Were a Virginia medical practice's out-of-state software license, remote hosting, and training travel charges taxable?

Plain-English summary

Virginia found that the software license, remote hosting, and training-related travel charges were not subject to sales and use tax on the facts presented. The medical practice could seek refunds from the vendors that collected the tax.

The practice licensed prewritten electronic medical records software from an out-of-state developer. The tangible software was sent directly to an out-of-state hosting company, and the practice accessed the application remotely over the Internet. No tangible personal property entered Virginia.

Under Va. Code §§ 58.1-602 and 58.1-603, a license that transfers a tangible copy can be taxable. But Va. Code § 58.1-609.10(4) and 23 VAC 10-210-780 excluded the transaction where title or possession passed outside Virginia and the property was not used in Virginia. The same condition applied to tangible support updates, fixes, or enhancements.

The hosting company provided remote access through a secure private network. The Department treated that as a nontaxable service under Va. Code § 58.1-609.5(1).

Travel and hotel costs were separately billed for on-site training. Because the trip provided training and did not install or transfer tangible personal property in Virginia, the reimbursed travel expenses were not part of a taxable property sale.

What this means for you

• Document where title or possession to software media passes and where the media is used.
• Remote access and hosting can differ from receiving a tangible software copy in Virginia.
• Travel reimbursement follows the purpose of the trip: training-only travel was nontaxable here, while travel for installing sold property could be taxable.
• Refunds were to be requested from the vendors that collected the tax.

Common questions

Q: Was the licensed software electronically delivered?
A: The ruling assumed tangible prewritten software, but it was delivered directly to the out-of-state host and never used in Virginia.

Q: Were annual support and updates taxable?
A: Not if tangible updates also passed to the taxpayer outside Virginia and were not used in Virginia.

Q: Was the monthly hosting fee taxable?
A: No. The ruling treated the remote hosting arrangement as a nontaxable service.

Q: Why were travel and hotel charges exempt?
A: They supported on-site training without a transfer of tangible personal property in Virginia.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, 58.1-609.5(1), and 58.1-609.10(4).
• 23 VAC 10-210-780.
• P.D. 01-61 (May 5, 2001).
• P.D. 96-88 (May 14, 1996).

Subject

Application of retail sales and use tax to the purchase of licensed software; charges by a third party vendor; reimbursable travel expenses

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-215

Original ruling text

December 21, 2012

Re: Ruling Request: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request a ruling on the application of the retail sales and use tax to the purchase of licensed software for use by * (the "Taxpayer"), and on charges by a third party vendor for hosting the software. In addition, the Taxpayer questions the sales tax on reimbursable travel expenses. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a medical practice in Virginia. The Taxpayer purchased a license to use electronic medical records software from Company A, a healthcare software developer located in another state. Company A charged and collected the Virginia sales tax on the software license, annual support/software maintenance, initial software training, and the initial setup management costs. In addition, Company A separately charged and collected the Virginia sales tax for employee travel and hotel expenses in connection with on-site training not included in the licensed agreement.

The Taxpayer contracted with Company B, a full service software company located in another state, to host the licensed electronic medical records software applications. The Taxpayer indicates that any software provided under the licensing agreement is delivered by Company A directly to Company B, and no tangible personal property enters into Virginia. The Taxpayer utilizes the software application hosted by Company B by remote access via the Internet. Company B charges and collects the Virginia retail sales and use tax on the monthly fee for hosting the licensed software.

The Taxpayer believes that the charges for the licensed software and hosting fees are not subject to the Virginia retail sales and use tax. Further, the Taxpayer believes that reimbursable travel expenses billed the Taxpayer are not subject to the Virginia sales tax. The Taxpayer seeks confirmation from the Department that the licensed agreement, hosting services, and travel expenses are not subject to the tax.

RULING

Pursuant to the definition of sale in Va. Code § 58.1-602 and the imposition of the sales tax in Va. Code § 58.1-603, the transfer of tangible personal property for a consideration constitutes a retail sale subject to the Virginia retail sales and use tax. These statutes support the Department's longstanding policy to apply the tax to the licensing of prewritten computer software if the license provides the customer not only the right to use the software, but also a copy of the software in some tangible form.

If the customer received the right to use the software (a service), and no tangible personal property is transferred, Va. Code § 58.1-609.5 1 provides an exemption from the retail sales and use tax for:

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 provides access to or use of the international network of computer systems commonly known as the Internet and any other related electronic communication service, including software, data, content and other information services delivered electronically via the Internet.

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

Virginia Code § 58.1-609.10 4 provides an exemption from the retail sales and use tax for "[d]elivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth . . . ." Title 23 of the Virginia Administrative Code (VAC) 10-210-780 interprets the above statute and provides the following:

The tax does not apply to sales of tangible personal property in interstate or foreign commerce. A sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia.

I will address the various areas of concern below:

Licensed Software

For purposes of this response, it its presumed that the software at issue is a prewritten program for repeated sale or lease, and not a custom program. Under the terms of the licensing agreement, software is provided to the Taxpayer in tangible form. The tangible software is shipped directly, from Company A (the licensor) to Company B (the hosting company), and no tangible personal property enters into Virginia. Pursuant to Title 23 VAC 10-210-780, the licensed software is not subject to the Virginia retail sales and use tax as long as title or possession to the property passes to the Taxpayer outside of Virginia and no use of the property is made within Virginia. Likewise, the annual support and software updates in tangible form are not subject to the Virginia retail sales and use tax as long as the software updates, fixes, or enhancements pass to the Taxpayer outside Virginia and no use of the property is made within Virginia.

Travel Reimbursement Charges

In P.D. 96-88 (5/14/96), the Tax Commissioner determined that charges for employee travel and accommodation expenses are exempt from the retail sales and use tax if the purpose of the trip is merely to provide exempt services to customers on site. However, the Tax Commissioner concluded, if the purpose of the trip is for on-site installation of tangible personal property sold to a customer, all of the reimbursable costs incurred for an employee's travel and accommodations are considered part of the selling price of the tangible personal property.

Based on the definition of "sales price" cited above, travel expenses billed to the Taxpayer are taxable only when charged in connection with the, sale of tangible personal property. Based on the information provided, the purpose of the trip is for on­site training and there is no transfer of tangible personal property in Virginia. Therefore, the charges for reimbursable travel expenses are not subject to the Virginia retail sales and use tax.

Software Hosting Services

Based on the information provided, Company B is hosting the licensed electronic medical records software application on a secure private network with access to the web-site for the Taxpayer via the Internet. Based on this information, Company B is providing a nontaxable service to the Taxpayer. Pursuant to Va. Code § 58.1-609.5 1 and P.D. 01-61, the charges by Company B for hosting the licensed software are not subject to Virginia sales tax.

CONCLUSION

Pursuant to the aforementioned authorities, the Taxpayer is correct that the licensed software, reimbursable travel expenses, and the hosting services are not subject to the Virginia retail sales and use tax. The Taxpayer can request refunds from its vendors in accordance with the rulings set forth in this letter.

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

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4983442883.T