rent or otherwise distribute the software. The software is not prepared to the customers specifications and all customers will generally be provided with copies of the same software. In some cases, however, it may be necessary to perform some modifications to the software, or to the software of the customer, or it may be necessary to write interface programs. The license fee will include training and installation assistance, as well as one year of maintenance. Travel and related expenses associated with support are to be separately reimbursed by the customer. A separate annual maintenance contract will be available after the first year for an additional fee. Enhancements which are separately priced and marketed will be added to the license for a separate fee as the customer agrees. As the software is provided in object code only, the customer may have the software escrowed to a third party in source code for an additional fee.
RULING

I will address the various areas of concern below:

Out-of-state Dealer

An out-of-state vendor who engages in business in Virginia as a dealer is required to register and to collect and pay sales and use tax on all tangible personal property sold or delivered for storage, use or consumption in this state (see Virginia Regulation 630-10-29.1 and 630-10-76). A dealer is considered to have sufficient activity to require registration if he 1) maintains or has within this state, directly or through an agent, an office, warehouse or other place of business; 2) solicits business in this state by employees, agents, or other representative; 3) advertises in newspapers or other periodicals printed and published in this state; or 4) makes regular deliveries of tangible personal property within this state by means other than common carrier. Therefore, your client would be required to register and must file returns and perform such other duties required of dealers in this state.

Licensing Agreement

Under Virginia law, the licensing of prewritten computer software constitutes a taxable lease or sale when the licensing agreement conveys not only the right to use computer software but also the software itself in tangible form. As your client's license agreement includes the software, computer programs and related documentation, the long term lease would be subject to the tax.

Licensing Fee

§58.1-602(17) of the Code of Virginia defines sales price as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale... [excluding] an amount separately charged for labor or services rendered in installing, applying, or remodeling or repairing property sold." Therefore, the license fee plus any charges for services or labor, except separately stated charges for installation or repairs, is taxable. In addition, the fee for source coding the software would be subject to the tax.

Prewritten Software

The sale, lease or rental of a customized computer programs is exempt from 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 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." Prewritten software is subject to the tax and is defined in §58.1-602(25) of the Code of Virginia as "a computer program that is prepared, held or existing for general or repeated sale or lease." However, separately stated labor or service charges in connection with the modification of prewritten software are excludable from the computation of the tax (see §58.1-602(17) of the Code of Virginia). Inasmuch as your client's software is not prepared to the customer's specifications, it would be considered prewritten software and subject to the tax. However, any separately stated labor or service charges associated with modifying the software can be subtracted from the base price and are not subject to the tax.

Maintenance Contract/Enhancements

The application of the tax to maintenance agreements is set forth in VR 630-10-62.1. Under this regulation, the provision of tangible enhancements or other tangible personal property by your client to licensees under a maintenance support agreement renders the agreement subject to the tax. If only labor or services are furnished, the agreement would not be subject to the tax.

I have enclosed copies of §58.1-602 of the Code of Virginia and the Virginia Retail Sales and Use Tax Regulations. Also, in the event that your client does decide to conduct business as a dealer in the Commonwealth, I have enclosed an application for registration and also copies of the sales and use tax returns.

I hope the foregoing will answer the questions presented in your correspondence. However, if you have additional questions or seek additional information, please do not hesitate to contact the department.

Sincerely,




W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner

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