My vendors told me by letter and email that our software was delivered electronically, not on a disc -- is that enough to get it exempted from a Virginia use tax audit assessment?

Plain-English summary

A medical services group was audited for the period January 2011 through April 2017 and assessed use tax on software and software-maintenance purchases from two vendors. The group argued the purchases should be exempt because the software and maintenance agreements were delivered electronically rather than on a physical medium (like a disc). It first cited the wrong statute -- Va. Code § 58.1-648(C)(viii), which only applies to the separate Communications Sales and Use Tax, not the retail sales and use tax at issue here. The actual relevant exemption is Va. Code § 58.1-609.5(1), which covers internet-access-type services, including software, data, and content delivered electronically via the internet.

The Department's established documentation standard (from prior rulings, P.D. 05-44 and P.D. 11-70) requires that, at minimum, a sales invoice, contract, or other sales agreement must EXPRESSLY CERTIFY the electronic delivery of the software AND state that no tangible medium was furnished -- all established at or before the time of the sale. Without that kind of contemporaneous documentation, the Department presumes the software was delivered in tangible form (all the more so if an invoice shows a Virginia ship-to address). A vendor's after-the-fact letter or email, without referencing the specific transaction at issue, has already been held insufficient in a prior ruling (P.D. 16-124).

Here, neither vendor's documentation met the standard. For Vendor 1, the taxpayer provided letters and emails stating delivery was electronic-only -- but no sales invoice, contract, or agreement with the required certification language, and the correspondence spoke generally about the business relationship rather than the specific purchases at issue (Vendor 1's own letter even admitted sales tax had sometimes been charged in error on its invoices). For Vendor 2, the taxpayer likewise provided only emails describing electronic delivery generally, while the actual sales invoices showed a shipping address AND sales tax charged -- both pointing toward a tangible-medium delivery rather than away from it. Because the group's evidence fell short of the required documentation standard for both vendors, the assessment on the software and maintenance purchases was upheld.

What this means for you

Businesses buying software they believe was delivered electronically

Get your documentation right at the time of purchase, not after an audit starts. Under Virginia's standard, you need a sales invoice, contract, or sales agreement that EXPRESSLY certifies electronic delivery and confirms no tangible medium was provided -- generic vendor emails or letters obtained later, especially ones that don't reference your specific transaction, won't satisfy an auditor or survive an appeal.

Businesses whose vendor invoices show a shipping address or sales tax charged

Those details are treated as evidence AGAINST electronic-only delivery. If your software really was delivered electronically but your invoice shows a ship-to address or tax was charged, get that corrected or clarified by the vendor at the time, not years later when it's harder to establish.

Businesses citing statutes for the wrong tax

Double-check which Virginia tax and exemption actually applies to your situation -- here, the taxpayer's initial reliance on a Communications Sales and Use Tax provision (rather than the retail sales and use tax exemption that actually covers electronically-delivered software) didn't help its case.

Common questions

Q: What proof do I need that software was delivered electronically, not on a physical disc, for Virginia sales/use tax purposes?
A: At minimum, a sales invoice, contract, or other sales agreement that expressly certifies the electronic delivery and states that no tangible medium was furnished to you -- established at or before the time of sale. A vendor's later letter or email isn't enough by itself.

Q: Is a vendor's email confirming electronic delivery ever useful evidence?
A: It can support your case, but it's not sufficient on its own, especially if it doesn't reference your specific transaction. The Department has specifically held that a generic vendor email, without ties to the exact sale being audited, doesn't establish the exemption.

Q: What if my invoice shows a shipping address or has sales tax charged on it?
A: Those are treated as evidence pointing toward a tangible-medium delivery, working against an electronic-delivery exemption claim -- if the software was truly delivered electronically, ask your vendor to correct the invoice to remove the shipping address and the erroneously charged tax.

Citations and references

• P.D. 05-44 (4/4/2005) (minimum documentation standard: a sales invoice, contract, or sales agreement must expressly certify electronic delivery and the absence of a tangible medium)
• P.D. 11-70 (5/11/2011) (a vendor's email alone, without documentation of the type described in P.D. 05-44, is insufficient to prove electronic delivery)
• P.D. 16-124 (6/22/2016) (a vendor email that doesn't reference the specific transaction at issue is insufficient proof of electronic delivery)

Subject

Exemption: Software - Electronic Delivery Requirements

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-120

Original ruling text

September 7, 2021

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 assessments issued to * (the “Taxpayer”) for the period January 2011 through April 2017. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a medical services group, contracted with two vendors for the purchase of software and maintenance for the software. As a result of the Department’s audit, the Taxpayer was assessed use tax on its purchases the software and maintenance agreements. The Taxpayer appeals, contending the software and maintenance agreements were delivered electronically, and the purchases qualify for the sales and use tax exemption provided in Virginia Code § 58.1-648 C (viii). In support of this contention, the Taxpayer has furnished a letter and emails from the vendors stating the software and maintenance agreements were delivered electronically.

DETERMINATION

The Taxpayer erroneously relies on Virginia Code § 58.1-648 C (viii) as the basis for the request that the software and maintenance agreement purchases be removed from the audit. This statute is applicable only to the Communications Sales and Use Tax, which is not at issue here. Virginia Code § 58.1-609.5 1 sets forth an exemption from the retail sales and use tax, in part, for “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.”

Public Document (P.D.) 05-44 (4/4/2005) sets out the Department’s minimum documentation requirements for confirming the electronic delivery of software products. P.D. 05-44 provides 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 furnished to the customer.” Without such proof, the Department will assume that the software is conveyed in tangible form and consider the software to be a taxable sale of tangible personal property. This is especially true when an invoice shows a Virginia ship-to address.

P.D. 11-70 (5/11/2011) discusses a similar situation in which a taxpayer contested an audit assessment on the purchase of software and provided email correspondence from the software vendor stating that there was no delivery via tangible media. The Tax Commissioner ruled that the vendor’s email correspondence alone was not sufficient evidence to support the removal of the purchase from the taxpayer’s audit. P.D. 11-70 further states that documentation must be one of the types discussed in P.D. 05-44 in order to demonstrate that the sale of software qualifies for the exemption in Virginia Code § 58.1-609.5 1. These forms of documentation establish the terms of delivery at or before the time of the sale, which is not the case with email correspondence received after the transaction takes place.

P.D. 16-124 (6/22/2016) further clarified the Department’s position regarding a vendor’s email in stating that such an email is insufficient proof that software sold to the taxpayer was delivered electronically because the email did not reference the specific sales transaction that was assessed by the Department and appealed by the taxpayer.

* (Vendor 1)

The Taxpayer has provided two letters and several emails from Vendor 1. The letters indicate that the software and services were delivered to the Taxpayer in electronic form only. Vendor 1 also states, however, that sales tax had occasionally been applied to invoices for software and services in error. The Taxpayer did not provide sales invoices, contract or an agreement as required by P.D. 05-44. Further, the correspondence provided from Vendor 1 does not specify the sales transaction in which it is referring, but instead speaks generally to the business relationship between itself and the Taxpayer.

* (Vendor 2)

Similar to Vendor 1, the Taxpayer has provided several emails from Vendor 2 indicating that delivery of their software products was done through electronic means only. However, invoices provided during the audit show a shipping address as well as sales tax charged, which serves as evidence for the transfer of tangible personal property. The Taxpayer has not provided the contractual agreement or other document expressly certifying the electronic delivery of the software being purchased.

CONCLUSION

Virginia Code § 58.1-205 1 states that “[a]ny assessment of a tax by the Department shall be deemed prima facie correct.” Thus, the burden is on taxpayers to prove that an assessment made by the Department is erroneous. While the Taxpayer has provided correspondence from Vendor 1 and 2 which reference the electronic nature of the delivery, this fact alone is insufficient evidence that electronic delivery was the method of delivery of the software and the maintenance agreements. Further, the Taxpayer has not provided any of the types of documentation, i.e ., a sales invoice, contract or sales agreement, which contain the required certification language discussed in P.D. 05-44. I also note that Vendor 2’s sales invoice includes a shipping address, which indicates the possibility that the software and maintenance agreement may have been delivered by a tangible medium.

Based on the foregoing, the audit assessments issued to the Taxpayer on the untaxed purchases of software and maintenance agreements are correct. Updated bills, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessments are paid within 60 days of the date of this letter.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s website. 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

AR/1560.A

Related Documents

05-44

11-70

16-24