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Ruling of the Virginia Tax Commissioner

06-103 (October 5, 2006)

No Obligation To Collect Virginia Sales Tax On Electronically Delivered Software Or Scanning Services

In response to a request for ruling, the Virginia Tax Commissioner advises a business process software company (the "Taxpayer") that it is not obligated to collect Virginia sales tax on scanning software delivered electronically to Virginia residents.  The Tax Commissioner further advised that the Company is not obligated to collect such sales tax on scanning services it provides to Virginia residents, provided it only makes the results of such services available electronically, and not via a tangible storage medium such as a CD Rom.

No CD-Rom Or Other Storage Media Containing Software Or Results Of Scanning Can Be Provided Customer

The Taxpayer is a business process software company that specializes in the sale of accounting software.  The Taxpayer also provides customers with software that allows them to scan documents for use in conjunction with Taxpayer's accounting software.  This software is only delivered to customers electronically.  No CD Rom or other storage medium is provided.  In addition, Taxpayer, through a third party, provides its customers with scanning services, by which they scan customers' documents for use with Taxpayer's accounting software.  As with its software, the product of these scanning services is only made available to customers electronically.

Scanning Services

The Taxpayer requested a ruling on its obligation to collect Virginia sales tax on such transactions.  Virginia Code § 58.1-609.5 provides an exemption from 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."

The Tax Commissioner ruled that the Taxpayer did not have to collect and remit sales tax on its scanning services provided the results were only made available electronically, and not via diskette or other storage medium.  Said the Tax Commissioner:

The Taxpayer's customers access and use the scanned data over the Internet.  There is no transfer to customers of tangible personal property containing the scanned information.  Based on the exemption provided in Va. Code § 58.1-609.5 1, the transaction is not taxable; therefore, the Taxpayer is not required to charge and remit Virginia sales tax on the charges billed to customers for the service.  If, however, the Taxpayer provides the scanned information to customers on a tangible medium, such as a computer diskette, CD or DVD, the total charge for the Taxpayer's service is subject to the Virginia sales and use tax.

Software Sales

Similarly, the Tax Commissioner ruled that the Taxpayer need not collect and remit sales tax on its sale of scanning software, provided the same was delivered to customers electronically, and not via storage media such as CD Roms.  The Tax Commissioner further noted that sales tax need not be collected on the sale of software training services, if either the sale of the software that is the subject of such training is itself not taxable, or if the training services are provided under contracts separate from the software itself.

The Taxpayer indicates that the scanning and imaging software is delivered to customers over the Internet.  If this is the case, the sale of the software is not subject to Virginia sales and use tax.  This position is consistent with the exemption provided in Va. Code § 58.1-609.5 1 and prior rulings of the Department that distinguish between information provided electronically and in tangible form.

Finally, the Tax Commissioner ruled that the location where the contracts are signed is not dispositive of the question of the applicability of Virginia's retail sales tax to the transaction in question.  That, instead, is determined by whether the transfer of title or possession of the subject tangible personal property -- such as CD Rom -- occurs in Virginia.

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