Were software license fees under the same contract decided in Intersections exempt from Virginia sales and use tax for 2002-2004?

Subject

True object of the contract is the performance of a service license fees exempt

Plain-English summary

Virginia had assessed sales and use tax on software license fees paid under a contract with DMS for January 2002 through December 2004. The taxpayer argued that the software and updates were delivered electronically or, alternatively, that the contract's true object was a service.

The Tax Commissioner did not conduct a new true-object analysis in this ruling. A Fairfax County Circuit Court had already held the license fees under the same contract exempt for April 1999 through December 2001 in Intersections, Inc. v. Virginia Department of Taxation. Because the later appeal involved the identical issue, Virginia treated the 2002-2004 fees as nontaxable and ordered a refund of the amount paid or collected through debt setoff, plus statutory interest.

What this means for you

• This result followed a court decision involving the identical contract, not a blanket exemption for software licenses.
• Electronically delivered software and service-contract arguments remain dependent on the actual contract and controlling law.
• When tax was paid on an issue already resolved for the same agreement, the ruling allowed a refund with statutory interest.

Citations and references

• Intersections, Inc. v. Virginia Department of Taxation, Case No. CL-2005-4731 (Fairfax County Circuit Court, November 8, 2006).
• Va. Code §§ 58.1-15(A) and 58.1-1833(A), refund interest.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-74

Original ruling text

May 18, 2007

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued by the Department for the period January 2002 through December 2004.

As a result of the Department's audit, the Taxpayer was assessed tax on license fees paid pursuant to a contract with * ("DMS"). You maintain that the software for which the license was granted is exempt from the retail sales and use tax. You contend that the initial software and all updates to the software were received electronically. In the alternative, you state that the true object of the contract between DMS and the Taxpayer is the performance of a service and therefore the license fees should be exempt.

In the case Intersections, Inc. v. Virginia Department of Taxation , Case No. CL-2005-4731 (November 8, 2006), the Circuit Court of Fairfax County determined that the license fees for the contract at issue are exempt from the retail sales and use tax. As a result, the court found that the Taxpayer was entitled to a refund of the tax paid on the license fees held taxable by the Department for the period April 1999 through December 2001.

The administrative appeal you filed on behalf of the Taxpayer for the period January 2002 through December 2004 involves the identical issue that is addressed in Intersections, Inc. v. Virginia Department of Taxation . Based on the court's decision in that case, the license fees at issue are not taxable. Therefore, the Department will issue a refund to the Taxpayer. The refund will be in the amount of * paid by the Taxpayer and obtained through debt set-off, plus interest calculated pursuant to Va. Code §§ 58.1-15 (A) and 58.1-1833 (A).

If you have any questions about this response, you may contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/56780. i