SALT Report 2026 – The Virginia Department of Taxation issued a ruling regarding the taxability of licensed software and hosting services. The Taxpayer in this case operates a medical practice in Virginia and purchased a license to use electronic medical records software from a software developer located in another state.
The software developer charged and collected sales tax on the software license, annual software maintenance fees, initial software training, and the initial setup management costs. Additionally, the software developer separately charged and collected sales tax for its employee’s travel and hotel expenses for on-site training that was not included in the license agreement.
After its purchase of the software, the Taxpayer contracted with another company to host the licensed electronic medical records software applications. The Taxpayer requested that any software provided under the original licensing agreement be shipped by the software developer directly to the hosting company. In this situation, the hosting company charges and collects sales and use tax on the monthly fee charged for hosting the licensed software.
The Taxpayer believes that sales and use tax should not be charged for the licensed software, the hosting fees, or the reimbursable travel expenses and requested guidance as to the taxability of these items.
According to the terms of the licensing agreement, the software is delivered to the Taxpayer in tangible form. By request of the Taxpayer, the software is shipped directly, from the developer to the hosting company, so no tangible personal property ever entered Virginia. Therefore, the licensed software is not subject to sales and use tax because title passes to the Taxpayer outside Virginia and no use of the property is made within the state.
Similarly, the annual support and software updates are not subject to tax as long as the software updates, fixes, and enhancements occur outside Virginia and no use of the property is made within the state.
Software Hosting Services
The hosting company hosts the software application on a secure private network in another state. The Taxpayer states that its only access to the software is via the Internet. Based on this information, the hosting company is providing a nontaxable service to the Taxpayer. Therefore, charges by the hosting company for hosting the licensed software are not subject to tax.
Travel Reimbursement Charges
In Virginia, travel expenses billed to a Taxpayer are taxable only when charged in connection with the sale of tangible personal property. Based on the information provided, the purpose of the trip was to provide onsite training and not to transfer or sell tangible personal property. Therefore, the charges for reimbursable travel expenses are not taxable.
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