United States

Virginia: Tax Commissioner Rules that Taxpayer Failed to Demonstrate Electronic Delivery of Software

Jul 20, 2015
From KPMG TaxWatch

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In a recent ruling, the Virginia Tax Commissioner addressed whether a taxpayer’s purchases of prewritten computer software and related services were subject to sales and use tax. Under Virginia law, sales of prewritten computer software are taxable if delivered in tangible form. The taxpayer argued that the software was exempt because it was delivered electronically. To support this assertion, the taxpayer provided an employee affidavit and various emails between the taxpayer and software vendor that, in its view, established that the software was delivered electronically. However, the Commissioner, noting that the taxpayer bore the burden of proving that the Department’s assessment was incorrect, rejected the taxpayer’s argument. First, the Commissioner noted that the sales invoice contained a "ship to" address, suggesting that the transaction contemplated physical delivery. In addition, the vendor charged sales tax on the software, which the Department believed indicated that the vendor considered the sale to be taxable. Finally, the Commissioner emphasized that additional software that was part of the overall sale (although not actually used by the taxpayer) was mailed to the taxpayer in DVD form. In light of this evidence, the Commissioner ruled that the taxpayer had failed to establish that the software was delivered electronically.  

The taxpayer also challenged the assessment of use tax on various services provided in connection with the software purchase, including training, consulting, and conversion services. Virginia law provides that transactions involving the sale of both tangible property and services are either taxable or exempt on the full amount charged, regardless of whether the charges are separately stated. In making the determination as to whether a sale is taxable, the Department applies the “true object” test. The Commissioner concluded that obtaining the software was the true object of the transaction because the training and consultation services had no value without the software. As such, the assessment of use tax was upheld. For more information regarding this ruling, please contact Sarika Bakshi at 703-286-8467.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.