Were electronically delivered digital certificates subject to Virginia retail sales and use tax?

Plain-English summary

Virginia found the digital-certificate offering exempt from retail sales and use tax. Customers registered online, supplied a public key, and received the certificate electronically after the provider authenticated the customer, website, business, and registration information.

The certificate encrypted communications and showed users that they had reached the authenticated server. No tangible personal property changed hands. Under Va. Code § 58.1-609.5(1) and 23 VAC 10-210-4040(A), Virginia treated the lump-sum certificate, authentication, and resolution services as a nontaxable service transaction.

The ruling compared the service to P.D. 02-111, where online access to automobile information was exempt because customers only accessed electronic information and received no tape, disk, or other tangible property.

What this means for you

• Electronic delivery and the absence of tangible property were central to the exemption.
• The provider's identity-verification and encryption functions were treated as services.
• A transaction involving physical media or other tangible property may require a different analysis.

Common questions

Q: Did the website authentication mark make the transaction taxable?
A: No. The ruling treated the overall electronically delivered authentication offering as a service.

Q: Did the lump-sum charge change the result?
A: No. On the stated facts, the bundled certificate, authentication, and resolution services remained nontaxable.

Citations and references

• Va. Code § 58.1-609.5(1).
• 23 VAC 10-210-4040(A).
• Virginia Public Document 02-111 (July 25, 2002).

Subject

Nontaxable service transactions under Va. Code § 58.1-609.5 1; Digital certificates

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-2

Original ruling text

January 19, 2012

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") in which you request a ruling on the application of the retail sales and use tax to the sale of digital certificates. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer provides authentication solutions for businesses and individuals seeking to perform secure electronic commerce and communications over the Internet. One solution provided by the Taxpayer is digital certificate, authentication and resolution services. The charges for these services are part of a lump sum charge and must be renewed periodically.

Digital certificates are used to facilitate secure transactions between an end user's browser and the Taxpayer's customer's server. A digital certificate allows an end user to recognize that they are accessing the customer's server, not a fake server. When the Taxpayer's digital certificates are purchased, a mark will appear on the customer's website indicating that the website is authenticated by the Taxpayer.

A digital certificate is provided through an on-line process. The customer completes an on-line registration form. As part of the customer's request of a digital certificate, a private and public key pair is generated by the customer's web server. The private key is retained by the customer on its web server. The public key is part of the information sent to the Taxpayer in the registration process.

The Taxpayer authenticates the identity of the customer, the related website and business, and the information presented by the customer during the registration process. Once the identity of the customer has been authenticated, the Taxpayer electronically sends a digital certificate to the customer. The digital certificate is installed by the Taxpayer's customer on the customer's web server. The digital certificate works to encrypt transmissions between the customer's server and the end user's browser.

RULING

Virginia Code § 58.1-609.5 1 provides, in pertinent part, the retail sales and use tax does not apply to:

Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made ...and 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.

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.

Transactions involving both the sale of tangible personal property and the provision of services generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated. As explained in subsection D of this section, the "true object" test is used to determine the taxability of these transactions.

In Public Document 02-111 (7/25/02), the taxpayer charged a monthly flat fee and a per minute usage fee to allow its clients to access information only regarding the location of automobiles and automobile parts. No tangible personal property was exchanged under these transactions. Additionally, the clients were not provided data on tape or disk, but merely used their computers to access and view data from the database. The Taxpayer's services were accessed by its clients on-line, and the automotive information was provided in electronic form. Because these transactions did not involve the exchange of tangible personal property, they were deemed nontaxable service transactions under Va. Code § 58.1-609.5 1. Accordingly, the taxpayer was not required to collect the Virginia sales tax on the flat monthly fees and the per minute usage fees charged to its clients for information access services.

In this instance, the services provided by the Taxpayer are accessed by its customers on-line. The customers register for the digital certificates on-line, and the digital certificates are delivered to the customers electronically. No tangible personal property is transferred as a result of these transactions. Pursuant to the aforementioned authorities, the transactions are for the provision of services. Accordingly, the charges associated with the services are not subject to the Virginia retail sales and use tax.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia section, regulation and public document 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 response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4568969570.P