Were optional consulting services that gave customers instructions for modifying taxable canned software also subject to Virginia sales tax?

Subject

Taxpayer sells prewritten canned software programs

Plain-English summary

A seller delivered taxable prewritten software in tangible form and separately offered technical-design and programming consulting. The consulting gave customers a roadmap for modifying the software, contained no additional software or tangible property, and was optional.

Virginia treated the consulting and software as separate transactions. Because the customer could buy the consulting with the software, later, or not at all, the separately stated consulting qualified for the modification-service exemption in Va. Code § 58.1-609.5(6).

Citations and references

• Va. Code §§ 58.1-609.5(6) and 58.1-602.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-28

Original ruling text

March 23, 2017

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you request a ruling on behalf of your client (the “Taxpayer”) regarding the application of the Virginia retail sales and use tax to consulting services provided by the Taxpayer in connection with the sale of prewritten software programs. I apologize for the delay in responding to your request.

FACTS

The Taxpayer sells prewritten canned software programs that are transferred or delivered to the customer in tangible form, thus rendering the sale of such software the taxable sale of tangible personal property. In addition to the software, the Taxpayer sells consulting services related to the technical design and programming of the software. The consulting services do not include additional software or the exchange of tangible personal property. The sale of the consulting services is optional to the customer and may be sold in conjunction with the original purchase of the software, or may be purchased by the customer at a later date. The consulting services offered by the Taxpayer provide the customer with a roadmap, or instructions, as to what the customer would need to do in order to modify the original prewritten software.

The Taxpayer requests a ruling to determine if the consulting services constitute a taxable service in connection with the sale of tangible personal property or a separate nontaxable service.

RULING

Virginia Code § 58.1-609.5 sets forth the retail sales and use tax exemptions for services. Subsection 6 specifically exempts “an amount separately charged for labor or services rendered in connection with the modification of prewritten programs as defined in § 58.1-602.” The term “prewritten program” is defined in Va. Code § 58.1-602 to mean “a computer program that is prepared, held or existing for general or repeated sale or lease, including a computer program developed for in-house use and subsequently sold or leased to unrelated third parties.” It is undisputed that the Taxpayer is selling prewritten canned software, a taxable transaction. At issue is whether the optional consulting services for the modification of the prewritten software constitute taxable services in connection with the sale of taxable software.

As provided in your letter, the purchase of the consulting services is at the option of the customer and may be purchased simultaneously with the purchase of the prewritten software program, or may be purchased at a later date by the customer. In some instances, the customer may exercise their option not to purchase the consulting services at all. In addition, the consulting services do not include additional software or the exchange of tangible personal property. There is also no requirement or obligation that the customer purchase the consulting services at the time of purchase of the software or at a later date. This being the case, I find that the purchase of the software and the purchase of the consulting service are separate and distinct transactions. Therefore, the consulting services would qualify for the exemption set forth in Va. Code § 58.1-609.5(6) as separately stated service charges in connection with the modification of a prewritten program.

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

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions 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,

Craig M. Burns

Tax Commissioner