Could a software seller reduce tax on implementation fees and exempt support fees without supplying the requested records?

Subject

Software support and implementation claims failed for lack of records

Plain-English summary

Virginia upheld the entire software audit because the seller did not provide evidence supporting its claims. The taxpayer argued that only 20% of implementation fees were taxable and that support fees were nontaxable because updates were delivered electronically.

The Department requested documentation during the audit and again during the appeal. Although the taxpayer said it needed 15-30 days to respond, the records had not arrived by the determination date.

Because taxpayers must retain adequate records and an assessment is presumed correct, unsupported assertions did not establish an error. The assessment remained due in full.

What this means for you

• Preserve contracts, invoices, delivery records, and fee allocations for software transactions.
• Electronic-delivery claims require evidence showing what was delivered and how.
• A percentage allocation is not enough without records supporting it.
• Appeal deadlines do not suspend the need to produce requested documentation promptly.

Common questions

Did Virginia decide that electronically delivered support is always taxable?

No. It upheld this assessment because the taxpayer did not prove its claim.

Were implementation fees reduced to 20% taxable?

No.

Citations and references

• Va. Code § 58.1-205(1).
• 23 VAC 10-210-470.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-156

Original ruling text

October 16, 2009

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

Dear *:

This is in response to your letter of April 23, 2009, requesting correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period October 2005 through September 2008.

FACTS

The Taxpayer sells software and maintenance services. An audit resulted in the assessment of sales tax on software support and implementation fees. The Taxpayer contests the entire assessment and claims that only 20% of the implementation fees are taxable and that the support fees are nontaxable because updates are delivered electronically. No convincing evidence was furnished with the appeal in support of these claims. I understand that the Taxpayer failed to furnish all of the requested documentation for the items held taxable during the course of the audit.

DETERMINATION

It is my understanding that a member of the Department's Appeals and Rulings section sent a letter to you dated May 27, 2009, requesting the Taxpayer's documentation in support of the claims made in this case. On June 3, 2009, you responded and stated it would take approximately 15-30 days to respond to the documentation request. As of the date of this letter, the requested documentation has not been received by the Department.

Pursuant to Title 23 of the Virginia Administrative Code 10-210-470, the Taxpayer is responsible for retaining complete and adequate records during the time that it was under audit, as well as after the assessment is issued until final resolution of this matter. Furthermore, Virginia Code § 58.1-205 1 deems any assessment of tax issued by the Department to be prima facie correct. This means that the burden of proof is upon the Taxpayer to convincingly show any error in the assessment. Because no convincing evidence has been furnished in support of the claims made in this case and such evidence does not appear to be forthcoming, there is no basis upon which to verify and accept the Taxpayer's claims. For these reasons, the assessment is upheld as issued.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia section and regulation 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/1-3401661332.R