Document Number
05-114
Tax Type
Retail Sales and Use Tax
Description
Software was delivered electronically to Va, Burden of proof on Taxpayer
Topic
Taxable Transactions
Date Issued
07-18-2005


July 18, 2005



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 assessment issued to ***** (the "Taxpayer") for the period July 2000 through December 2002. I apologize for the delay in the Department's response.

FACTS

The Taxpayer purchased software through a contractual agreement that allowed for delivery in electronic or tangible form. At issue in this case is an invoice that indicates the software was shipped to Virginia and that tax was applied. Because of a lack of documentation that supports that the tax is not due or was paid, the Department's auditor assessed the tax on the invoice amount. The Taxpayer contends that the vendor hosted the software out of state and there was no physical delivery of the software. To support its position, the Taxpayer has furnished a letter from the vendor stating the software was delivered electronically and the tax charged on the invoice was refunded to the Taxpayer. Based on the vendor's letter, the Taxpayer contends no tax is due on the transaction.

DETERMINATION

Pursuant to Va. Code §§ 58.1-602 and 58.1-603, the transfer of tangible personal property for a consideration to the consumer constitutes a retail sale subject to the Virginia retail sales and use tax. These statutes support the Department's longstanding policy to apply the tax to the licensing of prewritten computer software if the license provides the customer not only the right to use the software, but also a copy of the software in some tangible form. If the customer receives the right to use the software (a service), and no tangible personal property is transferred, Va. 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 provides 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.

The application of the above statutes regarding software license agreements is set out in prior rulings of the Tax Commissioner. See, for example, Public Documents 88-211 (7/26/88), 96-66 (4/26/96), and 01-103 (8/15/01).

The invoice in question (number 0001910) indicates the vendor charged the Taxpayer a "License Fee in Accordance with Contract." The invoice indicates a "Ship to" address for the Taxpayer in Virginia. In addition, the vendor charged the Virginia sales tax on the invoice.

In determining the intent and, thus, the application of the tax to transactions, the Department looks to the underlying document(s) that support the transaction. See P.D. 04-52 (8/18/04). In this case, Section 1.2, "Delivery," of Schedule A of the Software License Schedule states, "[The vendor] shall issue to [the Taxpayer], as soon as practical, one (1) Instance of the Software, along with one (1) copy of the on-line Documentation."

The Software License Schedule also states in Section 2.4, "Technology Transfer," that:
    • The Parties [Taxpayer and the vendor] agree that, unless otherwise requested by [the Taxpayer] (a) the Software and any other technology delivered hereunder that is deliverable electronically shall not be delivered on a tangible medium . . . . The Parties shall keep a detailed contemporaneous log documenting each Software and other technology transmission by date, time, place and the individuals responsible for such transmission.

The agreement does not specify a required method of delivery for the software. It does provide for delivery in tangible form and specifically states that a detailed log must be maintained should the software be delivered electronically. The Taxpayer has not produced a copy of the log to substantiate its claim that the software was delivered electronically. Although the letter provided to the Taxpayer from the vendor states that the software was provided in electronic form, and that the Taxpayer was refunded the tax charged on the invoice, this is not sufficient documentation to support a finding that the assessment is erroneous. The invoice at issue shows a "Ship to" address at the Taxpayer's main office in Virginia and a charge for sales tax. This document is strong evidence that the software was provided in tangible form. Furthermore, pursuant to Va. Code § 58.1-205, the taxpayer has the burden of proving an assessment is erroneous. The Taxpayer, as detailed above, has not satisfied the burden of proof.

To substantiate its position, the Taxpayer must provide (1) a credit memo, revised invoice or similar document from the vendor indicating that the sales tax was removed from the invoice and refunded to the Taxpayer, and (2) a log as required in Section 2.4 of the agreement indicating the method of transfer of the software. The information should be made available to the Department within 45 days of the date of this letter. The information should be sent to the attention of Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23219-7203. If no new information is furnished to the Department within the time allotted, it will be presumed that it is not forthcoming and no further adjustments to the assessment will be made.

The Code of Virginia sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's website, located at www.policylibrary.tax.virgnia.gov. If you have any questions about this response, you may contact ***** at *****.
              • Sincerely,

              • Kenneth W. Thorson
                Tax Commissioner



AR/53164.i


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46