March 30, 2022
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you seek correction of the sales and use tax assessments issued to ***** (the Taxpayer), as a result of an audit for the period August 2012 through April 2018. The assessments at issue have been paid in full. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, a dental and orthodontic practice located in Virginia, was audited by the Department. During the audit period, the Taxpayer purchased multiple computer software programs from a vendor. The invoice and other documentation provided did not specify whether the programs were physically delivered to the Taxpayer or electronically delivered by download. The auditor found that the vendor collected sales tax on the software that was delivered via a USB drive, but did not collect sales tax on the software that lacked any notation of its delivery method. Invoices on which no delivery method was designated were listed as exceptions in the audit report and an assessment was issued. The Taxpayer appeals the assessment, contending it received the software taxed in the audit through electronic delivery and the computer software qualifies for an exemption from the retail sales and use tax.
DETERMINATION
The Department’s longstanding policy is that the sale of software that is delivered electronically to a customer is not a sale of tangible personal property and is generally not subject to taxation. This policy only applies in cases where there is no disc, tape or other tangible medium provided to the customer before or after the electronic download of the software. The Department’s policy applies to updates provided electronically to customers when the original software is delivered electronically. See Public Document (P.D.) 05-44 (4/4/2005).
With its appeal, the Taxpayer submitted an email from a representative of the software vendor that references an invoice provided to the Taxpayer. The email states that only one item of software required a physical evekey for access and use and that nothing was mailed to the Taxpayer for the remaining purchases. The vendor goes on to say that sales tax was charged on only the one item of software requiring a physical evekey.
The Taxpayer also provided a “Software Order” form containing handwritten notes, a summary of the software order, and the Taxpayer’s signature with a date that matches the invoice date mentioned in the above email. The software order form contains a note that “[t]his [q]uote is good for 10 days. Sales tax will be added as required.” The order summary separately stated the sales of the prewritten software programs, licenses for the programs, training service charges, a data conversion fee, and a fee for monthly upgrades and service support for two office locations. The form featured a column titled “taxed” with an “x” filling the column next to each itemized charge. The Taxpayer noted in handwriting on the vendor’s invoice that one software program and its license were taxed as tangible personal property and appropriately entered on the form as estimated tax.
The Department adopted a documentation policy in P.D. 05-44 so as to provide guidance for taxpayers seeking an exemption from tax for electronically delivered computer programs. The public document explains, “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. The document goes on to state that “[w]ithout such proof, the Department will assume that the software is conveyed in tangible form and consider the software to be a taxable sale of tangible personal property.” See also P.D. 11-112 (6/20/2011), P.D. 15-118 (06/16/2015), P.D. 15-153 (7/16/2015), and P.D. 19-24 (4/8/2019).
In P.D. 15-153 (7/16/2015), however, the Department permitted the exemption for electronically delivered software in a case where the taxpayer submitted statements from the software vendor and sales invoices that confirmed electronic delivery of the software with its appeal under Virginia Code § 58.1-1821. In conjunction with the sales documentation reviewed during the audit, the information was deemed to meet the minimum documentation requirements for the exemption.
In this case, the documentation provided by the Taxpayer on appeal supports a finding that only one software program was physically delivered and that the appropriate sales tax was collected. The remaining items were electronically delivered over the internet with no corresponding tangible personal property being delivered so no sales tax is due. As such, this case is being remanded to the auditor to revise the assessment and issue a refund in accordance with this determination.
The Code of Virginia sections, regulation, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s website. If you have any questions about this determination, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1847.C