Did contract and FTP records prove that prewritten software was electronically delivered and exempt from Virginia sales tax?

Subject

Contract and FTP evidence proved electronic software delivery

Plain-English summary

Virginia removed three prewritten-software invoices from the audit sample because the programs were delivered electronically. The software developer's statement of work expressly required electronic delivery.

An email also showed that the files were uploaded to a public FTP server for the customer to download. Together, the contract and delivery evidence met Virginia's minimum documentation standard showing no tangible medium was furnished.

The contract's maintenance terms mentioned possible CDs or diskettes, but those terms did not control the original software transfer described in the statement of work. Virginia therefore revised the assessment to remove all three invoices.

What this means for you

• Electronic software treatment required more than a general assertion after audit.
• The invoice, contract, or sales agreement needed to establish electronic delivery and no tangible medium.
• Delivery emails or transfer logs could show that the contractual method was actually used.
• Separate maintenance provisions did not override the original-delivery terms here.

Common questions

Was the contract alone enough?

It established the required delivery method, and the FTP email confirmed the method was carried out.

Did possible delivery of maintenance items on disks make the original software taxable?

No. Virginia found those maintenance terms were not integrated into the original transfer at issue.

Citations and references

• Va. Code § 58.1-609.5(1).
• P.D. 01-149, 05-44, and 05-114.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-83

Original ruling text

May 28, 2009

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

Dear *:

This is in response to your letter of November 11, 2008, 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 2005 through June 2008.

FACTS

The Taxpayer is engaged in software development. An audit resulted in the assessment of sales tax on charges related to the provision of prewritten programs. Because no sales tax was collected on such charges, sales tax was assessed in the audit.

The Taxpayer contests such sales tax assessed and maintains that the prewritten programs were delivered electronically to the customer, i.e. , no tangible medium was used to convey the software program. Accordingly, the Taxpayer requests the removal of invoices #15578, #15670 and #15787 from the audit sales sample.

DETERMINATION

Virginia 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 provide 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.

Accordingly, transactions involving data accessed on-line by personal computers or information sent via the Internet constitute nontaxable service transactions. See Public Document (P.D.) 01-149 (10/5/01).

There are certain minimum documentation requirements that must be met to prove the occurrence of electronically delivered software. In P.D. 05-44 (4/4/05), the Tax Commissioner ruled that at a minimum, a sales invoice, contract or other sales agreement must expressly certify the electronic delivery of the software and that no tangible medium for that software has been or is to be furnished to the customer. In P.D. 05-114 (7/18/05), the Tax Commissioner looked to the underlying documents that support the transaction to determine the intent of the transaction, such as whether the agreement specifies a required method of delivery for the software.

The Taxpayer entered into a contract with its customer. On page 13 of the Statement of Work (SOW), the contract expressly states the software will be delivered electronically to the customer. The Taxpayer also furnishes an e-mail that it sent to its customer to further demonstrate that the software files were uploaded to a public file transfer protocol (FTP) server for download by its customer via an FTP website. I understand an FTP is a common method for downloading or transferring data from one computer to another over the web.

The contract at issue specifies a required method of electronic delivery. As such, it satisfies the minimum criteria needed to establish that the software was intended to be delivered electronically. I also find that the e-mail documentation shows that such intention was carried out. While the software maintenance and support terms set out in Schedule C of the contract define the supported methods of electronic transfer as potentially including CD-ROMS or diskettes, such maintenance terms are not integrated into the contract's SOW as to apply to the original transfer of the software at issue. Accordingly, the three contested invoices will be removed from the audit sales sample.

The assessment will be revised in accordance with this determination. Upon revision, 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 public documents 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/1-2994753810.R