New Guidance on Virginia Software Sales Tax Exemption

Simplified tax rules for electronically delivered software

A recent ruling, issued by the Virginia Department of Taxation (the Department), has eased the documentation requirements for software purchases and clarified which digital products are taxable. This update helps reduce audit risk and compliance confusion for many companies who rely on cloud-based tools, Software as a Service (SaaS) platforms, and other electronically delivered software.

Overview of the ruling

Historically, taxpayers in Virginia needed to provide formal documentation to prove software was delivered electronically in order to be exempt from sales tax. With the significant growth of the internet and cloud-based services, many software programs are no longer being sold in a physical format. This progression was noted by Richmond’s Circuit Court and cited by the Department during the announcement of this change in policy.

Electronically delivered software will now be presumed exempt from tax unless there is evidence that physical delivery took place. This shifts the burden of proof away from taxpayers for any digitally delivered products.

Which digital products are still taxable?

There are a few exceptions to this sales tax exemption. Software remains taxable when:

• It is sold with hardware, such as embedded software or when bundled with equipment
• The purchase includes a maintenance contract for hardware support

Businesses should keep records of their digital purchases and review their software maintenance contracts. Company purchasing policies should distinguish between hardware and software purchases. While this ruling no longer requires companies to show proof of electronic delivery, documentation can still be helpful in the event of an audit.

Questions specific to Virginia sales tax rules? Contact your Keiter Opportunity Advisor.