Were software training, consulting, and conversion services taxable when the software package included a mailed DVD?

Subject

Bundled DVD made software package and connected services taxable

Plain-English summary

Virginia held that the software transaction was taxable because the overall package included a mailed DVD. Employee affidavits and emails indicating electronic conveyance did not overcome the invoice's ship-to address, contract language contemplating delivery, and undisputed DVD transfer.

It did not matter that the taxpayer did not use the DVD software or that another producer created it. Tangible personal property was transferred as part of the contracted package.

The vendor had taxed the software but not the training, consulting, and conversion services. Virginia taxed those services because they were connected with the taxable sale and had no value without the software; the software was the transaction's true object.

Result: the paid assessment remained correct, and no further action was required.

What this means for you

• Review the entire software package for discs, devices, manuals, or other tangible property.
• Require invoices and contracts to state electronic-only delivery and no tangible medium.
• Do not rely solely on emails or internal affidavits when contract documents say otherwise.
• Treat implementation services as taxable when software is the true object of a taxable package.

Common questions

Q: Did unused DVD software still matter?

A: Yes. Transfer as part of the package, not actual use, made tangible property part of the sale.

Q: Did separately stated service charges make them exempt?

A: No. The true-object rule made the connected services taxable with the software.

Citations and references

• Va. Code §§ 58.1-205(1) and 58.1-602.
• 23 VAC 10-210-4040(B)(1) and (D).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-118

Original ruling text

June 16, 2015

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

Dear *:

This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to * (the "Taxpayer") for the period of January 2011 through March 2014.

FACTS

The Taxpayer was audited and assessed use tax on services provided to the Taxpayer in connection with the purchase of a prewritten software program from * (the "Vendor"). The Vendor charged the Virginia retail sales tax on the sale of the software to the Taxpayer. The services assessed in the audit include training, consulting, and conversion services that were provided in connection with the purchase of the prewritten software program.

According to the Taxpayer, the software in question was delivered electronically and qualifies for exemption from the retail sales and use tax, as there was no exchange of tangible personal property. Likewise, the Taxpayer believes the services provided in connection with the sale of the software are exempt. The Taxpayer seeks the removal of these services from the audit findings.

DETERMINATION

Electronic Delivery

Virginia Code § 58.1-205 1 states that an assessment of a tax by the Department of Taxation is deemed to be prima facie correct. As such, the Taxpayer has the burden of proving that the assessment is incorrect. In this case, the Taxpayer must prove that the software at issue was electronically downloaded and was not provided in tangible form, either before or after the sale.

Public Document (P.D.) 05-44 (04/04/05) discusses the Department's minimum documentation requirements for establishing the electronic delivery of software products. This document states that a sales invoice, contract or other sales documentation must expressly certify that the software is delivered electronically and that the software has not and will not be furnished in tangible form to the customer.

The Taxpayer has provided an affidavit from one of its employees that states the software in question was electronically conveyed to the Taxpayer. Emails that were exchanged between the Taxpayer and the Vendor have also been furnished to support the claim that the software at issue was delivered electronically. The Taxpayer cites P.D. 11-112 (6/20/11), in which the Department accepted an affidavit and email documentation as confirmation that a taxpayer received computer software by electronic delivery to an out-of-state location.

Based on a copy of the sales invoice for this transaction, the Vendor charged the Virginia retail sales tax on the sale of the software to the Taxpayer. The sales invoice for the software contains a "ship to" address, which suggests that the transaction includes the delivery and exchange of tangible personal property. Page 2 of the customer agreement for this software transaction states that the Vendor "will deliver, or have delivered, to Customer, for the License Fee set forth herein, object code copies of the Shrink-wrap Software ...." Similar language can be found in other sections of Page 2 of the customer agreement. Again, this suggests that the software was delivered in a tangible medium. Based on the sales invoice and the customer agreement, the evidence indicates that the software in question was delivered, or available for delivery, to the Taxpayer in tangible form. As such, this is a taxable transaction.

The Department's position is further supported by the fact that the software sales contract includes the provision of additional software on a DVD. The software on the DVD allows other software programs to interface with Microsoft Windows platforms. There is no dispute that this DVD was mailed to the Taxpayer. While the Taxpayer claims that it did not use the software provided on the DVD, the DVD was delivered to the Taxpayer as a part of the sale of the overall software package. The fact that the software provided on the DVD was not produced by the Vendor and that the Taxpayer did not use this version of the software has no bearing on the treatment of the sales transaction. As provided in the sales contract, a DVD containing software was transferred to the Taxpayer. This constitutes the exchange of tangible personal property and makes the transaction a taxable retail sale, regardless of whether the other software was delivered electronically.

The Taxpayer has not demonstrated that the electronic delivery of the software at issue was the sole method for delivery used by the Vendor. The sales documentation does not expressly certify that the software is delivered electronically and is not provided in tangible form. In addition, the Vendor charged the Virginia retail sales tax on the software, which indicates the Vendor considered the sale to be taxable. The delivery of other software in the form of a DVD was part of the sales transaction. Thus, there is no question that the Vendor transferred tangible personal property in the form of the DVD to the Taxpayer.

Finally, in P.D. 11-112 cited by the Taxpayer, the documentation provided to the Department was not the sole reason for removing the software sale from the taxpayer's audit. There were other factors that, in conjunction with the affidavit and emails, allowed the Department to confirm the electronic delivery of the software to an out-of-state location. Based on all of the above, it is proper to treat the sale of the software, in this instance, as a taxable retail sale.

Taxable Services

The Department did not assess the use tax on the sale of the actual software because it was taxed by the Vendor. The Department assessed use tax on various services provided in connection with the sale of the software. The Vendor did not charge the sales tax on the services billed with the software. The basis of the assessment is the definition of "sales price" in Va. Code § 58.1-602, which is defined, in part, as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale...." (Emphasis added.) Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 addresses the sales and use tax application to services. Subsection B.1 provides that "any services included in or in connection with the sale of tangible personal property" are taxable services.

Title 23 VAC 10-210-4040 D further provides that transactions involving both the sale of tangible personal property and the provision of services generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated. The key element in determining if separately stated services are subject to the tax is the "true object" of the transaction. In this instance, the true object of the transaction involving the sale of software, training and consulting services is the sale of the software. The training and consultation is of no value without the software application. (See P.D. 03-31, 04/09/03.)

CONCLUSION

It is apparent that the purchase of the software by the Taxpayer included the exchange of tangible personal property, thus rendering the transaction taxable. While the Taxpayer has provided email documentation and an affidavit from one of its employees that the software in question was electronically conveyed to the Taxpayer, this documentation is not sufficient by itself to warrant the removal from the audit of the charges for services provided in connection with the sale of the software. Based on all of the above, the contested transactions were properly assessed in the audit. The Department's records indicate that the Taxpayer has paid the contested assessment in full; therefore, no further action is required.

The Code of Virginia sections, regulation and public documents cited, along with other reference documents, are available on line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions regarding this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5909542880.S