Document Number
Tax Type
Retail Sales and Use Tax
Consumer use tax assessed on purchases of tangible personal property
Interest Payments
Tangible Personal Property
Date Issued

July 30, 2008

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

Dear *****:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period June 2000 through December 2005. I apologize for the delay in responding to your letter.


The Taxpayer is engaged in the sale of procurement software products and services. An audit resulted in the assessment of consumer use tax on purchases of tangible personal property for use in the Taxpayer's operations.

Included in the audit are software fees or royalties that the Taxpayer contends are exempt as custom software or on the basis that the software was delivered electronically. The Taxpayer maintains that the licensed software was designed and developed solely for use by the Taxpayer and is not a compilation of prewritten software or the modification of prewritten software. In addition to contesting the software issue, the Taxpayer requests waiver of all penalties and interest.


Custom vs. Prewritten Software

Virginia Code § 58.1-609.5 7 provides an exemption from the retail sales and use tax for custom programs as defined in § 58.1-602. Virginia Code § 58.1-602 defines custom programs to mean "a computer program which is specifically designed and developed only for one customer. The combining of two or more prewritten programs does not constitute a custom computer program. A prewritten program that is modified to any degree remains a prewritten program and does not become custom."

Although the licensor may have licensed the software program solely to the Taxpayer, the Taxpayer's website for February 20, 2001, as viewed on, indicates that the contested software was created to the specific needs of the federal procurement community. This statement strongly suggests that the program was not "specifically designed and developed only for one customer" as required in Va. Code § 58.1-602 to qualify as a custom program. Rather, it appears that the software was intended to be licensed to the Taxpayer in order for it to market the software to various federal government customers via sublicensing agreements. As such, it appears that the software was not intended solely for use by the Taxpayer and does not satisfy the definition of "custom program" in Va. Code § 58.1-602.

The contested software constitutes a prewritten program as defined by Va. Code § 58.1-602. Under that statute, a prewritten program is "a computer program that is prepared, held or existing for general or repeated sale or lease, including a computer program developed for in-house use and subsequently sold or leased to unrelated third parties." As a prewritten program, the software is taxable when transferred to the Taxpayer in a tangible format, such as on disk, tape, CD, computer or any other tangible medium. This is consistent with Public Document (P.D.) 96-66 (4/26/96).

Electronic Delivery

The Taxpayer claims that the software was delivered to it only in intangible form and exempt pursuant to P.D. 99-7 (1/08/99). The Taxpayer has not provided documentation to support its claim that the software in question was delivered to it electronically. Without proper documentation to support the Taxpayer's claim, I must conclude that the software was delivered in tangible format.


Rulings of the Tax Commissioner have consistently held that royalties paid in connection with the licensing of prewritten computer software constitute a taxable lease or sale when the licensing agreement conveys not only the right to use the software but also the software itself in tangible form. See P.D. 96-72 (5/1/96) and P.D. 04-176 (10/6/04). Based on all of the foregoing, I must consider the assessment correct with respect to this issue.

Penalty and Interest

Because this was the Taxpayer's first retail sales and use tax audit, the 30% compliance penalty has been waived in accordance with Title 23 Virginia Administrative Code 10-210-2032 A 1.

In regard to the interest, the application of interest to assessments is mandatory in accordance with Va. Code § 58.1-15. Interest is not imposed as a penalty, but rather represents the value of the use of money for a period of time. In this case, the Taxpayer had the use of money that was properly due the Commonwealth. Because the tax was properly assessed, I find no basis to waive the associated interest.


Based on this determination, the assessment is correct. An updated bill or statement, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill or statement date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."

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

                • Janie E. Bowen
                  Tax Commissioner


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46