Can a business avoid Virginia use tax on purchased software by claiming it was delivered electronically, if its own invoice and vendor emails do not clearly document that electronic delivery?

Plain-English summary

This ruling is a reconsideration of an earlier appeal decision (P.D. 18-111) about whether a taxpayer owed Virginia use tax on software and a related maintenance agreement it had purchased. The taxpayer had been audited for the period July 2012 through June 2015 and assessed use tax on those purchases. The taxpayer argued the software and maintenance agreement were delivered electronically and should therefore qualify for Virginia's exemption for electronically delivered software and services under Virginia Code § 58.1-609.5 1.

Virginia's exemption is narrow and document-driven. Under the Department's minimum documentation standard (set out in P.D. 05-44), the taxpayer must show, at a minimum, a sales invoice, contract, or other sales agreement that expressly certifies the software was delivered electronically and that no tangible medium was furnished to the customer. On reconsideration, the taxpayer submitted a vendor quote, purchase order, sales invoice, and vendor email correspondence that referenced the purchase order number and stated the software and maintenance service were delivered electronically, not physically.

The Tax Commissioner found this evidence insufficient. The taxpayer's own invoice stated a delivery address, listed "ground" as the shipping method, and used FOB (free on board) shipping terms -- all of which pointed to a physical, not electronic, delivery. The vendor's after-the-fact email statement alone, even though it referenced the specific purchase order, was not enough to overcome that contradictory paperwork, especially because it did not establish the delivery terms at or before the time of sale. Citing prior rulings such as P.D. 11-70, P.D. 19-24, P.D. 20-5, and P.D. 15-53, the Tax Commissioner explained that the strongest proof is documentation created at the time of sale (invoices, contracts, or sales agreements) that expressly certifies electronic delivery and the absence of tangible media -- not correspondence obtained later to support an appeal.

Because the software was found not to have been electronically delivered, the related maintenance agreement purchased alongside it also did not qualify for the exemption. The Tax Commissioner upheld the original assessment in full, including accrued interest, and directed the taxpayer to pay updated bills within 60 days to avoid further interest.

What this means for you

Software vendors and their invoicing practices

If you sell software and want your business customers to be able to claim Virginia's electronic-delivery exemption, your sales invoice, contract, or sales agreement should expressly state that the software (and any related maintenance) was delivered electronically and that no tangible medium (disc, USB drive, etc.) was provided. Avoid listing a physical shipping method (like "ground") or FOB shipping terms on invoices for software that is actually delivered electronically, since that language can undercut the customer's exemption claim later.

Businesses buying software and claiming the exemption

Keep contemporaneous proof -- generated at or before the time of the sale -- that clearly shows electronic delivery and no tangible media. A vendor email obtained after the fact, even one that references your specific purchase order, is unlikely by itself to overcome an invoice that shows a delivery address, physical shipping method, or FOB terms. If a maintenance agreement is bundled with the software purchase, its tax treatment follows the software: if the software purchase does not qualify for the exemption, the maintenance agreement will not either.

Common questions

Q: Does an email from the software vendor confirming "electronic delivery" guarantee the exemption applies?
A: Not by itself. This ruling found that a vendor email referencing the transaction was not sufficient when it conflicted with the sales invoice, which showed a delivery address, ground shipping, and FOB terms.

Q: What documentation does Virginia consider sufficient to prove electronic delivery of software?
A: At minimum, a sales invoice, contract, or other sales agreement that expressly certifies electronic delivery and states that no tangible medium was furnished to the customer, established at or before the time of sale.

Q: If the software purchase does not qualify for the exemption, does a related maintenance agreement purchased with it still qualify?
A: No. In this ruling, because the software was not shown to be electronically delivered, the taxpayer's request to remove tax on the related maintenance agreement was also denied.

Q: Can a taxpayer request reconsideration of a prior Tax Commissioner determination?
A: Yes -- this ruling itself arose from a taxpayer's request for reconsideration of a prior appeal determination (P.D. 18-111), where the taxpayer submitted additional documentation to try to support its exemption claim.

Citations and references

• Virginia Code § 58.1-609.5 1 (exemption for electronically delivered software, data, content, and related services)
• Virginia Code § 58.1-1821 (application for correction of erroneous assessment / basis for this appeal)
• P.D. 18-111 (6/8/2018) -- prior determination on this same taxpayer's assessment
• P.D. 05-44 (4/4/2005) -- minimum documentation requirements for electronic delivery of software
• P.D. 16-124 (6/22/2016) -- documentation must reference the specific transaction with specificity
• P.D. 11-70 (5/11/2011) -- vendor email alone insufficient to prove electronic delivery
• P.D. 19-24 (4/8/2019) and P.D. 20-5 (1/21/2020) -- citing P.D. 15-53 on documentation standards
• P.D. 15-53 (7/16/2015) -- exemption allowed where vendor statements and invoices confirmed electronic delivery
• P.D. 05-114 (7/18/2005) -- Department looks to underlying documents to determine transaction intent
• P.D. 95-49 (3/20/1995) -- cited by the taxpayer regarding taxation of maintenance agreements

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-19

Original ruling text

February 23, 2021

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

Dear *:

This will reply to your letter in which you seek the reconsideration of a prior appeal determination issued to * (the “Taxpayer”) for the period July 2012 through June 2015. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer was audited and assessed use tax on the purchase of software and a maintenance agreement for the software. The Taxpayer filed an administrative appeal of the assessment maintaining that the software and the maintenance agreement were delivered electronically and qualified for a sales and use tax exemption.

The Tax Commissioner responded to the Taxpayer’s appeal in Public Document (P.D.) 18-111 (6/8/2018) and concluded in the determination that the assessment issued to the Taxpayer on the untaxed purchase of the software and maintenance agreement were correct. In this request, the Taxpayer provides additional documentation that it claims demonstrates the electronic delivery of such purchases sufficient to qualify for the cited exemption.

DETERMINATION

Virginia Code § 58.1-609.5 1 provides an exemption from the tax, in part, 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.” P.D. 05-44 (4/4/2005) sets out the Department’s minimum documentation requirements for confirming the electronic delivery of software products. P.D. 05-44 provides that “at a minimum a sales invoice, contract or other sales agreement must expressly certify the electronic delivery of the software and that no tangible medium for that software has been furnished to the customer.” P.D. 16-124 (6/22/2016), addressed in the prior determination states that supporting documentation, such as an email or statement from a vendor, must reference the transaction with specificity in order to be included with any other proof of the software delivery method.

In the request for reconsideration, the Taxpayer has provided copies of the vendor’s quote, the purchase order, the sales invoice, and email correspondence from the vendor regarding the transaction at issue. The vendor’s correspondence references the purchase order number for the contested transaction and states that the software and related maintenance service were delivered electronically and were not physically delivered to the Taxpayer. The Taxpayer maintains that the vendor’s correspondence and the sales documentation provide the necessary evidence to prove that the software and maintenance agreement were delivered electronically. Unlike P.D. 16-124, the Taxpayer contends that the documentation provided identifies the contested purchase transaction. As such, the purchase should qualify for exemption.

While the Taxpayer has provided correspondence from the vendor that references the purchase order number for the contested transaction, this fact alone is insufficient evidence that electronic delivery was the only method available for delivery of the software. The determination in P.D. 16-124 was not based solely on the fact that the email correspondence provided did not reference the specific transaction that was appealed. For this reason, the Taxpayer cannot rely solely on the vendor’s statement that the software and maintenance agreement were delivered electronically. The Taxpayer provided materials that meet the document requirements stated in P.D. 05-44; however the invoice states the address the Taxpayer provided for delivery, the shipping method is stated as ground, and the shipping term is stated as FOB (free on board). The Taxpayer did not submit a document indicating the software was delivered electronically, such as a confirmation email of such an electronic delivery. Consequently, the Taxpayer has failed to provide sufficient documentation to overcome its burden of proving the software was electronically delivered.

P.D. 11-70 (5/11/2011) discusses a similar situation in which a taxpayer contested an audit assessment on the purchase of software and provided email correspondence from the software vendor stating that there was no delivery of software via tangible media. The Tax Commissioner ruled that the vendor’s email correspondence alone was not sufficient evidence to support the removal of the purchase from the taxpayer’s audit. P.D. 11-70 further states that documentation must be one of the types discussed in P.D. 05-44 in order to demonstrate that the sale of software qualifies for the exemption in Virginia Code § 58.1-609.5 1. These forms of documentation establish the terms of delivery at or before the time of the sale, which is not the case with email correspondence received after the transaction takes place.

The decision in this case is consistent with more recent determinations issued by the Department in regard to the documentation requirements. P.D. 19-24 (4/8/2019) and P.D. 20-5 (1/21/2020) cite P.D. 15-53 (7/16/2015) in which the Tax Commissioner allowed the exemption at issue because the taxpayer in that instance provided vendor statements and sales invoices that confirmed electronic delivery of the software. The documents reviewed in conjunction with sales invoices reviewed during the audit met the minimum documentation requirements for exemption consistent with P.D. 05-44. The decision in this instance is further supported by P.D. 05-114 (7/18/2005), which states that the Department looks to the underlying documents that support a transaction to determine the intent and the application of the tax to a transaction.

The Taxpayer has cited P.D. 95-49 (3/20/1995) in its request for reconsideration of the assessed taxes on its maintenance agreement purchased in conjunction with its purchase of software. Specifically, the Taxpayer requests the assessed taxes for its maintenance purchase be removed from the assessment due to the exemption of tax applied to the electronic delivery of software under Virginia Code § 58.1-609.5 1. Due to the determination that the Taxpayer did not receive the software at issue through an electronic delivery, the Taxpayer’s request for removal of the taxes assessed for the maintenance agreement cannot be granted

Based on the foregoing, the audit assessment issued to the Taxpayer on the untaxed purchase of the software and maintenance agreement is correct. The Taxpayer will be issued updated copies of bill #s 33322 and 33323. The bills will reflect accrued interest to date and should be paid within 60 days to avoid the accrual of additional interest.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you should have any questions concerning this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1756.W

Related Documents

18-111

05-44

16-124

11-70

19-24

20-5

15-53

95-49