Rulings of the Tax Commissioner
Retail Sales and Use Tax
Nexus; computer equipment, software
Basis of Tax; Collection of Tax; Property Subject to Tax
September 19, 2001
Re: Request for Ruling: Retail Sales and Use Tax
This is in response to your letter requesting a ruling on the application of the retail sales and use tax to certain sales made by ***** (the "Taxpayer"). I apologize for the delay in responding to your letter. Copies of cited sources are enclosed.
The Taxpayer is a manufacturer of computer equipment, software, printers and related supplies. The Taxpayer also sells various computer-related repair services on a per-incident or contractual basis. In addition, the Taxpayer sells optional software support agreements providing software users with phone-in support capabilities and access to software updates, if any.
The Taxpayer's customers are both end-users and resellers. The resellers are retailers of computer goods and software solutions. A particular reseller has provided a resale exemption certificate from its home state. This reseller indicates that it has no presence or nexus in Virginia and is not registered to collect the Virginia retail sales and use tax. This reseller contracts with the Taxpayer to purchase and resell the Taxpayer's manufactured equipment to an end-user in Virginia. The products are shipped via common carrier directly from the Taxpayer's site located outside Virginia to the end user's location in Virginia.
You ask several questions regarding responsibility for collecting the sales tax. However, your letter does not mention whether the reseller is in any way connected to the Taxpayer. Absent information to the contrary, this response presumes that the reseller is
a division, an assignee, copartnership, joint venture or unit of the Taxpayer. If this presumption is incorrect, the answers to the questions presented below may differ.
Are sales to the reseller recognized as exempt sales for resale?
Yes. The reseller's resale exemption certificate is acceptable for use in this situation
the reseller is validly registered for sales and use tax purposes in its state and the other state's resale exemption certificate contains the minimum information required by Public Document (P.D.) 97-95 (2/21/97) and
Code of Virginia
§ 58.1-623. In lieu of using the other state's resale exemption certificate, this reseller may use Virginia's resale exemption certificate (
, Form ST-10) and reference its state's registration number and the name of its state of registration on the certificate. Also see P.D. 98-142 (10/8/98), 92-94 (6/5/92), and 91-314 (12/30/91).
. How does the tax apply to optional hardware maintenance agreements sold to resellers when the Taxpayer performs repair services at the end-user site or at the Taxpayer's location outside Virginia?
The tax applies only when the hardware maintenance agreement is sold at retail to the ultimate consumer. In this instance, the retail transaction is between the reseller and its customer,
, the end-user. Thus, the Taxpayer should not collect the sales tax from the reseller
it has obtained a properly completed resale exemption certificate from the reseller.
. How does the tax apply to an optional software support agreement providing for technical consulting services and updates?
The department has traditionally held that such agreements are (i)
when any updates are transferred on a tangible medium such as a disk, tape, etc., or (ii)
if all updates are transferred by electronic means only. See P.D. 98-19 (2/9/98).
Regardless of whether the agreement is taxable or exempt when sold at retail, the Taxpayer should not collect the sales tax from the reseller. The sale of a taxable agreement between the Taxpayer and reseller is considered an exempt sale for resale.
Thus, the Taxpayer must obtain a properly completed resale exemption certificate from the reseller. See Title 23 of the Virginia Administrative Code (VAC) 10-210-280.
. Without regard to Question #2 and Question #3 above, would the Taxpayer have any sales tax collection responsibilities when the reseller sells computer equipment and software to an end-user in Virginia and has the Taxpayer ship the products to the end user and install these products at the end-user site in Virginia using the Taxpayer's employee or a contractor hired by the Taxpayer?
The presence of the Taxpayer's employees or hired contractors in Virginia on behalf of the reseller does not necessarily create nexus for the reseller unless (i) the installation services involve solicitation of business on behalf of or for the benefit of the reseller, and (ii) an agency relationship between the Taxpayer and reseller is established. See P.D. 99-94 (4/30/99). If the Taxpayer does not establish an agency relationship with the reseller and does not solicit business on behalf of the reseller, no nexus is created for the reseller.
. What is the taxable base used to calculate the tax if the Taxpayer is required to collect the sales tax in any of the above transactions?
There is no taxable base for the Taxpayer because it is selling its product at wholesale to the reseller. In the event that the reseller is registered to collect the sales tax, the reseller would be obligated to collect the tax. See 23 VAC 10-210-1090. Otherwise, if the reseller has no nexus with Virginia and has not voluntarily registered with the department as a service to its Virginia customers, no collection of the sales or use tax should be made by the reseller. Rather, in these instances, it is the ultimate responsibility of the end-user to report and pay the use tax based on the sales price charged by the reseller.
If you have any questions about this response, please contact **** in the department's Appeals and Rulings Office at *****.
Danny M. Payne
Related Policy Documents:
PD 97-95, PD 98-142, PD 92-94, PD 91-314, PD 98-19, PD 99-94