Tax Type
Retail Sales and Use Tax
Description
Computers, services and software; Hardware and software sold to phone companies
Topic
Taxability of Persons and Transactions
Date Issued
05-14-1996
May 14, 1995
Re: Ruling Request: Retail Sales and Use Tax
Dear******************
This will reply to your letter of September 25, 1995, concerning the application of the retail sales and use tax to various charges for services and maintenance by ********** (the "Taxpayer"). The Taxpayer's customers are mainly independent telephone companies.
Your questions are answered below in the same order presented in your letter. Several of the answers are cited from the Virginia Retail Sales and Use Tax Regulations (hereinafter, "VR"), and applicable public documents ("P.D.") and statutes; copies enclosed.
Question 1: Is labor taxable as it relates to engineering, consulting and data processing services?
Under Virginia law, any services which are part of the retail sale of tangible personal property are subject to sales and use taxation, unless specifically exempted or excluded by statute. For example, see subdivisions 2 through 6 of Code of Virginia § 58.1-609.5. Generally, however, charges for engineering, consulting and data processing services which are independent of the sale of tangible personal property are considered professional service transactions which are exempt from sales taxation under Code of Virginia § 58.1-609.5(1). See P. D. 89-183 (6/13/89).
Question 2: Are flat fees invoiced for preparing engineering plans and specifications taxable?
Fees for engineering services to produce an original or master plan and specifications for a particular project are not taxable. However, charges for additional copies of such plans and specifications are subject to the retail sales and use tax.
Question 3: Are reimbursable expenses such as lodging, meals, mileage, car rental charges, and flights taxable when invoiced?
Service Transactions: If the purpose of the trip is merely to provide exempt services to customers on-site, charges to recover the cost of employee traveling, meals and lodging are not taxable. The Taxpayer's employees must pay the sales tax charged by the restaurant, motel or hotel on meals or lodging charges.
Taxable Retail Sales of Tangible Personal Property: If the purpose of the trip is for on-site installation of a computer system or other tangible property sold to a customer, all of the reimbursable costs incurred for an employee's travel and accommodations are considered part of the selling price of the tangible property. As such, only those service or labor charges which are statutorily exempted from the tax may be excluded from taxation.
Although a separately stated charge for the transportation or delivery of goods sold at retail to customers is exempt from the tax (see VR 630-10-107), employee travel and accommodation expenses incurred for the purpose stated above are not deemed a part of exempt transportation charges (i.e., the costs of shipping goods to customers). The statute also exempts separately stated charges for repair labor or for installation labor (i.e., the labor costs associated with setting up, affixing, connection and adjustment of the property sold). Employee travel and accommodation expenses are not deemed part of exempt installation or repair labor charges, as such employee costs are incurred prior to, in preparation of, or after the actual installation or repair labor process. For these reasons and as there is no statutory provision to exempt reimbursable charges for employee travel and accommodation expenses, such charges are taxable, whether separately stated or not.
Although the charge for "reimbursable" expenses in this instance is subject to taxation, the Taxpayer is also required to pay the sales tax on charges made by hotels, motels, restaurants, etc., for meals and lodging. Subjecting "reimbursement" charges to sales tax does not result in double taxation. This is because the reimbursement charges made by the Taxpayer in connection with the sale of tangible products and charges made by restaurants, motels and others for meals and lodging are separate and distinct transactions.
Question 4: Are installation and freight charges taxable when separately stated on a data processing system (i.e., computer hardware, etc.) invoice?
No. See VR's 630-10-97.1(B)(1) and 630-10-107. For installation of cabling, see P. D. 90-210 (11/28/90).
Question 5: Are computer training services taxable when invoiced on an hourly or flat fee basis?
No, provided such training services are furnished independent of the sale of tangible personal property. See Ruling of the Tax Commissioner dated July 31, 1986 and P. D. 94-251 (8/12/94).
Question 6: Taxpayer's staff includes computer support personnel who assist clients with computer program questions. Is this a taxable service?
No, provided such services are furnished independent from the sale of tangible personal property. Please refer to the answer to Question 1 above. Also see P D. 87--209 (9/15/87) on telephone consultations via hot line support agreements.
Question 7: Are fax charges taxable?
No, but charges for copies of a fax document are taxable. See P. D. 91-185 (8/30/91).
Question 8: Are charges for hardware maintenance taxable?
General Rule: For maintenance contracts, see VR 630-10-62.1. Effective January 1, 1996, maintenance contracts which provide for both repair or replacement parts and repair labor are subject to the tax upon one-half of the total charge for such contracts; see subdivision 9 of § 58.1-609.5 of the Code and Tax Bulletin 95-8. For repairs and maintenance which do not involve a maintenance contract, see VR 630-10-90.
Possible Exceptions: See VR 630-10-87 on public utilities. A telephone public utility is not subject to the retail sales and use tax on tangible personal property purchased only for direct use in the rendition of a utility's public service. Accordingly, a public utility does not have a blanket exemption to cover all of its purchases. For instance, subsections F and G of the public utility regulation set out those public service activities, such as production, transmission or distribution activities, for which an exemption applies. Subsection E of such regulation sets out that a public utility is liable for the tax on tangible personal property purchased for use in administrative and management functions (i.e., billing, engineering, insurance, and other activities which do not play an immediate part in the utility's public services). When tangible personal property will be used in both taxable and exempt activities by a public utility, the tax due on the item may be prorated between the percentage of time the property is used in a taxable manner and the percentage of time used in an exempt manner. Of additional importance, see subsection H (3), pages 66 through 68, of the public utilities regulation which details the general tax application for telephone utility accounts.
Question 9: Are charges for software maintenance taxable?
Virginia law makes a distinction between "custom" and "prewritten" programs which are defined in § 4 of VR 630-10-49.2. Charges for maintenance of "custom" computer software programs are not taxable. The application of the tax to maintenance charges for "prewritten" computer software programs is treated in the same manner as computer hardware; see"General Rule" and "Possible Exceptions" answers to Question 8 above.
Question 10: Is software taxable?
Charges for custom computer software are exempt in all instances. Charges for prewritten computer software are generally taxable, but separately stated charges for the modification of prewritten programs are exempt from taxation. Please refer to the answer to Question 9. For sales of prewritten computer software to telephone utilities, please refer to the "Possible Exceptions" answer for Question 8.
Question 11: Is tangible personal property, such as a computer system, taxable?
The retail sale, lease or rental of computer hardware or any other tangible products is generally subject to the sales tax. When selling tangible personal property to a telephone utility, the application of the tax will depend upon how the property will be used by the utility, as previously explained in the answer given for Question 8. Accordingly, the Taxpayer must use reasonable care and judgement in applying the exemption to its telephone utility customers as set out in VR 630-10-20.
Question 12: Taxpayer's services include CABS and Toll processing and client tape backup. Is the processing of client data, usually received on computer tapes, taxable?
Charges for data processing services, such as billing services, are generally nontaxable. Instead, as the provider of the service, the Taxpayer is liable for the tax on the cost price of tangible personal property used or consumed in providing its data processing services. Any charges for duplicate copies of billing statements, tapes or other tangible personal property are subject to the sales tax. If the transaction does not involve the provision of data processing services but is merely for a duplicate copy of a tape or the conversion of data from one medium to another, the transaction constitutes a sale of tangible personal property for which the total charge is subject to the sales tax. See P.D. 86-22 (1/16/86).
If you have any questions regarding this letter, please contact **** in my Office of Tax Policy at ********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10306R
Rulings of the Tax Commissioner