Was software exempt when specific vendor records proved it was downloaded, despite freight for promotional materials and a guide?

Subject

Taxpayer is engaged in the sale, installation and repair of telephone and communications systems and cabling.

Plain-English summary

A communications-system installer paid audit use tax on software purchased in December 2013. Its invoice included freight for promotional items and an implementation guide, and initial contract language referred ambiguously to delivery or download.

The company later supplied transaction-specific evidence: a signed vendor letter requiring all customers to download software and updates, a dated download-history page, and an email saying the product was available for download with the serial number needed to access it.

Virginia found that evidence sufficient to prove electronic delivery under Va. Code § 58.1-609.5(1). The audit was revised and the overpaid tax was refunded with interest.

Citations and references

• Va. Code § 58.1-609.5(1).
• Commonwealth v. Research Analysis Corp., 214 Va. 161, 198 S.E.2d 622 (1973).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-96

Original ruling text

May 20, 2016

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter requesting correction of the retail sales and use tax assessments issued to * (the “Taxpayer”) as a result of an audit for the periods April 2011 through March 2014. The assessments have been paid.

FACTS

The Taxpayer is engaged in the sale, installation and repair of telephone and communications systems and cabling. An audit resulted in the assessment of sales tax on untaxed trip charges and the assessment of use tax on untaxed asset and expensed purchases.

The Taxpayer takes exception to the use tax assessed on certain software purchased in December 2013 in the amount of *. [1] The Taxpayer maintains that the software was electronically delivered to the Taxpayer via the Internet as a downloaded program. The Taxpayer indicates that the invoice for the software included freight charges only for the physical delivery of promotional items and an implementation guide for the software. The Taxpayer requests a refund of the tax and associated interest assessed and paid.

DETERMINATION

Virginia Code § 58.1-609.5(1) provides an exemption from the retail sales and use tax for “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.” For any exemption from the retail sales and use tax, the Virginia Constitution and the courts apply the rule of strict construction against the exemption. That is, statutory tax exemptions are strictly construed against the taxpayer, with doubts resolved against the exemptions. An example of this construction is set out in Commonwealth of Virginia v. Research Analysis Corporation , 214 Va. 161, 198 S.E.2d 622 (1973).

The initial review of the documentation presented found a conflict between the vendor's policy requiring downloading software via the Internet and the invoice/agreement that warranted the product for a certain amount of days from the date of delivery or download. Because of this conflict, a member of the Department's Appeals and Rulings staff contacted the Taxpayer for additional evidence to resolve this conflict. The Taxpayer subsequently furnished a signed letter from the vendor certifying that “all customers are required to download software and updates over the Internet.” The vendor also produced a history page of the downloaded software in this case that included date stamps of the individual downloads. In addition, the Taxpayer submitted a copy of an email dated December 27, 2013 that was received from the vendor informing the Taxpayer that such software was available for download. Such email included the product serial number needed for the downloading process.

Based on the evidence provided, I find sufficient basis for allowing the above cited exemption to apply to the transaction in question.

CONCLUSION

The audit will be revised in accordance with this determination, and a refund of the overpaid amount, plus overpayment interest, will be issued to the Taxpayer as soon as practical.

The Code of Virginia sections 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 matter, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6235571009.R

[1] The auditor did not include the $30 freight charge. Thus, the taxable measure is *.