Tax Type
Retail Sales and Use Tax
Description
Tax on untaxed purchases of tangible personal property used or consumed
Topic
Tangible Personal Property
Taxable Transactions
Date Issued
06-20-2011
June 20, 2011
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you request correction of a portion of the retail sales and use tax assessment issued as a result of an audit for the period January 2006 through July 2009. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer provides satellite mobile communications. An audit resulted in the assessment of use tax on untaxed purchases of tangible personal property used or consumed in the Taxpayer's business operations. Because the uncontested tax liability was not paid within 30 days of the date of assessment, a 20% post-amnesty penalty was applied in accordance with subsection F.1 of Va. Code § 58.1-1840.1 prior to the filing of the appeal.
The Taxpayer contests the assessment of use tax on purchases of software that it contends was electronically downloaded and therefore not subject to taxation. Specifically, the Taxpayer contests three purchases held in the audit. Two items are purchased from ***** (Vendor 1), and one item is purchased from ***** (Vendor 2).
DETERMINATION
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 generally not subject to sales and use taxation. See Va. Code § 58.1-609.5 1 and Public Document (P.D.) 05-44 (4/4/05). This policy is conditioned on the fact that no compact disc (CD), tape or other tangible medium is provided to the customer before or after the electronic download of the software. In P.D. 05-44, certain minimum documentation requirements were established to prove the occurrence of electronically delivered software. 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 will be furnished to the customer.
Virginia Code § 58.1-205 1 sets out the rule that any assessment of a tax by the Department of Taxation shall be deemed prima facie correct. As such, the Taxpayer has the burden of proving that the assessment is incorrect. Thus, the burden is on the Taxpayer to prove that the contested purchases of software were electronically downloaded.
With the appeal, the Taxpayer provided documentation to support its contention. After such documentation was reviewed, it was determined that additional documentation and clarifications were needed. Pursuant to Va. Code § 58.1-1821, the Tax Commissioner may require such additional information, testimony or documentary evidence as he deems necessary to a fair determination of the appeal. A request for such additional information, testimony and documentary evidence was requested on February 7, 2011. However, the Department received no reply to such request.
Vendor 1 - Line 8
The Taxpayer contests the prewritten computer software (consisting of three software programs) assessed on line 8 of the non-contested assets exceptions list. Vendor 1 entered into an agreement with the Taxpayer to provide modified prewritten computer software. According to the letter dated July 12, 2010 from the Chief Financial Officer (CFO) of Vendor 1, such vendor's standard method of delivery of licensed software is by electronic download. The CFO goes on to state that the Taxpayer's installation did not vary from such standard method, and no tangible personal property was transferred in conjunction with the delivery of such software. As proof, copies of three e-mails were furnished to prove that Vendor 1 electronically delivered the computer software by file transfer protocol (FTP).
While the minimum documentation requirements to prove electronic delivery are not present in this case, the 2007 e-mails do provide evidence that the computer software at issue was delivered electronically. Notwithstanding, such e-mail evidence does not establish that a tangible medium such as a CD was not used to furnish the computer software to the Taxpayer. In this regard, there are a couple of things that are troublesome in Vendor 1's claim that no tangible personal property was transferred in conjunction with the delivery of such software.
First, the e-mail documentation presented mentions a CD in connection with the Interactive software program (one of three software programs at issue). The CD reference in the e-mail documentation suggests that a tangible medium was used to deliver the software to the Taxpayer. While such CD may only be used as a backup copy of the software, the provision of prewritten computer software in any tangible form would constitute the sale of tangible personal property.
Second, I would note the ground transportation requirement set out in the Taxpayer's purchase order #4500000216 dated May 21, 2007. Clause #2 of such order specifically sets out the following terms and conditions of delivery:
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- Unless otherwise agreed in writing by the parties, the goods shall be delivered to [the Taxpayer's] offices at the address and in accordance with the schedule shown on the order form of this purchase order. Unless otherwise indicated on the order form of this purchase order, seller must ship products using ground transportation and seller will select the carrier and insurance that is consistent with the accepted industry practices. Seller may not ship partial orders of products without [the Taxpayer's] prior written consent. Seller acknowledges and agrees that time is of the essence in this purchase order. If seller fails to deliver the goods or perform the services, as the case may be, at the time agreed upon, or to perform the work hereunder in such a manner as will endanger its ability to make timely deliveries or render timely performance of services, [the Taxpayer] reserves the right to cancel this purchase order and purchase elsewhere the goods and/or services and hold seller responsible for any additional costs or damages incurred by [the Taxpayer] as a result. [Emphasis and inserts added.]
These terms and conditions make no provision for electronic delivery. Rather, such terms and conditions obligate Vendor 1 to furnish the computer software by ground transportation. Because of this condition for ground transportation delivery, it would appear that the Taxpayer expected the receipt of the computer software via tangible medium, such as one a CD or other software storage device.
Third, none of the records of the transaction provide any minimum proof to establish that electronic delivery was the sole means of delivery. While the purchase order and vendor invoices list the Taxpayer's street address as the shipping address, none of them mention any type of FTP delivery. The purchase agreement presented also makes no mention of FTP delivery of the computer software. The Taxpayer has not produced any negotiated agreement between Vendor 1 and the Taxpayer that supersedes the agreement of March 30, 2007 between such parties and that would require the delivery of the software by electronic means only.
Although the Taxpayer claims that no tangible personal property was used as a medium for transferring the computer software, the Taxpayer has not established that the ground transportation requirement was voided. In addition, no valid reason has been offered as to why Vendor 1 would not comply with this ground transportation requirement, if it was not voided.
Based on the foregoing, it appears that some of the software, if not all of it, was furnished to the Taxpayer on a tangible medium, such as a CD. Just because a vendor declares that electronic delivery is its standard method of delivery does not sufficiently establish, by itself, that the only method of delivery was by electronic means. The documentation presented suggests that the computer software was delivered by electronic and tangible means. Thus, the facts do not support a conclusion that the sole method of delivery was by electronic means. Accordingly, this item will remain in the audit.
Vendor 1 - Line 9
The Taxpayer contests the computer software assessed on line 9 of the noncontested assets exceptions list. No invoice or other information was provided in regard to this item. In the Department's February 7, 2011 letter, you were requested to provide a copy of the invoice and any related documentation to establish the claim of electronic delivery. However, such documentation has not been presented. Because no documentation has been furnished for this issue, the Taxpayer has not met its burden of proof. Accordingly, this item will remain in the audit.
Vendor 2 - Line 12
The Taxpayer contests the computer software assessed on line 12 of the noncontested assets exceptions list on the basis that delivery of the software was made electronically.
Although the Department previously requested a copy of the purchase order, it had been misplaced and was subsequently found. Such purchase order provides a street address as the shipping address. No FTP delivery request or similar electronic delivery request is provided on the face of the purchase order. The terms and conditions of this purchase order are the same as the purchase order used to purchase computer software from Vendor 1. As such, the Taxpayer required Vendor 1 to ship such computer software products via ground transportation delivery. There are no terms or conditions on the purchase order setting out a different method of delivery, such as by FTP delivery. The purchase requisition and the purchase agreement make no mention of any type of electronic or FTP delivery.
Notwithstanding the foregoing, the Taxpayer has furnished e-mail documentation and an affidavit indicating that the computer software was electronically delivered to the Taxpayer at a location outside of Virginia because such location was the only place where the particular equipment was located. Accordingly, Virginia is without jurisdiction to impose its tax on this transaction, which will be removed from the audit.
CONCLUSION
The assessment will be revised in accordance with this determination. A revised bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections and the public documents cited are available on-line at www.tax.virginia.gov 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 *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4531895516.R
Rulings of the Tax Commissioner