Tax Type
Retail Sales and Use Tax
Description
Software support maintenance agreements
Topic
Taxability of Persons and Transactions
Date Issued
07-29-1988
July 29, 1988
Re: Ruling Request/ Sales and Use Tax
Dear************************
This will reply to your letter of August 14, 1987 on behalf of************* (taxpayer), seeking information on the application of the sales and use tax to software support service agreements (hereinafter, service agreements) sold by the taxpayer to purchasers of its software. This also has reference to information provided in conversations you have had with a member of my staff.
The sales tax is imposed in Virginia Code §58.1-603 on the sale, lease or rental of tangible personal property. The term "sale" is then defined in §58.1-602(16) of the Code as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property.
Based on information recently provided, it is the department's understanding that after payment of an annual fee, purchasers of the taxpayer's "Level 1", "Premium Support" or "Update Services" service agreements are entitled to receive and use one copy of any software updates and documentation changes in tangible form, such as on floppy diskettes or magnetic tape. As such, these service agreements constitute the sale of taxable maintenance contracts within the meaning of Virginia Regulation (VR) 630-10-62.1, copy enclosed. The regulation defines the term "maintenance contract" to mean, "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."
Since these service agreements provide, at least in part, for the provision of tangible personal property - floppy diskettes or magnetic tape - the tax applies to the total charge for the agreements under the regulation. (See subdivision (D) of the enclosed regulation)
It is the department's further understanding that the taxpayer's "Software Update Duplication" service agreement typically involves the provision of tangible items such as diskettes and/or instruction manuals. Therefore, in accordance with the Virginia Code and regulation sections cited above, the tax applies to the total charge for such service agreements.
Lastly, based on your recent telephone conversations with a member of my staff, it is my understanding that the taxpayer makes no lump sum charge payable in advance and imposes no annual fee for the provision of On-Site Systems Support. Rather, the customer desiring this level of software support pays only an hourly fee plus reimburses the taxpayer for any travel expenses, such as room and board, of its on-site technical assistance personnel. Based on the specific facts and circumstances of this case, the hourly fees charged by the taxpayer for the provision of on-site systems support, including any charges to reimburse the taxpayer for travel expenses of its on-site systems support personnel, represent charges for an exempt service. Therefore, the taxpayer should pay the tax on all of its purchases of tangible personal property used in providing such service, including any items actually provided to its on-site systems support customers in connection with this service.
For your further information, enclosed is a copy of the department's Legislative Impact Statement for recently enacted legislation concerning sales of custom and prewritten software. The department is now in the process of developing a regulation governing such sales. I hope that the foregoing has responded to your questions but let the department know if you have any further questions.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner