My practice bought several software programs, and the vendor's invoices didn't say how most of them were delivered -- I say it was all electronic download, but the auditor taxed everything without a stated delivery method. Can I still win this on appeal with vendor documentation I gather afterward?

Plain-English summary

Virginia has a long-standing rule that prewritten software delivered purely by electronic download -- with no disc, tape, USB drive, or other physical medium ever provided -- isn't a taxable sale of tangible personal property. But that exemption lives or dies on documentation, and this ruling is a genuine success story showing exactly what kind of proof works, even when it's gathered AFTER the original purchase.

A dental and orthodontic practice was audited, and the auditor found that its software vendor had properly charged sales tax on one item that required a physical access key ("evekey"), but hadn't charged tax on other software purchases where the invoices simply didn't specify a delivery method. Rather than treating the silence favorably, the auditor assumed the untaxed items with no stated delivery method were taxable and included them in the assessment -- consistent with the Department's standard rule (from P.D. 05-44) that without documentation expressly certifying electronic delivery and confirming no tangible medium was provided, the Department assumes the software was delivered in physical, taxable form.

On appeal, the practice came back with real proof. First, an email from a representative of the software vendor -- referencing the specific invoice at issue -- stated that only the one item needing a physical access key required anything physical, and that nothing else was mailed to the practice. Second, the practice produced a signed "Software Order" form from the time of purchase, itemizing each program, license, training charge, data conversion fee, and support fee, with a "taxed" column where the vendor had marked an "x" next to the one item that was actually taxed -- matching the practice's own handwritten notation that only that one program and its license were taxed as tangible personal property.

The Department has accepted exactly this kind of after-the-fact vendor documentation before (P.D. 15-153): statements from a vendor confirming electronic delivery, combined with the sales documentation already in the audit file, can meet the minimum proof requirements even when it wasn't gathered until the appeal stage. Here, the vendor's email plus the itemized, contemporaneously-marked order form together confirmed that only the one access-key-requiring item was physically delivered, and everything else was purely electronic with no tangible medium involved. The Department found the remaining software properly exempt and sent the case back to the auditor to revise the assessment and issue a refund.

What this means for you

Any business buying multiple software programs from one vendor in a single order

Ask your vendor, at the time of purchase, to expressly state in the invoice or order documentation which items (if any) require a physical medium or access device, and confirm in writing that the rest are delivered purely electronically. Getting this in writing up front avoids having to reconstruct it during an audit.

Anyone facing an audit assessment on software purchases where the invoice doesn't specify delivery method

Don't assume silence on delivery method is fatal. Go back to your vendor and ask for a written statement (an email or letter) that specifically references your invoice or order and confirms which items were delivered electronically with no tangible medium -- the Department has accepted exactly this kind of after-the-fact documentation before, both here and in P.D. 15-153.

Businesses that keep a contemporaneous order form or purchase record with per-item detail

A signed order form itemizing each program, license, and service charge -- especially one showing which specific items were actually taxed at the time -- is strong corroborating evidence when paired with a vendor's confirmation, even years later during an appeal.

Common questions

Q: My software invoice doesn't say whether the program was delivered electronically or physically -- does that mean it's automatically taxable?
A: The Department's default assumption is that software is taxable tangible personal property absent documentation proving otherwise. But you can still win an exemption by producing later documentation -- like a vendor email or statement -- that specifically confirms electronic-only delivery for that transaction.

Q: Can I get vendor confirmation of electronic delivery after the fact, during an audit or appeal, or does it have to be in the original invoice?
A: It doesn't have to be in the original invoice. The Department has accepted vendor emails and statements obtained during an appeal, as long as they specifically reference the transaction at issue and confirm no tangible medium was furnished.

Q: If only one item in a multi-item software order required a physical access device, does that make the whole order taxable?
A: No -- each item can be analyzed separately. Here, only the one item requiring a physical access key was properly taxed; the rest, confirmed as purely electronic, were found exempt.

Q: What kind of documentation actually satisfies the electronic-delivery exemption requirement?
A: At minimum, a sales invoice, contract, or other sales agreement (or a vendor statement/email tied to the specific transaction) expressly certifying electronic delivery and confirming no tangible medium was or will be furnished to the customer.

Citations and references

• Department's long-standing policy that prewritten software delivered purely by electronic download, with no tangible medium furnished, is not a taxable sale of tangible personal property
• P.D. 05-44 (4/4/2005) (minimum documentation requirements: a sales invoice, contract, or sales agreement must expressly certify electronic delivery and confirm no tangible medium was furnished; absent such proof, the Department assumes taxable tangible delivery)
• P.D. 11-112 (6/20/2011), P.D. 15-118 (6/16/2015), P.D. 15-153 (7/16/2015), P.D. 19-24 (4/8/2019) (applying and refining the electronic-delivery documentation standard)
• P.D. 15-153 (7/16/2015) (vendor statements and sales invoices produced on appeal, confirming electronic delivery, met the minimum documentation requirements when combined with the audit's existing sales documentation)
• Va. Code § 58.1-1821 (application for correction of an assessment)

Subject

Purchases : Computer Software - Electronic Delivery, Documentation

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-57

Original ruling text

March 30, 2022

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

Dear *:

This is in response to your letter in which you seek correction of the sales and use tax assessments issued to * (the Taxpayer), as a result of an audit for the period August 2012 through April 2018. The assessments at issue have been paid in full. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a dental and orthodontic practice located in Virginia, was audited by the Department. During the audit period, the Taxpayer purchased multiple computer software programs from a vendor. The invoice and other documentation provided did not specify whether the programs were physically delivered to the Taxpayer or electronically delivered by download. The auditor found that the vendor collected sales tax on the software that was delivered via a USB drive, but did not collect sales tax on the software that lacked any notation of its delivery method. Invoices on which no delivery method was designated were listed as exceptions in the audit report and an assessment was issued. The Taxpayer appeals the assessment, contending it received the software taxed in the audit through electronic delivery and the computer software qualifies for an exemption from the retail sales and use tax.

DETERMINATION

The Department’s longstanding policy is that the sale of software that is delivered electronically to a customer is not a sale of tangible personal property and is generally not subject to taxation. This policy only applies in cases where there is no disc, tape or other tangible medium provided to the customer before or after the electronic download of the software. The Department’s policy applies to updates provided electronically to customers when the original software is delivered electronically. See Public Document (P.D.) 05-44 (4/4/2005).

With its appeal, the Taxpayer submitted an email from a representative of the software vendor that references an invoice provided to the Taxpayer. The email states that only one item of software required a physical evekey for access and use and that nothing was mailed to the Taxpayer for the remaining purchases. The vendor goes on to say that sales tax was charged on only the one item of software requiring a physical evekey.

The Taxpayer also provided a “Software Order” form containing handwritten notes, a summary of the software order, and the Taxpayer’s signature with a date that matches the invoice date mentioned in the above email. The software order form contains a note that “[t]his [q]uote is good for 10 days. Sales tax will be added as required.” The order summary separately stated the sales of the prewritten software programs, licenses for the programs, training service charges, a data conversion fee, and a fee for monthly upgrades and service support for two office locations. The form featured a column titled “taxed” with an “x” filling the column next to each itemized charge. The Taxpayer noted in handwriting on the vendor’s invoice that one software program and its license were taxed as tangible personal property and appropriately entered on the form as estimated tax.

The Department adopted a documentation policy in P.D. 05-44 so as to provide guidance for taxpayers seeking an exemption from tax for electronically delivered computer programs. The public document explains, “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 or is to be furnished to the customer. The document goes on to state that “[w]ithout such proof, the Department will assume that the software is conveyed in tangible form and consider the software to be a taxable sale of tangible personal property.” See also P.D. 11-112 (6/20/2011), P.D. 15-118 (06/16/2015), P.D. 15-153 (7/16/2015), and P.D. 19-24 (4/8/2019).

In P.D. 15-153 (7/16/2015), however, the Department permitted the exemption for electronically delivered software in a case where the taxpayer submitted statements from the software vendor and sales invoices that confirmed electronic delivery of the software with its appeal under Virginia Code § 58.1-1821. In conjunction with the sales documentation reviewed during the audit, the information was deemed to meet the minimum documentation requirements for the exemption.

In this case, the documentation provided by the Taxpayer on appeal supports a finding that only one software program was physically delivered and that the appropriate sales tax was collected. The remaining items were electronically delivered over the internet with no corresponding tangible personal property being delivered so no sales tax is due. As such, this case is being remanded to the auditor to revise the assessment and issue a refund in accordance with this determination.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1847.C

Related Documents

05-44

09-83

11-112

12-6

13-51

14-178

15-118

19-5

19-24