SALT Report 2709 – The Virginia Tax Commissioner issued a letter ruling regarding the taxability of computer setup and configuration charges. The Taxpayer in this case operates a computer sales and service company. As a part of its installation service the Taxpayer will generally unpack products, attach peripherals, plug in the power cord, add client purchased software, transfer files from an old computer to a new computer, adjust network connections to accept the hardware, and check for compatibility.
During an audit the Taxpayer was issued a sales tax assessment 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 appealed the assessment claiming that the setup and configuration charges qualified as exempt installation labor charges.
Upon review of the case, the Commissioner referred to Va. Code §58.1-609.5(2) which provides an exemption for “an amount separately charged for labor or services rendered in installing….property sold.” The Commissioner stated that installing 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, all of which are computer installation activities necessary to set up the computer.
The Commissioner stated that although some of these activities may be similar to installation activities, not all configuration activities are similar to installation activities. However, in this case, adjusting the network connections on a computer for it to accept hardware is considered a configuration activity that is also an installation activity. This type of activity is intended to prepare the computer for use after it is physically installed and is considered part of the installation of the computer. The same applies to checking the computer for compatibility issues.
In regards to the transfer of files from an old computer to a new computer, this type of activity is considered part of an exempt installation activity because it is performed in connection with the installation of a computer and does not involve the “taxable conversion” of data from one media to another. For example, the transfer of old computer data to a new computer is exempt as a part of its installation when the transfer occurs through use of the customer’s keyboard or another electronic medium.
Based on the above, the Commissioner determined that the Taxpayer’s separately stated setup and configuration charges were exempt from Virginia sales and use tax as installation charges and the audit assessment was revised.
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