Document Number
Tax Type
Retail Sales and Use Tax
Taxability of prewritten software and software maintenance updates
Date Issued

April 4, 2005

Re: Request for Ruling: Retail Sales and Use Tax

Dear *****:

This is in response to your letter in which you request a ruling on the application of the retail sales and use tax to the sale of software by ***** (the "Taxpayer"). I apologize for the delay in responding to your letter.


The Taxpayer is a leading software provider. Customers have requested the Taxpayer to offer the remote delivery of prewritten software for faster delivery and to avoid sales taxation.

The Taxpayer asks about the taxability of prewritten software and software maintenance (updates) when sold at retail and delivered to customers electronically, i.e., over the Internet. The Taxpayer also asks how certain actions in conjunction with electronic software delivery affect the taxability of the software. In addition, the Taxpayer asks about what specific minimum documentation is needed to establish the electronic delivery of prewritten software to Virginia customers.


It is the Department's long-standing policy that the sale of prewritten software delivered electronically to customers does not constitute the sale of tangible personal property and is, therefore, generally not subject to sales and use taxation. This policy is conditioned on the fact that no disc, tape or other tangible medium is subsequently provided to the customer (by mail or other means) before or after the electronic download of the software. This same general policy applies to electronic software updates furnished to customers.

In your letter, you list a number of actions and ask whether they affect the taxability of the software. Those concerns are addressed as follows:
  • 1. Software, and updates thereof, are remotely downloaded for installation on equipment owned by the Taxpayer prior to selling the equipment to the customer. When computer equipment is sold with the software and software updates installed, the software and software updates are a constituent part of the taxable sale of computer equipment. Therefore, the software and hardware are taxable.
  • 2. When the Taxpayer electronically uploads software to the customer's computers from an on-site piece of Taxpayer-owned equipment, the transaction is not taxable provided no tangible medium is furnished to the customer and the software is not furnished in connection with the sale of computer equipment.
  • 3. The addition of tangible software documentation or publications in connection with the sale of prewritten software that has been transferred via electronic download only does not affect the exempt transfer. See Public Document (P.D.) 01-61 (5/15/01).
  • 4. As an entitlement to the original sale of electronically delivered software, the Taxpayer furnishes customers with prewritten software releases without any further charge within a few weeks or months after the original transaction. If the software releases are delivered electronically and no tangible medium is provided to the customer, such releases will not affect the exempt nature of the original sale of software. If the Taxpayer conveys the software releases via a tangible medium, the true object test outlined in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 must be applied to the transaction to determine if the sale of tangible personal property is taxable.
  • 5. Under a separate software maintenance agreement or as an entitlement under the original sale of electronically delivered software, the Taxpayer brings on-site or ships to the customer prewritten software maintenance repairs and patches for the previously downloaded software. If provision of repairs and patches is an entitlement of the original purchase, the response to item #4 above applies. On the other hand, the application of the tax to maintenance contracts follows the same application of the tax to the property for which such contracts are intended. See P.D. 95-49 (3/20/95). In other words, if the software is exempt from the sales and use tax, the maintenance agreement is also exempt.

    6. Although the customer initially downloads an electronic copy of the prewritten software, the Taxpayer provides the customer with a separate, tangible medium backup copy of the same software conveyed electronically. Because the customer receives a tangible copy of the prewritten software, the entire transaction constitutes the sale of tangible personal property and is taxable to the consumer.
  • 7. The Taxpayer will restore the customer's crashed computer system. In these instances, the Taxpayer will bring tangible software to the customer's site to reinstall the software (previously delivered to the customer electronically) onto the customer's computer system. Provided the Taxpayer does not convey the tangible software to the customer in any manner and merely uses it to furnish its service, the restoration charges made to the customer will not be taxable.
  • 8. The Taxpayer will provide a technical service associate at the customer's location to perform or assist in executing the electronic software download and installing the same software onto other devices of the customer's computer system. This installation service will not affect the exempt nature of the electronic download of prewritten software, provided no tangible copies of the software (whether for backup or other purposes) are furnished to the customer and the software is not installed on equipment sold by the Taxpayer. If this installation service is in connection with the taxable sale of computer hardware (i.e., the software sold is to be installed on hardware sold by the Taxpayer), the charge for the prewritten software will be taxable although electronically conveyed to the customer's site. In such instances, separately stated charges for installation labor will be eligible for exemption. See Va. Code § 58.1-609.5 2.
  • 9. After testing a short-term loaned computer system, the customer purchases the system, including separately priced and contracted for software, and requests the Taxpayer to redeliver the software electronically to avoid sales tax. Under such instances, there is no legitimate avoidance of the sales and use tax because the Taxpayer intends to sell computer hardware and software, notwithstanding Taxpayer's actions to remove and redelivery the software electronically or to "overlay" the original software with redelivered software. The pretesting actions are convincing evidence that the sale of software and hardware (even if separately invoiced) are inextricably linked and, therefore, subject to taxation.


You ask whether the Department routinely looks for or requires that taxpayers provide specific documentation to prove the occurrence of electronically delivered software. If so, you want to know the minimum documentation requirements.

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. Both the vendor and the customer must retain such evidence for a number of years. See Title 23 VAC 10-210­470. 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 based on invoices showing a Virginia ship-to address. Also, a purchase order or similar request, by itself, presented by the customer is not sufficient to establish that the vendor electronically conveyed the software.

In regard to the Taxpayer's example of a contract addendum, I find that it provides, at least, the minimum criteria to demonstrate that software is intended to be delivered electronically. I must caution the Taxpayer, however, that such addendum is ineffective in creating an exemption for electronic delivered software if, in fact, the software is sold in connection with the sale of computer hardware (as discussed in #1, #8 and #9 above), or upon a finding that the software was also conveyed by tangible means to customers. Accordingly, I cannot sanction the use of the Taxpayer's contract addendum in its entirety, especially the second paragraph of section 4 to the addendum where it is evident that software is sold incident to the sale of hardware. Such an artificial division of the contract into its component parts cannot alter the character of the entire transaction.

The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at If you have any questions about this ruling, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,

                • Kenneth W. Thorson
                    • Tax Commissioner


Rulings of the Tax Commissioner

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