Sales & Use Tax Blog

Virginia Sales Tax Exemption for Software

The Virginia sales tax exemption for software allows businesses that utilize software at their Virginia-based locations to claim an exemption on software purchases that meet certain criteria. With their team of knowledgeable and detail-oriented consultants, the Agile Consulting Group is uniquely qualified to help your business leverage this sales tax exemption to improve your cash flow.

In general, per Virginia Code Ann. 58.1-603, tangible personal property that is sold at retail or distributed in Virginia is subject to sales tax on the gross sales price. Prewritten computer software, which is defined in Virginia Code Ann. 58.1-602 as, “a computer program that is 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” is considered tangible personal property in Virginia and is subject to sales tax when it is delivered through a physical medium. However, there are several types of software purchases that are not considered tangible personal property and thus, are not subject to sales tax.

Custom Software

Virginia sales tax consulting

Virginia Code Ann. 58.1-609.5(7) provides a specific Virginia sales tax exemption for software purchases that are considered to be “custom programs”. Per Virginia Code Ann. 58.1-602, a custom program is defined as “a computer program that is specifically designed and developed only for one customer.” This definition does not include prewritten programs that are modified to any degree or the combination of two or more prewritten programs. Based on the way Virginia defines “custom programs”, this exemption is somewhat limited because it only applies to software programs that are designed, developed, and intended for use with a specific customer. Even if a software program undergoes substantial modifications or changes to satisfy the specific needs of a customer, the Virginia Department of Revenue has consistently issued rulings determining that those modifications are not sufficient to meet the definition of “custom program” in Virginia Code Ann. 58.1-602. However, separately stated amounts charged for labor or services rendered in connection with the modification of a prewritten software program are exempt from sales tax per Virginia Code Ann. 58.1-609.5(6).

Electronically Delivered Software

Virginia sales tax consulting

The Virginia sales tax exemption for software also applies to sales of software that are delivered electronically to customers, regardless of whether the software program is prewritten or custom. The Virginia Department of Revenue has maintained a long-standing policy, which is referenced in Virginia Public Document Ruling No. 05-44, that sales of software delivered electronically do not constitute the sale of tangible personal property and are not subject to sales tax. This exemption also applies to any software updates that are subsequently provided to the customer, as long as those updates are delivered electronically. If there is any tangible personal property included with the sale of software delivered electronically, like hardware or a backup copy of the software, then the entire transaction is considered to constitute a sale of tangible personal property and is subject to sales tax. Since the inclusion of tangible personal property with software delivered electronically changes the taxability of the transaction, the purchaser must retain clear documentation that establishes the software was delivered electronically and that there was no exchange of tangible personal property connected with the sale.

How to Claim the Virginia Sales Tax Exemption for Software

Since the Virginia Department of Revenue does not provide a specific exemption certificate for custom software programs or electronically delivered software on their website, any Virginia business making a qualifying exempt software purchase can submit a letter to their vendors that include the following information based on the guidelines provided in Virginia Code Ann. 58.1-623:

  • Name and address of the taxpayer (purchaser)
  • Virginia certificate of sales tax registration number, if any, issued to the taxpayer
  • The general character of the personal property sold, distributed, leased, or stored, or to be sold
  • Statutory reason that the personal property sold, distributed, leased, or stored, or to be sold is exempt from sales tax
  • Signature and Title from an authorized representative of the taxpayer stating that “I certify that I am authorized to sign this Certificate of Exemption and that, to the best of my knowledge and belief, it is true and correct, made in good faith, pursuant to the Virginia Retail Sales and Use Tax Act”

How to Recover Virginia Sales Taxes Already Paid

Any Virginia business that purchased software which meets the exemption criteria listed above are entitled to refunds for purchases that were made within three years from the due date of their vendor’s sales and use tax return. In order to receive a refund for overpaid sales tax on exempt software, Virginia purchasers will have to request a refund directly from the vendor who sold the software because the only entity that can request a refund from the Virginia Department of Revenue is the one who remitted the taxes on their sales and use tax returns. To accomplish this, the vendor will need to amend their Virginia sales and use tax returns and issue the purchaser a refund. The consultants at Agile Consulting Group have experience in recovering overpaid sales taxes directly from vendors and can assist any Virginia business with this cumbersome process.

As with all sales and use tax research, the specifics of each case need to be considered when determining taxability. Additional advice from Agile Consulting Group’s sales tax consulting team can be found on our page summarizing Virginia sales and use tax exemptions.

Reach Out to Us with Questions

If you have questions, comments or would like to discuss the specific circumstances you are encountering in regard to this issue or any other sales and use tax issue, please contact a member of Agile Consulting Group’s sales tax consulting team at (888) 350-4TAX (4829) or via email at info@salesandusetax.com.

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