Virginia Clarifies Taxation of Prewritten Software
- Jul 17, 2015 | Gail Cole
It comes down to the form of delivery.
The Virginia Tax Commission recently issued a ruling regarding the taxation of prewritten or “canned” software. The buyer (Taxpayer) contends that the software was delivered electronically and therefore qualifies for an exemption from Virginia sales and use tax. In addition, he contends that services received in connection with the purchase of the software are exempt. The Tax Commissioner respectfully disagrees.
The Virginia Department of Taxation requires sellers to document the electronic delivery of software products. Electronic delivery — and solely electronic delivery — must be expressly certified on the sales invoice, sales contract, or on some equally valid sales documentation. There must also be written proof that “software has not and will not be furnished in tangible form to the customer.”
Although the Taxpayer was able to furnish email communications supporting the electronic delivery of the software, there is also evidence of a tangible delivery. The sales invoice includes a “ship to” address and references the delivery of “object code copies of the Shrink-wrap Software….” Furthermore, the sales contract “includes the provision of additional software on a DVD.”
Whether or not the Taxpayer made use of the DVD is irrelevant: the fact that it was transferred from the vendor to the Taxpayer makes the transaction subject to retail sales tax.
Under Va. Code § 58.1-602, the taxable sales price is “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale….”
Since the vendor in this case did not collect sales tax on the services, the Department of Taxation assessed use tax on them. The Tax Commissioner found that to be correct. Read Ruling 15-118 in full here.
If sales and use tax is generally confusing, the application of sales and use tax to digital goods and services is particularly so. Learn more about the identification and taxability of digital products.