Virginia: Printing and Programming Services Are Exempt
- Feb 20, 2014 | Gail Cole
When services are sold in conjunction with tangible personal property, those services are subject to Virginia sales tax (Va. Code § 58.1-602). In other words, labor and service charges billed “in connection with the sale of tangible personal property” are taxable, unless they're not.
The Virginia Department of Taxation audited a business (Taxpayer) that provides a number of services for customers: direct mail, electronic document, online bill pay services, and printing services. During the audit, the Taxpayer was assessed sales tax on the following three electronic document services used over the Internet:
- eView/eApprove, which allows Taxpayer’s customers to view electronic versions of documents, like bank statements and bills;
- DocSight, which allows third parties to view electronic versions of documents, like “bank statements that are viewed by a bank’s customers through the bank’s website;” and
- PDF Image Transfer, which allows customers to transfer documents in PDF format.
According to the auditor, the above services were subject to sales tax because they “were billed in connection with the Taxpayer’s sales of printed materials….” The Taxpayer disagreed and requested a ruling by the Virginia Tax Commissioner.
Electronic document services
The Taxpayer argued that its electronic document services have “no connection” to the production and sale of printed materials. Furthermore, the electronic document services under scrutiny are optional services, and charges for these services are separately stated on customer invoices. According to the Taxpayer, “the ‘true object’ of the electronic document services is to provide customers access to or the transfer of information electronically.”
Indeed, Virginia law allows, in part, “an exemption from the sales and use tax for ‘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 Tax Commissioner ruled that the Taxpayer’s electronic document services are indeed not connected to sales of printed materials, and should therefore not be subject to sales tax.
This is not the first time the Virginia Tax Commission has been asked to rule on the application of sales tax to programming services, and a policy of applying the true object test to transactions has been established. Virginia law allows an exemption from sales tax for custom programs (Virginia Code § 58.1-609.5 7). Custom program is defined as “a computer program which is specifically designed and developed for only one customer….”
Based on the information available, the department determined that the Taxpayer’s programming services are indeed “specifically designed and developed for one customer based on the software needs of that customer….” As such, charges for those programming services qualify for an exemption from sales tax.
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