Were subscriptions, online training, and analytic services taxable when contracted with software delivered in tangible form?

Subject

Tangible software made contracted subscriptions, training, and analytics taxable

Plain-English summary

Virginia upheld tax on three software-related invoices because each service was contracted with software delivered in tangible form. The supplier sold software designed for nonprofit entities and challenged charges involving an online-donation product, online training, and donor-list analytics.

Virginia treated software transferred on tangible media as taxable property. Under the true-object test, the purchase agreements' object was the software, so the statutory sales price included related services and subscriptions.

The annual online-donation product invoice combined software, services, and subscriptions. The training was optional but contracted in connection with the taxable software purchase, rather than under an independent transaction. The analytics likewise accompanied tangible software and was not shown to be separately contracted.

Because all three services were part of taxable property transactions, the professional-service exemption did not apply and each assessment remained correct.

What this means for you

• Tangible software delivery can make associated service charges taxable.
• Separately stated does not necessarily mean separately contracted.
• Training can be exempt when truly independent from a software sale, but not when bundled with taxable software under the rule applied here.
• Electronic-only delivery received different treatment under the cited Virginia policy.

Common questions

Was the online-donation product taxable?

Yes. Its software was delivered in tangible form and the entire bundled amount was taxed.

Was optional online training exempt?

No. It was contracted with the taxable software purchase.

Why were analytic services taxable?

They were part of the same agreement for tangible software and not a separate service transaction.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-609.5(1).
• 23 VAC 10-210-4040(A) and (D).
• Virginia Public Documents 01-61, 06-103, and 03-31.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-43

Original ruling text

April 23, 2010

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 seek correction of the retail sales and use tax assessment issued for the period October 2005 through September 2008. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a supplier of software specifically designed for use by nonprofit entities. The Taxpayer contests the assessment of tax on three specific invoices that involved sales to its customers. Each invoice will be addressed separately below.

DETERMINATION

Invoice *

The Taxpayer represents that the invoice is for the sale of one of its products that allows its customer to accept on-line donations through the customer's website. The Taxpayer states that this product is paid for on an annual basis and is an optional service provided to its customer that should not be subject to the tax.

Virginia Code § 58.1-602 defines sales prices as:

The total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, 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.]

Title 23 of the Virginia Administrative Code 10-210-4040 A states "Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable." When transactions involve both the sale of tangible personal property and the provision of services, the true object test, as explained in subsection D of this section "is used to determine the taxability of these transactions."

Pursuant to Title 23 VAC 10-210-4040 D, "[i]f the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which is produces, then the entire charge, including the charge for any services provided, is taxable."

Pursuant to Public Document (P.D.) 01-61 (5/15/01), the Department has long held that the sale of computer software transferred in tangible form is the taxable sale of tangible personal property. Conversely, computer software transferred electronically is deemed to be a nontaxable transaction because there is no transfer of tangible personal property.

In this instance, the invoice at issue includes charges for software, services and subscriptions. Based on the description provided in the purchase agreement related to this invoice, the software is provided to the Taxpayer's customer in tangible form, and is a taxable transaction with respect to the Virginia retail sales and use tax. Applying the true object test to the transaction, as required in Title 23 VAC 10-210-4040, the true object of the transaction at issue is the sale of the software. Pursuant to Va. Code § 58.1-602 and P.D. 01-61, the total amount charged for the software, services and subscriptions sold is subject to the retail sales and use tax. Accordingly, the tax assessed in the audit is upheld as issued.

Invoice *

The Taxpayer contests the assessment of tax on the charge for on-line training included on the invoice. The Taxpayer contends that the training is optional and was offered under a separate contract. Relying on P.D. 06-103 (10/5/06), the Taxpayer contends that the charge for the on-line training is not subject to the retail sales and use tax.

The Department's policy with respect to training services is well established and is detailed in P.D. 06-103. Pursuant to the public document and others previously issued, "training services included with the sale of software are generally taxable if the sale of the software is taxable. Training services provided under contracts that are separate from the sale of taxable software are exempt from the tax."

In this instance, the training at issue was contracted for in connection with the sale of software. Pursuant to the purchase agreement, the software was delivered to the Taxpayer's customer in tangible form. Accordingly, pursuant to Title 23 VAC 10­210-4040, the true object of the transaction is the sale of the software. In accordance with Va. Code § 58.1-602 and P.D. 06-103, the charge for the training, included on the contested invoice, is subject to the retail sales and use tax, and the tax assessed in the audit is upheld as issued.

Invoice *

The Taxpayer contends this invoice represents a charge for analytic services, which involve assisting its customer with making the best use of its donor list. The Taxpayer states that the service does not involve the exchange of tangible personal property and is not taxable under Va. Code § 58.1-609.5 1.

Virginia Code § 58.1-609.5 1 states the retail sales and use tax does not apply to "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made . . . ."

In P.D. 03-31 (4/9/03), the taxpayer contested the assessment of tax on a charge for training that was separately stated on the contested invoice. The taxpayer contended that the charges for training were separately stated and were separate and distinct transactions from the sale of software. The Tax Commissioner upheld the tax assessed in the audit because the training was contracted for along with software purchased by the taxpayer's customer, i.e. , "the assessed training was bundled with the sale of tangible personal property . . . ." Pursuant to the Va. Code § 58.1-602 definition of sales price, the tax was properly assessed on the total amount for which the software and training were sold.

The service at issue was contracted for in connection with software that was sold to the Taxpayer's customer and delivered in tangible form. In accordance with Title 23 VAC 10-210-4040, the true object of the purchase agreement is for the sale of software. Pursuant to Va. Code § 58.1-602 and P.D. 03-31, the retail sales and use tax should have been applied to the services sold in the contested transaction. Accordingly, the tax is correct as assessed in the audit. The exemption authorized by Va. Code § 58.1-609.5 1 is not applicable in this instance because the service at issue was not a separately contracted for item. Rather, the service was contracted for in connection with software that was delivered in tangible form to the Taxpayer's customer.

Based on this determination, the assessment is correct. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit your payment to: Virginia Department of Taxation, Appeals and Rulings Division, P. O. Box 27203, Richmond, Virginia 23261-7203, Attn: *.

The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virgiriia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3280595457.P