Virginia sales tax treatment of electronically provided software.

• Author: Sutton, Giles

Virginia Pub. Doc. Ruling No. 05-44 (4/4/05), issued by the Department of Taxation (DOT), provides a practical perspective on that state's sales and use tax treatment of computer software.

Statutory Treatment

In determining the sales and use tax treatment of a sale of software, one issue is whether the software is a custom or prewritten program. Virginia provides an exemption from the retail sales and use tax for a "custom program" defined as a computer program specifically designed and developed only for one customer. The combining of two or more prewritten programs does not constitute a custom computer program. Further, a prewritten program that is modified to any degree remains a prewritten program and does not become custom; see VA Code Ann. [subsection] 58.1-602 and 58.1-609.5.

In contrast, a "prewritten program" is "a computer program prepared, held or existing for general or repeated sale or lease, including a computer program developed for in-house use and subsequently sold or leased to unrelated third parties." (Emphasis added.) (In this context, "prewritten" evidently means written before a commercial contract for the use or sale of the software is in place between the owner/developer and third parties. Query: when can a determination be made as to when software developed for in-house use becomes taxable, because it is subsequently sold or leased to unrelated third parties? Presumably, tax is triggered when the software is licensed or sold, not when the decision is made to sell or lease it. Note: sale or lease transactions between related parties may not trigger Virginia sales or use tax taxation.) A blanket sales tax exemption is not available for prewritten programs.

However, prewritten software may quality for exemption from sales tax if it is provided in electronic format. Virginia exempts from sales tax "services not involving an exchange of tangible personal property which provide access to or use of the international network of computer systems commonly known as the Internet and any other related electronic communication service, including software, data, content and other information services delivered electronically via the Internet"; see VA Code Ann. [section] 58.1-609.5.

Prewritten Software

Virginia has issued significant guidance on the application of sales tax in the form of policy determinations. In Pub. Doc. Ruling 05-44, the taxpayer, a leading software provider, delivered prewritten software to customers over the...