July 16, 2015
Re: § 58.1-1821 Application: Retail Sales and Use Tax
This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period June 2010 through May 2013. The contested assessment is paid in full. I apologize for the delay in responding to your appeal.
The Taxpayer is a value-added reseller of computer products and services. Although the Taxpayer has no retail stores, it sells its products via catalogs. Its company headquarters are in Virginia. An audit resulted in the assessment of sales tax on untaxed sales, and the assessment of use tax on untaxed purchases used or consumed in its operations.
The Taxpayer contests four sales transactions included in the audit and maintains that they are exempt transactions for the sale of prewritten software programs that are delivered electronically. The Taxpayer also contends that some of the assessed transactions constitute exempt software maintenance agreements.
Virginia Code § 58.1-205 1 sets out the rule that "[a]ny assessment of a tax by the Department shall be deemed prima facie correct." As such, the burden of proof is upon the Taxpayer to establish that the assessment issued by the Department is incorrect.
The Department has generally held that a sales invoice, contract or other sales agreement must expressly certify the electronic delivery of computer software and that no tangible medium for the software has been or is to be furnished to the customer. See Public Document (P.D.) 05-44
(4/4/05). The basis for this policy is found in Va. Code § 58.1-609.5 1, which provides an exemption from the retail sales and use tax for the electronic delivery of computer software via the Internet, provided there is no exchange of tangible personal property. Thus, to satisfy the criteria of the exemption, the records of the transaction should establish two things: (1) the electronic delivery of the software and (2) no exchange of tangible personal property.
In this case, the Taxpayer contends that four transactions were for the electronic delivery of computer software because there is no charge for freight. Absent a freight charge, the Taxpayer maintains that no tangible personal property was delivered. While conducting the audit, I understand that the auditor noted the occurrence of other invoices within the sample period in which tangible personal property was shipped to customers without a charge for freight. For example, see invoice #V1220646, which is included in the audit as line item #12 of the sales exception list. Such invoice lists the shipping method as UPS RED but no freight charge was added to the invoice. This evidence demonstrates an inconsistent pattern in billing for freight. Accordingly, I am not convinced that this contention is valid.
The contested sales are taxed at 50% of the sales price because the auditor treated them as parts and labor maintenance contracts, which is consistent with subdivision 9 of Va. Code § 58.1-609.5. The Taxpayer contends that these agreements are for the sale of software license renewals that provide 24/7 phone support. While this may be the case, it is my understanding from the vendor's website that the software subscriptions and premium support plans sold provide not only for such phone support but also provide software upgrades and enhancements. As such, I am not convinced that the software maintenance agreements are for phone support only.
The Taxpayer also provides copies of several invoices that list a certificate key number for each software product sold. According to the Taxpayer, its customers will use the certificate key numbers to activate, download and/or renew software subscriptions. In addition, a vendor's email to the Taxpayer specifically states that the contested product sales "relate to software that is electronically downloaded." The vendor further states that "[n]one of the software listed provides for the replacement of any tangible personal property." While the transactional evidence in this case does not satisfy the criteria of the exemption, this evidence coupled with the vendor's statement is sufficient to support a finding that the contested software was electronically downloaded and no tangible personal property was furnished. Because the Taxpayer has met its burden of proof, the contested sales will be removed from the Department's audit.
The assessment will be revised in accordance with this determination. Because the assessment is paid, the overpayment of tax and interest will be refunded along with refund interest computed in accordance with Va. Code § 58.1-1833 A.
The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Craig M. Burns