January 30, 2019
Re: Request for Ruling: Retail Sales and Use Tax
Dear ******:
This is in response to your letter submitted on behalf of an anonymous client (the “Taxpayer”), in which you request a ruling on the application of the retail sales and use tax to fees for software activation codes sent via the Internet. I apologize for the delay in responding to your request.
FACTS
The Taxpayer purchases coin/bill-operated game terminals from manufacturers. The Taxpayer then enters into an agreement with operators who coordinate the placement of the terminals into third-party owned establishments. The agreement between the Taxpayer and an operator is such that the terminals are provided at no cost and the operator installs, services, and maintains the terminals in exchange for a share of revenue from them. Software comes installed in the terminals and in order to play the games on the terminal, the software must be activated. It must be reactivated in order to maintain access to the software, as well. The operator pays the Taxpayer a fee for software access or reactivation, and the Taxpayer provides a code the operator can enter into the terminal to activate the software. This code is provided electronically.
RULING
Virginia Code § 58.1-603 imposes the retail sales tax on the retail sale, lease or rental of tangible personal property in Virginia. Virginia Code § 58.1-602 defines “retail sale” as “a sale to any person…in the form of tangible personal property or services taxable under this chapter….” In addition, 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.
Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A interprets this exemption, stating charges for services generally are exempt from the retail sales and use tax unless the service is provided in connection with the sale of tangible personal property. The Department has held that transactions involving data accessed online by personal computers or the transmittal of information via fax, internet, or other electronic means are nontaxable service transactions.
Public Document (P.D.) P.D. 05-44 (4/4/05) outlines the Department’s policy that prewritten software delivered electronically does not constitute the sale of tangible personal property. P.D. 05-44 further explains “this same general policy applies to electronic software updates furnished to customers.” In P.D. 08-43 (4/17/08), the taxpayer sold additional music packages for jukeboxes, and the Department determined charges for additional services were nontaxable as no tangible personal property was provided.
In accordance with the above authorities, the software activation fee charged by the Taxpayer for the service of providing an electronic code to an operator for the continuation of services does not constitute a taxable transaction because no tangible personal property is provided.
It is the Department’s longstanding policy that, with regard to electronic delivery of software or related electronically delivered products, taxpayers should maintain a sales invoice, contract, or other sales agreement that expressly certifies electronic delivery and that no tangible medium has, or will, be furnished to the customer. Without such proof, the Department will assume that software and any related products are conveyed in tangible form, and as such, would constitute a taxable sale of tangible personal property.
I trust the aforementioned responds to your inquiry. his response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia section, regulation and public documents cited, along with other reference documents, 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 response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner