Document Number
Tax Type
Retail Sales and Use Tax
Develops, manufactures and markets software-driven medical technology:Untaxed charges
Taxable Transactions
Date Issued
October 23, 2014

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

Dear *****:

This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period August 2010 through June 2013. I apologize for the delay in responding to your appeal.


The Taxpayer develops, manufactures and markets software-driven medical technology. The Taxpayer was audited and assessed retail sales tax on untaxed charges billed to a customer for the sale of a medical system. The Taxpayer charged the customer sales tax on the hardware charges billed in the transaction. The Taxpayer maintains that some of the untaxed charges billed in the transaction are for software that was electronically delivered to the customer. The Taxpayer maintains that the software charges and other untaxed charges related to the sale of the software qualify for exemption based on the method of delivery used for the software.


Virginia Code § 58.1-603 imposes the Virginia retail sales tax upon "every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth...." The tax is computed on the gross sales price of tangible personal property and services that are expressly stated as taxable under Virginia law. "Sales price" is defined in Va. Code § 58.1-602 as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale, ... without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever." (Emphasis added.) Based on this statutory definition, any services billed in connection with the taxable sale of tangible personal property are subject to taxation unless the service is exempt under the Code of Virginia.

Software Sold With Hardware 

For the sales transaction at issue, charges for prewritten software and related services were billed on the same invoice with taxable computer hardware and other equipment. The software and related services were an integral part of the sale to the customer of a complete medical system. The auditor treated these charges as taxable services made in connection with the taxable sale of tangible personal property.

The Taxpayer states that the software at issue was either downloaded directly to the computer equipment sold to the customer or was downloaded to a thumb drive from which a technician employed by the Taxpayer then transferred the software to the customer's equipment. The technician assisting with the software transfers was located at the customer's site. The software is clearly provided to the customer electronically over the Internet. The Taxpayer is correct that the sale of software delivered electronically to customers does not constitute the sale of tangible personal property and is generally not subject to Virginia sales and use taxation. This is the basis for the Taxpayer's claim that the software and related charges qualify for exemption. The Taxpayer cites Public Document (P.D.) 05-44 (4/4/05) to support this claim.

P.D. 05-44 is a ruling that addresses the taxation of software sales and the remote or electronic delivery to customers of software over the Internet. P.D. 05-44 sets out the Department's policy that the sale of prewritten software that is an integral part of the sale of tangible personal property does not qualify for exemption on the basis that the software is delivered electronically. This ruling provides some examples that illustrate this policy. Example #8 describes a vendor that provides a technician at a customer's location to perform or assist with the electronic download of software and the installation of the same software on the customer's computer equipment. This example states that if the software is sold and installed in connection with the taxable sale by the vendor of computer hardware, the charge for the software is a taxable component of the sale. Although the software is delivered electronically, the software is part of the overall sale of taxable tangible personal property and is properly included in the taxable sales price of the system. Example #9 also provides that when a sale of hardware and software are inextricably linked, the charge for the software is taxable, notwithstanding the fact that it is delivered via electronic means to the customer.

The Department's policy is consistent with Va. Code § 58.1-609.5 1, which provides, in part, an exemption from the sales and use tax 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." (Emphasis added.) The statutory language limits the exemption to services that do not involve the exchange of tangible personal property. Based on the cited authorities, I find that the untaxed charges for the software and related services were properly held taxable in the audit.

Documentation For Electronic Delivery

During the audit, the Taxpayer was unable to provide documentation to establish that the software in the disputed transaction was transferred electronically to the customer. The Taxpayer has provided documentation with this appeal that it contends satisfies the documentation requirements to support an exemption for the electronic delivery of the software. These requirements are set out in P.D. 05-44. However, based on the Department's policy as discussed above, the software is taxable regardless of the method of delivery because the software was an integral part of the sale of a taxable system that includes tangible equipment.

Further, the Taxpayer did not provide adequate documentation to support its claim that the software was delivered electronically to the customer. P.D. 05-44 sets out the minimum documentation requirements necessary to prove the electronic delivery of software. At a minimum, a sales invoice, contract or other type of 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. The documentation is required because the exemption does not apply if the software is provided to the customer in a tangible form, such as a disc or tape, before or after the electronic download of the same software.

The supporting documentation provided with this appeal by the Taxpayer consists of excerpts from service and installation manuals used by technicians that are responsible for installing and setting up the systems and related software that it sells. While the excerpts provide evidence that the Taxpayer's technicians do engage in the electronic download of software products at customers' sites, this information does not provide specific information about the sales transaction at issue. The excerpts from the manuals are not sufficient to establish the exemption for electronic delivery of software because the minimum requirements set out in P.D. 5-44 are not satisfied.


The Taxpayer's audit bill ***** is correct as issued and is now due and payable. An updated bill with interest accrued to date will be issued to the Taxpayer. The bill should be paid within 30 days to avoid the accrual of additional interest.

The Code of Virginia sections and public document cited, along with other reference documents, are available on line at in the Laws, Rules and Decisions section of the Department's web site. If you have any questions concerning this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.


                                                                                              Craig M. Burns
                                                                                              Tax Commissioner


Rulings of the Tax Commissioner

Last Updated 02/22/2017 12:43