June 2, 2017
Re: § 58.1-1824: Protective Claim for Refund
Dear *****:
This will reply to your letter in which you submit a protective claim for refund on behalf of ***** (the “Taxpayer”) regarding sales and use taxes paid for the period August 2010 through December 2013. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer provides administrative functions and is the parent company for a corporate group that includes two subsidiaries. The Department's audit disclosed that the Taxpayer purchased assets and general merchandise without payment of the sales tax to suppliers or accrual and remittance of the use tax to the Department.
The Taxpayer is in agreement with the tax assessed on a majority of the purchases with the exception of two asset software purchases and one general expense renewal purchase of an annual software support contract. The Taxpayer contends these were purchases of electronically downloaded software. The Taxpayer has submitted documentation in support of its contention that the asset software and the annual support contract were electronically downloaded. The Taxpayer requests a refund of the tax and interest paid on the software at issue.
DETERMINATION
Virginia Code § 58.1-609.5 1 provides an exemption from the retail sales and use tax for:
Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made; ... and services not involving an exchange of tangible personal property which provide access to or use of the Internet and any other related electronic communication service, including software, data, content and other information services delivered electronically via the Internet.
The Taxpayer has submitted documentation to support that the asset software purchases were electronically downloaded. Accordingly, the Department's audit will be revised to remove these purchases.
With regard to the remaining transaction, there was no electronic download exemption available as the transaction at issue involved the purchase and physical delivery of manuals and a computer disc (CD). This fact was stated by the vendor in its electronic mail to the Taxpayer. In Public Document (P.D.) 05-44 (4/4/05), a taxpayer asked about the taxability of prewritten software and software maintenance (updates) when sold at retail and delivered to customers electronically. The Tax Commissioner ruled that “at a minimum, a sales invoice, contract or other sales agreement must expressly certify the electronic delivery of the software and that no tangible medium for that software has been or is to be furnished to the customer.” In this instance, the Taxpayer received manuals and software in tangible form prior to the electronic delivery of any subsequent upgrades.
Notwithstanding the above, Virginia Code § 58.1-609.5 9 provides that “maintenance contracts, the terms of which provide for both repair or replacement parts and repair labor, shall be subject to tax upon one-half of the total charge for such contracts only . . . ." The Department's auditor has noted that the purchase at issue represents the purchase of a maintenance agreement that qualifies for treatment under Va. Code § 58.1-609.5 9. Accordingly, this transaction will also be adjusted by 50%.
The Department's audit will be returned to the field audit staff for the foregoing revisions. Once revised, the Department will issue the appropriate refund of the tax paid, plus refund interest in accordance with Va. Code § 58.1-1833
The Code of Virginia sections and public document cited are available on-line in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov. If you have any questions regarding this matter, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/676.Q