Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; Computer systems
Topic
Taxability of Persons and Transactions
Date Issued
06-20-1996
June 20, 1996
Re: Request for Ruling: Retail Sales and Use Tax
Dear***********
This is in response to your request for a ruling on the application of the sales and use tax to computer hardware and software sold by *****(the "Taxpayer"). Your correspondence has been forwarded to my attention from the department's *****District Office.
FACTS
The Taxpayer develops and sells a computer software sales system which is designed for automotive dealers. This software sales system is used as a marketing tool by your customers and consists primarily of graphics, digitized photos, and information most of which are specific to each customer.
In those instances when a customer already owns applicable computer hardware, the Taxpayer travels to the customer's site to load the software sales system onto the customer's computer. In other cases, the Taxpayer purchases computer hardware on behalf of specific customers. I understand that in these cases the hardware is delivered to the Taxpayer's graphic's division in ***** where the software sales system is loaded onto the computer. The hardware, including the software, is then delivered to customers both within and without Virginia.
Customers pay the Taxpayer an initial fee which includes payment for the hardware (if applicable), software customization, installation, and initial training. Customers also pay a monthly fee, which is primarily a license charge for the use of the software sales system. The monthly fee also includes ongoing training and software maintenance, and you indicate that any software maintenance is provided by the Taxpayer at the customer's site.
Upon payment of the initial fee, the hardware becomes the property of the customer, but customers never take title to the software sales system. If customers decide they no longer wish to pay the monthly fee, the software is removed from their computers.
RULING
Custom software v. prewritten software: The first question to be determined in this case is whether the Taxpayer's software sales system is a custom software program or a prewritten program. In this regard, Code of Virginia § 58.1-602 defines a "custom program" to be:
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- 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. (Emphasis added)
It does not appear that the software sales system is a "custom program" as defined above. For example, the Taxpayer's initial agreement specifies the Taxpayer is providing a "customized version of the [Taxpayer's] Sales System". Further, this document also indicates that the Taxpayer will "perform initial programming to customize the [Taxpayer's] Sales System to the specific needs" of the customer. This language strongly suggests that the sales system is not "specifically designed and developed only for one customer" as the statute requires.
I agree that the Taxpayer's product is not the same as off-the-shelf generic software. I would also agree that a customer's data, including digitized photographs, is custom information. It appears, however, that the Taxpayer uses a basic program (referred to as the Sales System) which is then customized for each specific customer.
Tangible v. nontangible computer software: Because the Taxpayer delivers its software to customers in a variety of ways, a second question in this case is whether the software sales system is tangible or intangible property.
Code of Virginia § 58.1-603 imposes the tax on the sale or distribution of tangible personal property in Virginia. As set out in the enclosed Public Documents 86-147 (7/31/86) and 87-209 (9/15/87), the department determined that the tax applies to the sale or lease of computer software which is provided to customers in tangible form. Similarly, the tax applies to the licensing of computer software if the license agreement permits the customer not only the right to use the software, but a copy of the software itself in some tangible form.
Conversely, computer software which is transferred to the customer via a modem, or which is keyed into a customer's computer by the software vendor, is not the sale of tangible personal property. Accordingly, the sale of computer software in such nontangible forms is not taxable.
With this in mind, the application of the tax to the Taxpayer's transactions is as follows:
Loading the software sales system onto customer-owned computer: As discussed above, when the Taxpayer travels to a customer's site and loads the sales system onto customer-owned hardware, the Taxpayer is not providing tangible personal property. Accordingly, neither the initial fee nor the monthly fee are subject to the tax in this type of transaction.
Sales of hardware and software: The term "sale" is defined in Code of Virginia § 58.1-602 to mean "any transfer of title or possession ... in any manner or by any means whatsoever, of tangible personal property...." This same section then defines "sales price" to be "the total amount for which tangible personal property or services are sold ... without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever."
Initial fee: When the Taxpayer loads the software sales system into hardware which is purchased for customers, the subsequent sale of the product (which includes hardware and software) is deemed to be the taxable sale of tangible personal property. Accordingly, if the initial fee represents a lump-sum charge for computer hardware, sales system customization, delivery, installation and other services, the Taxpayer must charge and collect the tax on the entire charge.
As indicated in Virginia Regulation 630-10-95, separately stated charges for installation and delivery would be exempt from the tax. Furthermore, as authorized by Code of Virginia § 58.1-609.5(6), the Taxpayer's labor and service charges for sales system customization would also be exempt provided such charges are separately stated. Other charges included in the initial fee would remain fully taxable even if separately stated.
Further, this application of the tax to charges for the computer hardware is not altered in any way by your assertion that the Taxpayer is acting as an agent for the customer when it purchases computer hardware. The Taxpayer is clearly making a sale of tangible personal property as defined above, and the tax must be charged on the sales price of that transaction.
Monthly fee: The monthly licensing fee entitles the customer to use a customized prewritten program which has been delivered in tangible form (with the computer hardware). The monthly fee therefore entitles the customer to use tangible personal property and is thus taxable. The fact that title to the software sales system has not passed to the customer is not determinative. Possession has been given to the customer, and the transfer of possession qualifies as a sale for sales and use tax purposes.
Taxpayer purchases: Since the computer hardware is first delivered by vendors to the Taxpayer's location in****, the Taxpayer is advised to contact the **** Department of Revenue to determine how that state treats the transaction. ***** Sales and Use Tax Division may be contacted by calling *****.
For Virginia purposes, computer hardware which is delivered to the Taxpayer in Virginia for resale may be purchased by the Taxpayer exempt of the tax. When making purchases of computer hardware for resale, the Taxpayer must give its vendors a fully completed certificate of exemption, Form ST-10.
While computer hardware purchased for resale may be purchased exempt of the tax, the Taxpayer is required to pay the tax on all tangible personal property used in Virginia to provide its software sales system. This includes all computer hardware and computer software used by the Taxpayer to create and customize the sales system, provided that such property is used in Virginia.
I trust that this information addresses your concerns. If you have any questions, please contact***** in my Office of Tax Policy at ****** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9085I
Rulings of the Tax Commissioner