My company sells cloud-based practice management software (billing, records, patient messaging) to healthcare providers -- do I need to charge Virginia sales tax or communications tax on subscriptions?

Plain-English summary

A Virginia-based business providing practice management services to healthcare providers asked the Department for an advance ruling on three cloud-based subscription applications: billing and claims (tracking insurance claims, patient billing, payment posting, payer reimbursement data), a records manager (automated medical record and patient workflow management, configurable data sharing with patients/third parties, onboarding support), and a transmission application (a patient portal offering messaging, live-operator access, appointment scheduling, and payment collection). Everything is delivered on a cloud-based platform, purchased individually or bundled on a recurring monthly charge, with customers accessing it through their own equipment and their own internet service provider -- the business itself provides no equipment, media, or other tangible personal property.

Sales and use tax: exempt. Va. Code § 58.1-609.5 1 exempts services that don't involve an exchange of tangible personal property and that provide access to or use of the Internet -- including software, data, content, and other information services delivered electronically via the Internet. The Department's settled position (P.D. 12-191, P.D. 16-135) treats cloud-computing services the same as electronically downloaded software, because neither typically involves transferring tangible personal property to the customer. Since none of this business's three applications involve any tangible property changing hands, all three -- and any bundle of them -- are exempt from Virginia sales and use tax.

But the provider still owes tax on its own inputs. The exemption covers the customer-facing transaction, not the business's own purchases. Under 23 VAC 10-210-4040 E and P.D. 13-182, the business remains liable for Virginia sales or use tax on the cost price of the computer equipment, software, hardware, and other tangible personal property it uses in Virginia to actually provide these cloud services.

Communications tax: also inapplicable. Virginia's separate Communications Sales and Use Tax Act (Va. Code § 58.1-648) reaches specific defined communications services, collected by registered "communications services providers" (§ 58.1-647) with sufficient Virginia contact (§ 58.1-651). The Department found none of the three applications' descriptions meet the statutory definition of a taxable communications service -- and more fundamentally, this business isn't a communications services provider at all. It offers a cloud-based platform that its customers reach through their own communications service provider; it doesn't provide the underlying communications service itself. So the Communications Sales and Use Tax doesn't apply to any of the three applications either.

What this means for you

SaaS and cloud-software companies serving Virginia customers

If your product is purely software/data/content access delivered over the Internet, with no tangible personal property changing hands, it's likely exempt from Virginia sales and use tax under § 58.1-609.5 1 -- consistent with the Department's established cloud-computing-equals-electronic-software-download treatment. But don't forget the flip side: you still owe use tax on your own servers, software licenses, and hardware used in Virginia to run the service.

Healthcare practice-management and similar vertical SaaS providers

A patient portal, messaging feature, or live-operator scheduling/payment-collection function bundled into a cloud subscription doesn't turn the product into a taxable "communications service" merely because it involves messaging or live agents -- what matters is whether YOU are the registered communications services provider, which a platform that rides on customers' own internet/communications service typically is not.

Businesses bundling multiple cloud products together

This ruling confirms that bundling doesn't change the analysis -- if each individual product would be exempt, the bundle remains exempt too.

Common questions

Q: Is my cloud-based SaaS subscription subject to Virginia sales tax?
A: Generally no, if it's a pure software/Internet-access service with no tangible personal property transferred to the customer -- Virginia treats cloud computing the same as electronic software downloads for this exemption.

Q: If my sales to customers are exempt, do I owe any Virginia tax at all on my business?
A: Yes, potentially -- you still owe sales or use tax on your own computer equipment, software, and hardware used in Virginia to deliver the service, even though the customer-facing subscription itself is exempt.

Q: My cloud product includes messaging and a patient portal -- does that make me subject to Virginia's Communications Sales and Use Tax?
A: Not automatically. That tax targets registered "communications services providers." If your customers reach your platform through their own internet/communications service rather than one you provide, you likely aren't a communications services provider under the statute.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-609.5 1 -- exemption for services not involving an exchange of tangible personal property that provide access to or use of the Internet, including software, data, content, and information services delivered electronically via the Internet
• 23 VAC 10-210-4040 E -- a cloud-computing/software provider remains liable for sales/use tax on its own computer equipment, software, and hardware used in Virginia to provide the service
• Va. Code § 58.1-648 -- defines the communications services subject to the Virginia Communications Sales and Use Tax Act
• Va. Code § 58.1-647 -- defines a "communications services provider" as a person who provides communications services to Commonwealth customers and is or should be registered with the Department
• Va. Code § 58.1-651 -- the communications tax is collectible by registered communications services providers with sufficient Virginia contact

Authorities the Department relied on (described here, not linked): P.D. 12-191 (11/29/2012) and P.D. 16-135 (6/24/2016) (cloud-computing services are treated the same as electronic software downloads); P.D. 13-182 (10/18/2013) (a cloud-service provider still owes tax on its own tangible personal property used to provide the service).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-109

Original ruling text

November 6, 2024

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter on behalf of your client, a Virginia-based business, in which you request a ruling on the application of the retail sales and use tax, and the communications sales and use tax on the taxability of cloud-based services.

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.

FACTS

The business, a provider of practice management services to healthcare providers, offers three types of web-based applications to its customers: billing and claims, records manager, and transmission services.

The billing and claims application is a practice management and revenue cycle service application that offers administrative and billing-related functions for physician practices. These functions include tracking insurance claims, managing patient billing, posting payments, and accessing a payer-specific reimbursement database.

The records manager application offers managed and automated medical record and patient workflow-related services. Customers can configure the product to determine what information is shared with patients and third parties. Depending on the scope of the subscription, the business may also render services such as coordination between its customers and third-party providers, maintenance of patient records, and support for new customers during the onboarding process.

The transmission application offers on-demand interaction between patients and provider practices, including a patient portal. The three facets of this application include messaging, access to live operators, and a patient portal. Depending on the scope of the subscription, live agent operators can provide certain services, including scheduling patient appointments, collecting payments, and relaying patient messages.

The business does not provide any equipment, media, or any other items of tangible personal property in the provision of the products or performance of these services. Individual products may be purchased on a recurring monthly charge separately or bundled together. All the products are provided on a cloud-based platform and accessed by customers through their own equipment and internet service provider. The Taxpayer requests a ruling on the applicability of Virginia sales and use tax and Virginia communications tax for each facet of their products and services offered to customers.

RULING

Retail Sales and Use Tax

Virginia 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 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.

Generally, cloud-computing services are treated in the same manner as the electronic download and transfer of software products. There is typically no transfer or provision of tangible personal provided to customers of cloud-computing services. See Public Document (P.D.) 12-191 (11/29/2012) and P.D. 16-135 (6/24/2016).

Based on the facts presented in the ruling request, the service and product transactions between the business and its customers are not subject to the Virginia sales and use tax.

While the transactions with its customers may be exempt, the business would generally be liable for the Virginia retail sales or use tax on the cost price of computer equipment, software, hardware, and any other tangible personal property used in Virginia in providing services to its customers. See Title 23 of the Virginia Administrative Code 10-210-4040 E and P.D. 13-182 (10/18/2013).

Communications Tax

The Virginia Communications Sales and Use Tax Act is applicable to specific communications services defined in Virginia Code § 58.1-648. The descriptions of the products at issue does not meet the criteria described in the statute. Virginia Code § 58.1-651 provides “[t]he tax levied by § 58.1-648 shall be collectible by all persons who are communications services providers, who have sufficient contact with the Commonwealth to qualify under subsection B, and who are required to be registered under § 58.1-653.” Virginia Code § 58.1-647 defines a communications services provider as “every person who provides communications services to customers in the Commonwealth and is or should be registered with the Department as a provider.” In this case, the business is not the provider of communications services. Rather, they are offering a cloud-based platform for their customers, who access this service through their own communications service provider.

Based on the facts presented in the ruling request, the service and product transactions between the business and its customers set forth in this ruling are not subject to the Virginia Communications Sales and Use Tax.

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

Sincerely,

Kristin Collins

Deputy Commissioner for Tax Policy

Commonwealth of Virginia

Related Documents

12-191

13-182

16-135