VA P.D. 19-5 Retail Sales and Use Tax 2019-01-30

Were fees for game-terminal software activation codes taxable when the codes were sent electronically and no tangible property accompanied them?

Short answer: No. The terminal software was already installed, and an operator paid only for an electronically transmitted code that activated or renewed access. Virginia treated the code as an electronically delivered software-related service with no exchange of tangible personal property, making the fee nontaxable. The ruling followed the Department's policy for electronic software and updates. The taxpayer still had to maintain an invoice, contract, or other sales agreement expressly certifying electronic delivery and stating that no disc, tape, or other tangible medium had been or would be provided. Without that documentation, Virginia would presume tangible delivery and tax the transaction.

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This page answers the general question as of 2019. Ezel answers yours, under current Virginia tax law, with citations.

Disclaimer: This is an official published Ruling of the Virginia Tax Commissioner (Virginia Department of Taxation), issued as a redacted public document. It is based on the specific facts the taxpayer presented and the law in effect when issued; different facts or later changes in the law can change the result, and another taxpayer should not assume it applies to their situation. Virginia's retail sales and use tax is administered by the Department, but many Virginia local taxes, including the business license (BPOL) tax, business tangible personal property tax, and machinery and tools tax, are administered by local commissioners of the revenue. This summary is informational only and is not legal or tax advice. Consult a licensed Virginia tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

A terminal owner charged operators for activation or reactivation codes sent over the internet. The code unlocked software already installed in coin- or bill-operated game terminals.

Virginia treated the fee as nontaxable because no tangible property was provided.

Why the code was exempt

Virginia exempts electronically delivered software, data, content, and related services when no tangible medium is exchanged. The activation code continued software access and arrived entirely electronically.

Documentation requirement

The sales invoice, contract, or agreement should expressly state electronic delivery and certify that no tangible medium has been or will be furnished. Without that proof, Virginia presumes tangible delivery.

What this means for you

Document electronic-only delivery in the transaction record.
State expressly that no disc, tape, or other medium is furnished.
Keep activation and renewal fees separate from terminal transfers.
A change in delivery method can change taxability.

Citations and references

Va. Code §§ 58.1-603, 58.1-609.5(1) — retail tax and electronic services
23 VAC 10-210-4040(A) — services
Related Virginia rulings cited: P.D. 05-44 and P.D. 08-43

Source

Landing page: Virginia Laws, Rules & Decisions
Ruling: P.D. 19-5

Original ruling text

January 30, 2019

Re: Request for Ruling: Retail Sales and Use Tax

Dear **:

This is in response to your letter submitted on behalf of an anonymous client (the “Taxpayer”), in which you request a ruling on the application of the retail sales and use tax to fees for software activation codes sent via the Internet. I apologize for the delay in responding to your request.

FACTS

The Taxpayer purchases coin/bill-operated game terminals from manufacturers. The Taxpayer then enters into an agreement with operators who coordinate the placement of the terminals into third-party owned establishments. The agreement between the Taxpayer and an operator is such that the terminals are provided at no cost and the operator installs, services, and maintains the terminals in exchange for a share of revenue from them. Software comes installed in the terminals and in order to play the games on the terminal, the software must be activated. It must be reactivated in order to maintain access to the software, as well. The operator pays the Taxpayer a fee for software access or reactivation, and the Taxpayer provides a code the operator can enter into the terminal to activate the software. This code is provided electronically.

RULING

Virginia Code § 58.1-603 imposes the retail sales tax on the retail sale, lease or rental of tangible personal property in Virginia. Virginia Code § 58.1-602 defines “retail sale” as “a sale to any person…in the form of tangible personal property or services taxable under this chapter….” In addition, 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 Internet and any other related electronic communication service, including software, data, content and other information services delivered electronically via the internet.

Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A interprets this exemption, stating charges for services generally are exempt from the retail sales and use tax unless the service is provided in connection with the sale of tangible personal property. The Department has held that transactions involving data accessed online by personal computers or the transmittal of information via fax, internet, or other electronic means are nontaxable service transactions.

Public Document (P.D.) P.D. 05-44 (4/4/05) outlines the Department’s policy that prewritten software delivered electronically does not constitute the sale of tangible personal property. P.D. 05-44 further explains “this same general policy applies to electronic software updates furnished to customers.” In P.D. 08-43 (4/17/08), the taxpayer sold additional music packages for jukeboxes, and the Department determined charges for additional services were nontaxable as no tangible personal property was provided.

In accordance with the above authorities, the software activation fee charged by the Taxpayer for the service of providing an electronic code to an operator for the continuation of services does not constitute a taxable transaction because no tangible personal property is provided.

It is the Department’s longstanding policy that, with regard to electronic delivery of software or related electronically delivered products, taxpayers should maintain a sales invoice, contract, or other sales agreement that expressly certifies electronic delivery and that no tangible medium has, or will, be furnished to the customer. Without such proof, the Department will assume that software and any related products are conveyed in tangible form, and as such, would constitute a taxable sale of tangible personal property.

I trust the aforementioned responds to your inquiry. his response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virgini a section, 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 about this response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

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