Were software license fees exempt when the vendor remotely installed every application and upgrade and emailed the documentation?

Subject

Downloaded applications and upgrades remote installations and electronic mail communications

Plain-English summary

Virginia removed the Statware license fee from the audit because the taxpayer proved that no tangible software or documentation was delivered. The vendor remotely installed the applications and upgrades by logging directly into the taxpayer's server.

The license agreement itself did not specify how delivery had to occur. The Department therefore examined the supporting transaction records. Emails between the taxpayer and vendor showed electronic downloads of the identified software versions, reports, indexes, client programs, and other upgrades. Documentation also arrived by email.

Virginia generally taxed licensed prewritten software when the customer received a tangible copy. Here, the evidence showed only a right to use electronically delivered software, so the service and electronic-communication exemption applied.

What this means for you

• A silent contract does not necessarily decide delivery method; contemporaneous implementation records can matter.
• Keep vendor emails, remote-installation logs, download records, and proof that no disk or other medium was supplied.
• The taxpayer still bears the burden of overcoming the audit assessment.

Common questions

Did the contract promise electronic-only delivery? No. The taxpayer won through additional email evidence showing what actually occurred.

Were upgrades and documentation also electronic? Yes. The ruling identified remotely downloaded upgrades and emailed documentation.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, 58.1-609.5(1), and 58.1-205.
• P.D. 88-211 (July 26, 1988), P.D. 96-66 (April 26, 1996), P.D. 01-103 (August 15, 2001), and P.D. 04-52 (August 18, 2004).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-17

Original ruling text

February 29, 2008

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period August 2003 through July 2006. I apologize for the delay in responding to your letter.

FACTS

As a result of the Department's audit, the Taxpayer was assessed tax on the untaxed purchase of Statware (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 received the right to use the software (a service), and no tangible personal property is transferred, Va. Code § 58.1-609.5 1 provides an exemption from the retail sales and use tax for:

Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made . . . and services not involving an exchange of tangible personal property which provides access to or use of the international network of computer systems commonly known as the Internet and any other related electronic communication service, including software, data, content and other information services delivered electronically via the Internet.

The application of the above statutes regarding software license agreements is set out in prior rulings of the Tax Commissioner. See, for example, Public Documents (P.D.) 88-211 (7/26/88), 96-66 (4/26/96), and 01-103 (8/15/01).

In determining the intent and, thus, the application of the tax to transactions, the Department looks to the underlying document(s) that support the transaction. See Public Document (P.D.) 04-52 (8/18/04). 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 provides electronic mail communications between representatives of the Taxpayer and the vendor to support its position. The electronic mail communications indicate that versions 2.1.95 through 3.0.190 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.

Virginia Code § 58.1-205 provides that a tax assessment issued by the Department is deemed prima facie correct. The burden is upon the taxpayer to prove otherwise. In this case, the Taxpayer has provided sufficient documentation to prove that the software was downloaded electronically and there was no exchange of tangible personal property. Accordingly, the exemption provided by Va. Code § 58.1-609.5 1 is applicable, and the portion of the assessment related to the software license fee will be removed from the audit.

An updated bill with interest accrued to date will be sent to the Taxpayer. No additional interest will accrue provided the bill is paid within 30 days of the date on the bill. Please remit payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia sections and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact the Appeals and Rulings unit at *.

Sincerely,

Janie E. Bowen

Tax Commissioner

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