Tax Type
Retail Sales and Use Tax
Description
Computer-aided design; Storage fees
Topic
Taxability of Persons and Transactions
Date Issued
06-13-1989
June 13, 1989
Re: Request For Ruling: Sales and Use Tax
Dear*****************
This will reply to your letter dated October 17, 1988, in which you requested a ruling on the application of the sales and use tax to your business, *********** ("The Taxpayer" ).
FACTS
The Taxpayer provides technical designs, illustrations and drawings or transparencies ("the drawings") to clients through the utilization of a computer aided drafting program. Associated with the above transaction, the Taxpayer will maintain the database of the drawings ("drawing management") and provide revisions of the drawings at the request of the client. Here, the Taxpayer charges a monthly library maintenance fee for the drawing management on a per page/time basis (e.g. $1.00 per 10 pages per week). Also, if the customer desires a hard copy of the drawing that is stored in drawing management or a revision of a stored drawing, the Taxpayer will charge the customer based on a per page rate (e.g. $1.00 per page).
Third, the Taxpayer may provide customer telephone and mailing lists separate from the drawing management database. Finally, the Taxpayer will provide consultation to a client in formatting and structure development for a draft service manual.
The Taxpayer asks about the specific application of the tax to each of the above described transactions.
RULING
Drawings
Virginia Code §58.1-608(2), provides an exemption from the tax for "personal service transactions which involve sales as inconsequential elements for which no separate charges are made.... " The decisive issue in this case is whether the sale of a drawing is an inconsequential element of a service transaction which is exempt from the tax or whether it is a sale of tangible personal property subject to the tax.
Applying the true object test set forth in Virginia Regulation 630-10-97.1(B)(2), copy enclosed, I find that the Taxpayer's sale of the drawings is a sale of tangible personal property and not a service transaction. The true object of the sale is the drawing itself.
Therefore, the Taxpayer must charge the tax on the total sales price of his drawings to customers. Virginia Regulation 630-10-95(A)(1), copy enclosed, defines "sales price" as "the total amount for which tangible personal property or taxable services are sold and includes any services in connection with such sale. " (Emphasis added) .
The Taxpayer, however, may purchase tangible personal property which becomes a component part of the actual drawings (e.g. paper, ink, etc.) subject to a resale exemption certificate, Form ST- 10, copy enclosed. The only instance when the Taxpayer need not collect the tax from clients/customers is when the drawings are to be used in "media advertising." See Commissioner's Ruling dated October 31, 1988, copy enclosed. In this case, the Taxpayer would be considered the ultimate consumer of materials used in producing the drawings and would be liable for the tax at the time of purchase.
Furthermore, the computer equipment used in designing the drawings may not be purchased exempt from the tax since the Taxpayer's business does not qualify for the manufacturing exemption. See Commissioner's Determination Letter dated November 7, 1988, copy enclosed.
Drawing Management
In connection with the above transaction, the Taxpayer also provides drawing management, a database management service for the storage and revision of drawings. Under the "sales price" concept, the Taxpayer must charge the client the tax when tangible personal property is transferred in connection with the drawing management service. The true object of the drawing management in this instance is the sale of tangible personal property, the drawing. The tax does not apply, however, in those situations when the Taxpayer merely charges a library storage maintenance fee for the database management and provides no tangible personal property to its customer.
Customer Lists
The Taxpayer may also provide customer telephone and mailing lists to clients. Mailing and telephone lists that are specially designed ("customized") to a particular client's needs are exempt from the tax.
The true object of such a transaction is the acquisition of the services of the Taxpayer in designing the lists. See Commissioner's Ruling Letter dated May 28, 1985, copy enclosed. However, if the Taxpayer does not customize the list, then the Taxpayer must charge the tax to the customer at the time of sale.
Consultation
Finally, the Taxpayer will provide consultation to a client in formatting and structure development for a draft service manual. Consultation services provided independent from the sale of tangible personal property are not subject to the tax. However, these charges are subject to the tax if consultation services are provided in connection with the sale of tangible personal property by the taxpayer (e.g. consultation services provided in connection with the sale of a drawing).
If you have any further questions, please contact us.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner