How did Virginia tax broadcast servers, software, support, maintenance, installation, and delivery sold by an out-of-state provider?

Subject

Tax on the sale of certain broadcasting equipment, software and related services

Plain-English summary

Virginia gave a mixed answer: equipment used directly to transmit broadcast signals was exempt, while editing, storage, tangible software, and several connected services were taxable. The provider's servers performed both exempt transmission and taxable editing or storage, so the taxable and exempt use had to be prorated and tax applied to the taxable share of the sales price.

Prewritten conversion software was not itself used directly to disseminate a signal. It was taxable when delivered on tangible media or installed as part of equipment. Pure electronic delivery without any tangible medium was not taxed only when the software was not sold in connection with tangible personal property such as a server.

Customer support and training sold with taxable property were taxable and followed the equipment's proration. Sold independently, those services were not taxable. Labor-only maintenance contracts were not taxable, parts-only contracts were fully taxable, and combined parts-and-labor contracts were taxed on 50% of the price. Separately stated installation, repair labor, and transportation were exempt, but combining exempt and taxable services in one lump-sum charge could make the full charge taxable.

The out-of-state provider also had Virginia collection nexus because traveling representatives solicited sales and provided installation and maintenance services in Virginia.

What this means for you

• The broadcasting exemption follows direct signal transmission, not equipment merely used to create, edit, convert, or store programming material.
• Dual-use servers require a supportable allocation between exempt broadcasting use and taxable use.
• Delivery method and bundling matter for software: tangible or equipment-connected software was taxable, while qualifying stand-alone electronic delivery was not.
• Separately state exempt installation, repair-labor, and transportation charges instead of combining them with taxable services.
• Out-of-state sellers can have Virginia sales-tax collection duties through in-state employees, contractors, agents, or representatives even without a Virginia office.

Common questions

Q: Were the broadcast video servers completely exempt?
A: No. Their direct signal-transmission use was exempt, but editing and storage were taxable uses, requiring proration.

Q: Was downloaded software exempt?
A: It was not taxed when delivered electronically with no tangible medium and not sold in connection with tangible personal property. Software delivered tangibly or installed with equipment was taxable.

Q: How were support and training taxed?
A: When sold with taxable property, they were taxable and followed any equipment proration. When sold independently of tangible personal property, they were not taxable.

Q: How were maintenance contracts treated?
A: Labor-only contracts were not taxable, parts-only contracts were fully taxable, and parts-and-labor contracts were taxable on 50% of the sales price.

Q: Why did the seller have Virginia nexus?
A: Its traveling representatives solicited Virginia customers and performed installation and maintenance services in the state.

Citations and references

• Va. Code §§ 58.1-609.6 2; 58.1-609.5 1, 2, 3, and 9; and 58.1-612.
• 23 VAC 10-210-3030, 10-210-910, 10-210-3050, and 10-210-6000.
• Tax Bulletin 95-8 (Sept. 27, 1995).
• WTAR Radio-TV v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977).
• Winchester TV Cable Co. v. State Tax Commissioner, 216 Va. 286, 217 S.E.2d 885 (1975).
• General Trading Co. v. State Tax Commission of Iowa, 322 U.S. 335 (1944).
• P.D. 93-240 (Dec. 28, 1993).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-167

Original ruling text

September 11, 2008

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter requesting a ruling on the application of the retail sales and use tax to the sale of certain broadcasting equipment, software and related services. I apologize for the delay in responding to your letter.

FACTS

An out-of-state corporation (the "Taxpayer") is a provider of broadcast computer equipment (servers) and software used to transmit data via television. The Taxpayer sells these products to public radio and television broadcasting stations and to nonprofit public broadcasting stations in the United States. In connection with its server sales, the Taxpayer provides installation, customer support, training services, and repair and maintenance services.

The Taxpayer does not maintain a home office in Virginia, nor does it employ Virginia residents for sales or active solicitation. Rather, the Taxpayer uses traveling sales representatives that solicit sales to Virginia based customers and provide installation and maintenance services to these customers. The Taxpayer requests a ruling that its sales of broadcasting equipment and services are exempt from the Virginia retail sales and use tax.

RULING

Generally, the retail sale of tangible personal property in Virginia is subject to the retail sales and use tax. The only exceptions are those sales that qualify for one of the exemptions specifically set out in Virginia Code § 58.1-600 et seq . Pursuant to Va. Code § 58.1-609.6 2, the tax does not apply to:

Broadcasting equipment (and parts and accessories for that equipment) and towers used or to be used directly in broadcasting by commercial radio and television companies, wired or land based wireless cable television systems, common carriers or video programmers using an open video system or other video platform provided by telephone common carriers, or concerns which are under the regulation and supervision of the Federal Communications Commission and amplification, transmission and distribution equipment used or to be used by wired or land based wireless cable television systems, or open video systems or other video systems provided by telephone common carriers.

This broadcasting exemption applies regardless of whether the broadcasting establishment is conducted for profit or is a nonprofit organization. Furthermore, Title 23 of the Virginia Administrative Code (VAC) 10-210-3030 defines broadcasting to mean "transmitting and not programming (program preparation)." Thus, the exemption is applicable to "broadcasting equipment and accessories to such equipment used directly in disseminating a signal into the air." However, "[e]quipment and accessories used to create the material to be disseminated are taxable." This regulation is consistent with the decision made by the Virginia Supreme Court in WTAR Radio-TV v. Commonwealth , 217 Va. 877, 234 S.E.2d 245 (1977). Also see Winchester TV Cable Co. v. State Tax Commissioner , 216 Va. 286, 217 S. E.2d 885 (1975).

To support an exempt sale, the Taxpayer must obtain from its customers a completed certificate of exemption. The Department has issued Form ST-20 as the certificate of exemption used in claiming the broadcasting equipment exemption.

Servers

The Taxpayer offers broadcast quality video servers specifically designed to transmit data and content to on-air operations. Although transmission is the primary function, the servers are also used to edit content before transmission and to store content after transmission for future airing. To the extent this equipment is used directly in broadcasting a signal over the airwaves to viewers, the servers will enjoy the exemption. Because these servers are also used to edit and store content, they are used in a taxable manner based on the prior precedents set out by the courts. As such, the proration of taxable versus exempt use must be established. Once such proration is established, the tax is applied to the taxable portion of the sales price.

Software

Prewritten conversion software is used to prepare and manage media content for on-air operations. For example, the software is used to convert data from standard definition to high definition and signals from analog to digital. Customers may purchase the software either in conjunction with broadcasting equipment or separately via the Internet. When the software is delivered electronically, no disc, tape or other tangible medium is subsequently provided to the customer.

While this software is necessary for converting data and signals, it is not used directly to disseminate signals over the airwaves. Accordingly, the software is taxable when delivered in tangible form with or without the equipment or installed as part of the equipment. When electronically delivered and no tangible medium is provided, no tax will apply provided the electronically delivered software is not sold in connection with the sale of tangible personal property, such as a server. See Va. Code § 58.1-609.5 1.

Taxable Services

Generally, the application of the retail sales and use tax to services charged in connection with the sale of tangible personal property depends upon whether the property sold is taxable or not. If taxable property is sold, then the services charged in connection with such property are generally taxable based on the sales price definition set out in Va. Code § 58.1-­602.

Taxable services are those included or sold in connection with the taxable sale of tangible personal property, except for those services specifically exempted by statute. Examples of taxable services sold in connection with the sale of tangible personal property are customer support services and training services as provided in this instance. If the tax on the sale of equipment must be prorated, then the tax on the services will also follow the same tax proration.

When customer support services and training services are sold independent of any sale of tangible personal property, the charges for such services are not taxable in accordance with Va. Code § 58.1-609.5 1.

Contracted Maintenance Services

If maintenance services are furnished as a result of entering into a contract for the repair or maintenance of a server over a period of time, the tax treatment would generally follow the maintenance contract regulation asset out in Title 23 VAC 10-210-910. Labor only contracts are not taxable. Parts only contracts are subject to the tax based on 100% of the sales price. However, parts and labor contracts are subject to tax based on 50% of the sales price. See Va. Code § 58.1-609.5 9 and Tax Bulletin 95-8 (9/27/95).

Exempt Services

A separately stated charge for installation labor is exempt pursuant to Va. Code § 58.1-609.5 2. Separately stated repair labor is also exempt pursuant to Va. Code § 58.1-609.5 2. See Title 23 VAC 10-210-3050 on repair businesses. Further, a separately stated transportation charge is exempt pursuant to Va. Code § 58.1-609.5 3. See Title 23 VAC 10­210-6000 on transportation and delivery charges.

Any of the above statutorily exempt services could become taxable if combined with a taxable service into a lump-sum charge. For instance, a lump-sum charge for exempt shipping and taxable handling is fully taxable. See Title 23 VAC 10-210-6000.

Nexus - Collection of Sales Tax

Pursuant to Va. Code § 58.1-612 A, the sales tax is collectible from all persons who are dealers. Virginia Code § 58.1-612 B defines the term "dealer" to include every person who "[i]mports or causes to be imported into this Commonwealth tangible personal property from any state or foreign country, for sale at retail, for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth." As such, the Taxpayer qualifies as a "dealer" under § 58.1-612.

Virginia Code § 58.1-612 C sets forth the nexus requirements that give Virginia the authority to require a business to register for the collection and remittance of the Virginia retail sales and use tax. The statute provides in part that a dealer shall be deemed to have sufficient activity or nexus in Virginia if the dealer solicits business in Virginia by employees, independent contractors, agents or other representatives. Based on the facts presented, the Taxpayer satisfies this requirement and is subject to the registration and collection requirements of the Virginia retail sales and use tax.

I would also note the decision made by the United States Supreme Court in General Trading Co. v. State Tax Commission of Iowa , 322 U.S. 335 (1944). In that case, the presence of traveling salesmen in a state constituted sufficient nexus to impose use tax collection responsibilities. The requirement to collect Iowa's use tax was upheld regardless of the fact that General Trading Company did not maintain a branch, office, or warehouse in Iowa. Also see Public Document 93-240 (12/28/93).

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

The Code of Virginia sections, regulations, bulletin and the public document cited are available on-line at www.tax.virginiai.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this ruling, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1868481371.R