Were remote grid-computing charges taxable in Virginia, and what tax applied if the provider moved or bought service equipment in Virginia?

Subject

Taxpayer is offering nontaxable grid computing service to its customers.

Plain-English summary

Virginia treated the described grid-computing charges as nontaxable electronic services because customers remotely accessed computing resources over the Internet and received no tangible personal property. The answer applied to Virginia and non-Virginia customers.

The equipment side was taxable to the service provider. New equipment bought for use in Virginia was subject to sales or use tax because the provider was the user and consumer of property used to deliver the service.

Existing equipment moved into Virginia could qualify for a relocation exception if the company was a nonresident business not already doing business in Virginia and the property had been bought more than six months before it was first brought into Virginia or before the business was established, whichever occurred first. Documentation was required.

What this means for you

• Separate the tax treatment of customer service charges from provider infrastructure.
• Remote access without tangible deliverables supported service treatment under the rule applied here.
• The provider can still owe tax on servers and other equipment used to deliver a nontaxable service.
• Preserve acquisition dates, prior use, business-establishment dates, and migration records for relocated equipment.

Common questions

Were per-CPU-hour charges taxable? No, on the described remote-access facts.

Did customer location change the service answer? No. The ruling found no collection duty on Virginia or non-Virginia customer charges.

Was all equipment moved into Virginia exempt? No. The older-equipment exception had nonresident-business and six-month conditions.

Citations and references

• Va. Code § 58.1-607, § 58.1-604, and § 58.1-609.5(1).
• 23 VAC 10-210-4040 and 23 VAC 10-210-6030.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-126

Original ruling text

August 17, 2007

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you request a ruling on the application of the retail sales and use tax to the provision of grid computing services by * (the "Taxpayer"). I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is headquartered outside of Virginia and is engaged as a manufacturer, wholesaler and retailer of network computing products and services. As a new service, the Taxpayer is offering grid computing service to its customers.

The grid computing service provides customers remote access, via the Internet, to Taxpayer owned computer facilities on an as-needed basis. The customer is billed on a per central processing unit per hour basis. The grid computing service allows the client to have access to computing resources without having to design, procure, install and manage their own local infrastructure.

Currently, the equipment used to provide the service is housed outside Virginia. The Taxpayer is considering moving the equipment into Virginia and questions the application of the retail sales and use tax to the transfer of this equipment. The Taxpayer also requests a ruling on the application of the retail sales and use tax to its grid computing service.

RULING

Transfer of Equipment to Virginia

Virginia Code § 58.1-607 provides that "[t]he use tax shall not apply to tangible personal property purchased outside this Commonwealth for use outside this Commonwealth by a then nonresident natural person or business entity not actually doing business within this Commonwealth, who later bring such tangible personal property into this Commonwealth in connection with his establishment of a permanent residence or business in this Commonwealth, provided that such property was purchased more than six months prior to the date it was first brought into this Commonwealth or prior to the establishment of such residence or business, whichever first occurs."

In order to enjoy the benefits of Va. Code § 58.1-607, the Taxpayer must be a nonresident business entity not doing business in Virginia. Furthermore, the Taxpayer must be able to provide evidence and documentation to support that the equipment brought into Virginia was purchased more than six months prior to the date it is first brought into Virginia or prior to the establishment of the business. If the Taxpayer satisfies these requirements, it is not subject to use tax on equipment brought into Virginia.

Addition of New Equipment

As a service provider, the Taxpayer is deemed the user and consumer of all tangible personal property used in Virginia in the provision of its service. See Title 23 of the Virginia Administrative Code (VAC) 10-210-4040.

Virginia Code § 58.1-604 imposes the use tax on the "use and consumption of tangible personal property in this Commonwealth, or the storage of such property outside the Commonwealth for use or consumption in this Commonwealth In accordance with Va. Code § 58.1-604, the Taxpayer is subject to tax on the sales price of the equipment placed in use in Virginia in connection with the grid computing service. The Taxpayer must pay the Virginia tax at the time of purchase; however, if the vendor fails to collect the tax or is not registered to collect the Virginia tax, the Taxpayer must remit use tax based on the cost price tax directly to the Department. See Title 23 VAC 10-210-6030.

Charges to Virginia and Non-Virginia Customers

Virginia Code § 58.1-609.5 1 provides an exemption from the sales and use tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made . . . and services not involving an exchange of tangible personal property which provide access to or use of the international network of computer systems commonly known as the Internet, and any other related electronic communication service, including software, data, content and other information services delivered electronically via the Internet."

The Department traditionally has held that transactions involving data accessed on-line by personal computers are nontaxable service transactions under Va. Code § 58.1-609.5 1. This is also true of information sent via fax, Internet, or other electronic means. Intangible property or services generally are exempt from the tax unless provided in connection with the sale of tangible personal property.

The grid computing service, as described in your letter, involves electronic communications activity conducted via remote access on-line. Because there is no exchange of tangible personal property, the service is deemed a nontaxable service transaction. Therefore, the Taxpayer is not required to collect the Virginia sales tax on the charge to Virginia customers or non-Virginia customers for such services.

This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.

The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this ruling, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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