Sales Tax Articles
Sales Tax State Activity Update - April 2008
Look but Don't Touch for Virginia Software Exemption
Prewritten software downloaded electronically is exempt from Virginia sales tax because there was no exchange of tangible personal property. Accordingly, the exemption provided by Va. Code § 58.1-609.5 1 is applicable.
Facts
As a result of the sales tax audit, the Taxpayer was assessed tax on the untaxed purchase of prewritten software package. The Taxpayer contends that the software package was downloaded electronically from the vendor. The vendor who downloaded the applications and upgrades remotely performed all installations and upgrades by logging directly into the Taxpayer's server. In addition, all documentation related to the software package was electronically mailed to the Taxpayer.
Determination
Pursuant to Va. Code §§ 58.1-602 and 58.1-603, the transfer of tangible personal property for a consideration constitutes a retail sale subject to the Virginia retail sales and use tax.
These statutes support the Department's longstanding policy to apply the tax to the licensing of prewritten computer software if the license provides the customer not only the right to use the software, but also a copy of the software in some tangible form. If the customer only received the right to use the software this considered a service, and no tangible personal property is transferred, then Va. Code § 58.1-609.5 1 provides an exemption from the retail sales and use tax.
In this case, the agreement between the Taxpayer and the vendor does not specify a required method of delivery for the software. However, the additional documentation submitted by the Taxpayer indicates that the Taxpayer did not receive tangible personal property.
The Taxpayer provided electronic mail communications between representatives of the Taxpayer and the vendor to support its position. The electronic mail communications indicate that versions of the software were downloaded electronically via the vendor logging directly into the Taxpayer's server. In addition, other upgrades, including those related to reports, indexes and client programs were downloaded electronically.
The full text can be viewed on the Virginia Tax Policy Library.
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