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Subscriptions to use online-hosted software are not taxable. Charges for maintenance or upgrades to online hosting software are not taxable, even if separately stated. Digital products are products provided to a customer electronically.
The Taxpayer is correct that the sale of software delivered electronically to customers does not constitute the sale of tangible personal property and is generally not subject to Virginia sales and use taxation.
Sales of digital products are exempt from the sales tax in Virginia.
Electronically Delivered Software 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.
In the state of Virginia, any maintenance contracts that provide only repair labor are considered to be exempt. Any contracts that provide both parts and labor are definitely subject to tax on one-half the total charge for the contract. Contracts which provide only parts are considered to be taxable.
There is typically no transfer or provision of tangible personal provided to customers of cloud-computing services. Therefore, the Taxpayer incurs no taxable use in downloading from the Developer's servers in Virginia.
In other words, Software-as-a-Service as a cloud-computing program that is only accessed remotely without delivery of a tangible media and does not include the user taking possession of the program is not subject to sales or use tax.
In the state of Virginia, any canned software which has been modified to any degree at all is not considered to be exempt custom software. Sales of digital products are exempt from the sales tax in Virginia.
Because downloadable prewritten software is not identified as tax-exempt, it is treated as generally taxable regardless of how it is transferred or delivered to the purchaser.