Were separately charged computer setup and configuration services exempt installation labor in Virginia?

Plain-English summary

Virginia treated the company's qualifying computer setup and configuration charges as exempt installation labor. The taxpayer sold and serviced computers. Its audit taxed setup and configuration associated with equipment sales and trip charges associated with taxable repairs.

Installation included more than physically placing and plugging in the computer. On these facts, it could include attaching peripherals, adding customer-ordered off-the-shelf software, transferring files from the old computer, adjusting network connections to accept hardware, and checking compatibility, because those tasks prepared the computer for use after placement.

The file-transfer rule had a boundary. Moving old data electronically or through the customer's keyboard could be part of exempt installation, but converting data from one medium to another was taxable. Virginia also warned that configuration is not automatically synonymous with installation; each activity must fit the installation function.

The audit was ordered revised for qualifying setup and configuration charges. The ruling did not overturn prior policy and did not separately remove the trip charges mentioned in the audit facts.

What this means for you

• Separately state computer-installation labor on the invoice.
• Describe the work as preparing the sold computer for use, with task-level detail.
• Distinguish electronic migration from taxable conversion between media.
• Do not assume every configuration, consulting, or repair-related charge qualifies as installation.

Common questions

Q: Did loading off-the-shelf software qualify?
A: Yes, when it was customer-ordered and performed as part of installing the new computer.

Q: Was file migration exempt?
A: It could be exempt when electronically transferring old data to the new computer, but not when converting data from one medium to another.

Q: Were network and compatibility checks installation?
A: Yes on these facts, because they prepared the computer for use after physical placement.

Q: Did the ruling exempt the repair-trip charges?
A: The operative determination addressed setup and configuration charges, not separate relief for the trip charges identified in the facts.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, and 58.1-609.5 2.
• Virginia Public Documents 87-88 and 98-12.
• Commonwealth v. Community Motor Bus Company, 214 Va. 155, 198 S.E.2d 619 (1973); Commonwealth v. Pounding Mill Quarry Corp., 215 Va. 647, 212 S.E.2d 428 (1975); and WTAR Radio-TV Corporation v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977).

Subject

Computer sales and service company/ exempt installation charge/trip charges

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-119

Original ruling text

July 1, 2013

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer"), as a result of an audit for the period January 2009 through December 2011. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a computer sales and service company. An audit resulted in the assessment of sales tax on trip charges made in connection with taxable repairs of equipment and on setup and configuration charges made in connection with taxable sales of equipment.

The Taxpayer takes exception to the tax assessed on setup and configuration charges and contends such charges are exempt installation labor charges. According to the Taxpayer, a typical installation includes unpacking the product, attaching peripherals, plugging in the power cord, adding client ordered off-the-shelf software, transferring files from the old computer to the new computer, adjusting network connections to accept the hardware, and checking for compatibility. The Taxpayer contends that the legal definition of "install" as set out in Public Document (P.D) 98-12 (1/20/98) should apply to the setup and configuration charges at issue in this case. The Taxpayer indicates that these charges did not involve any labor to fabricate or create the product.

DETERMINATION

For any sale of tangible personal property, the sales tax is imposed on the gross sales price of tangible personal property sold at retail or distributed in Virginia. See Va. Code § 58.1-603. Virginia Code § 58.1-602 defines "sales price" to mean "the total amount for which tangible personal property or services are sold, including any services that are part of the sale . . . without any deduction therefrom on account of the cost of the property, the cost of materials used, labor or service costs, losses or any other expenses whatsoever." As such, all services furnished in connection with the sale of tangible personal property are subject to the sales tax. The only exceptions to the taxation rule are the specific exemptions set out in the statute, such as the exemptions listed in Va. Code § 58.1-609.5. For the issue in question, subdivision 2 of Va. Code § 58.1-609.5 provides an exemption from the retail sales and use tax for "[a]n amount separately charged for labor or services rendered in installing, applying, remodeling or repairing property sold."

In P.D. 98-12, a taxpayer that sold and installed office furniture and workstations was assessed tax on installation charges on the belief that such charges included assembly labor. The Tax Commissioner made the following determination:

Black's Law Dictionary (1995) defines "install" as "[t]o set up or fix in position for use or service." When the Taxpayer receives the workstation panels from the manufacturer, the panels are ready to be installed. There is no assembly performed by the Taxpayer, nor is it needed, prior to installation of the panels. The finished panels are set in place and connected to create a workstation. Desktops, file cabinets, light fixtures, and similar items are then attached to the workstation, which is then ready for use by the customer. Based on the information provided by the Taxpayer, I agree that the Taxpayer is merely performing installation services in connection with the sale of workstations to its customers. The charges for installation labor will be removed from the audit.

In claiming an exemption, we must keep in mind that any exemption from the retail sales and use tax is strictly construed against the one claiming it. The courts have consistently enforced this rule on numerous occasions. For example, see Commonwealth v. Community Motor Bus Company , 214 Va. 155, 198 S.E.2d 619 (1973), Commonwealth v. Pounding Mill Quarry Corp. , 215 Va. 647, 212 S.E.2d 428 (1975) and WTAR Radio-TV. Corporation v. Commonwealth , 217 Va. 877, 234 S.E.2d 245 (1977). Thus, care must be taken in construing an exemption so that it is not used beyond its intended purpose.

While installation of a computer in a customer's business involves unpacking the computer, the physical placement of the computer, the attachment of peripherals and plugging in the power cord, installation activities of a computer would also include setting up the computer for use after its physical placement. For example, installation would include activities such as adding client ordered off-the-shelf software, transferring files from the old computer to the new computer, adjusting network connections to accept the hardware, and checking for compatibility.

While some configuration activities may be synonymous with the act of installation, it must be emphasized that not all configuration activities are synonymous with installation. In this case, adjusting the network connections on a computer for it to accept certain hardware is a configuration activity that is also an installation activity. Such activity is intended to prepare the computer for use after its physical installation and is thus part of the installation of the computer. The same rationale applies to checking the computer for compatibility.

In regard to the transfer of files from the old computer to the new computer, such activity may be considered as part of an exempt installation activity when performed in connection with the installation of a computer and provided that it does not involve the taxable conversion of data from one media to another. A taxable conversion involves the transfer of data from one medium to another medium. See P.D. 87-88 (2/27/87). Whereas, the transfer of old computer data to a new computer is exempt as a part of its installation when the transfer is keyed through the customer's keyboard or performed via some other electronic medium.

Based on the foregoing and the particular facts presented in this case, I find basis for treating the contested charges as exempt installation charges, provided such activities fall within the guidelines noted above. While this determination does not overturn any prior ruling, it does point out some exceptions to the general policy of taxing configuration and setup charges.

CONCLUSION

The audit assessment will be revised in accordance with this determination. If a balance remains after the revision, an updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges.

The Code of Virginia sections and public documents 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

AR/1-5112574831.R