Did a contract reference to website URLs prove that prewritten software was delivered electronically and exempt from Virginia tax?

Subject

Tax assessed on a prewritten software program delivered electronically via the Internet

Plain-English summary

Virginia upheld tax on the prewritten-software fee because the contract did not conclusively prove electronic delivery. The taxpayer relied on language saying it would integrate modules into its website using URLs supplied by the vendor.

The Commissioner found that clause too vague. URLs could identify web pages, files, or resources, but the agreement did not establish that the taxpayer downloaded the software over the Internet rather than using the URLs for another purpose, including ordering tangible software.

The taxpayer could request reconsideration within 45 days if it supplied additional convincing documentation.

What this means for you

• A contract should expressly state how software is delivered, not merely reference URLs or website integration.
• Keep download records, delivery emails, access logs, vendor attestations, and invoices showing no tangible media.
• The taxpayer bears the practical burden of proving electronic delivery when claiming the exemption.
• Ambiguous contract language can leave the entire software fee taxable.

Common questions

Q: Why was the URL language insufficient?
A: It established website integration but did not show that the software modules themselves were downloaded.

Q: Could the taxpayer submit more proof?
A: Yes. The ruling allowed a reconsideration request within 45 days with convincing additional documentation.

Citations and references

• Va. Code § 58.1-609.5 1.
• P.D. 06-140 § 6 (Nov. 29, 2006).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-132

Original ruling text

July 30, 2008

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

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period July 2004 through June 2007. I note that the assessment is paid in full.

FACTS

The Taxpayer protests the use tax assessed on a prewritten software program and contends that the program was delivered to the Taxpayer electronically via the Internet. The Taxpayer relies upon specific terms of the contract. Accordingly, the Taxpayer maintains that the software is exempt pursuant to the exemption set out in Va. Code § 58.1-609.5 1.

DETERMINATION

Virginia Code § 58.1-609.5 1 provides an exemption 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."

You claim that the specific term indicating the software was delivered via the Internet is found in the last sentence on page 7 of the contract. Based on the contract provided, such term, by itself, does not support your claim.

The last sentence on page 7 of the contract states the Taxpayer is responsible for integrating certain modules into its current website using URLs (Uniform Resource Locators) that were to be provided to the Taxpayer. It is my understanding that URLs are basically web site addresses for identifying web pages, files or resources located on the Internet. Accordingly, the contract clause is too vague for establishing a claim of Internet delivery of the software and thus does not provide conclusive evidence that the modules were downloaded by the Taxpayer via the Internet. In the absence of complete information about the use of the URLs, it appears just as likely that the URLs may have been used to place orders for tangible software. Accordingly, the contract clause noted above, by itself, provides no conclusive evidence of Internet downloading of the software at issue. Because the Taxpayer has not supported its claim, I must uphold the tax assessed on the software fee.

CONCLUSION

Based on this determination, the assessment is correct. If the Taxpayer has additional documentation to convincingly establish its claim, it may request a reconsideration of this determination provided it is submitted within 45 days of the date of this letter. See § 6 of Public Document 06-140 (11/29/06).

The Code of Virginia section and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2166433138. R