Virginia Confirms that Software License Renewal Fees Are Taxed According to Original Purchase of Software

Monday, March 12th, 2012

 
 
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The Virginia Department of Taxation released a ruling that confirms that fees to renew software licenses are taxed in the same manner as the original sale of the software. Va. Rul. of the Tax Commr. No. 12-6 (Feb. 23, 2012).

The taxpayer who requested the ruling licenses software to a variety of customers and then renegotiates and renews those licenses on a yearly basis. The software at issue was initially transmitted by the taxpayer to its customers by tangible means, by a CD or DVD. The taxpayer specifically asked whether those software license renewals were subject to sales tax.

The Tax Commissioner explained that the renewal fee is subject to tax if the initial software purchase was taxable. Virginia taxes sales of prewritten software that is conveyed to the purchaser by tangible means but does not tax sales of prewritten software conveyed electronically or sales of custom software. Thus, the renewal fee is taxable when it allows the user to continue to use a prewritten program that was originally conveyed to the user by tangible means. On the other hand, the renewal fee is not taxable when it allows the purchaser to continue to use either custom software or prewritten software that was originally conveyed electronically. In response to a related question regarding software updates delivered electronically provided under a mandatory software maintenance agreement, the tax commissioner explained that the upgrades are considered part of the original transaction and, thus, do not alter the original taxable transaction.


About TTR

Transaction (buying or selling things), Tax (the tax on this activity), Resources (our people, our website, our support services) - TTR, Inc.

TTR has a website that companies subscribe to and use daily. This website provides a list of everything that can be bought or sold in the U.S. It provides simple answers to whether buying or selling these items is taxable (subject to a sales tax or other tax), and it provides all the legal authority to support these tax answers.

TTR likes to keep things simple and fun, which is why it has great people who provide help to clients on any support questions they have about transaction tax issues.

Please visit TTR on the web at www.ttrus.com or call 866.578.8193.

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