Virginia: Tax consequences for purchasing and selling software

Recently, the Virginia Department of Taxation issued a ruling on the application of sales and use tax on the purchase and sale of computer software.

For example, the taxpayer licenses basic software (via a reseller) from a developer and then customizes and resells such software to its clients. All transactions among the taxpayer, the developer and the taxpayer’s clients are performed using cloud-computing services with no exchange of tangible personal property. The developer owns the servers that host and back up the software. The taxpayer, in this case, has no access or control over the server. The taxpayer subscribes to the developer’s software, customizes the software to meet its own client’s needs and resells the subscriptions, including cloud-computing services, to its clients.

Generally, under Virginia’s rules, canned or prewritten software is subject to sales and use tax provided such software is transferred via tangible personal property (i.e., tape, disc, etc.). Custom programs specifically designed for a single customer are exempt. In this situation, since the taxpayer is modifying an existing software program to fit a client’s needs, it does not constitute a custom program under the Virginia statute. However, Virginia has a long-standing policy where the sale of prewritten software delivered electronically or through the cloud does not constitute the sale of tangible personal property. Since all of these transactions are transmitted electronically through the cloud, the taxpayer is neither obligated to pay Virginia sales tax to the reseller or developer nor required to collect sales tax from its customers.

For more information on this topic, or to learn how Baker Tilly software and technology specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.