Virginia – Taxability of Prewritten Software and Maintenance Agreements

SALT Report 2465 – The Virginia Tax Commissioner issued a ruling regarding the application of sales and use tax to prewritten software, software maintenance agreements, updates to prewritten software, and training. In previous years, the Taxpayer would deliver its software licenses both electronically and by compact disc. However in the past year, all software licenses were electronically downloaded by the customer and no tangible medium was provided. The Taxpayer, requested guidance as to whether sales and use tax applies to the transactions that are delivered electronically.

Maintenance Contracts

In its response, the Commissioner stated that the Taxpayer’s software maintenance agreement does not specifically define the terms of delivery of any software release or update. Therefore, the agreement would allow the Taxpayer to deliver a prewritten program by any means, including a tangible medium, such as by CD or disk. Because the agreement does not specify or restrict delivery to electronic means only, the Commissioner ruled that the agreement provided was insufficient to determine if the Taxpayer’s prewritten program was only provided by electronic means.

For future retail sales and use tax purposes, the Commissioner stated that the software maintenance agreement should include specific language that would define the type of transfers allowed or not allowed so that the intention of the parties is clearly known. Documentation such as an invoice or other internal record can be used to establish the exact method of delivery that was intended and used, so long as it is verifiable.

Modifications or Updates to Prewritten Software

Virginia Code § 58.1-609.5 6 provides an exemption for “an amount separately charged for labor or services rendered in connection with the modification of prewritten programs as defined in § 58.1-602.” In a previous ruling the Tax Commissioner determined that separately stated labor to modify prewritten software, even though furnished on a disk, was not taxable pursuant to Va. Code § 58.1-609.5 6. Therefore, because the Taxpayer separately stated its charges for the software modifications on its customer’s invoice, the exemption applies regardless of whether the modification was transferred by tangible or intangible means.


The Taxpayer provided a training session in 2010, a few months prior to the customer’s purchase of the software and maintenance contract. The purpose of the training session was to answer any questions about how the Taxpayer’s product could work for the customer. The Taxpayer stated that the training session was not bundled with the original purchase of the software and he believes the training charges are exempt from tax.

The Taxpayer provided a copy of the invoice for the one day training session which showed charges for meals, lodging and mileage. There were no charges for books or other materials. Based on the invoice, the Commissioner determined that the training session was not conducted in connection with the sale of tangible personal property, as the customer did not purchase the software and the license agreement until a few months later. Accordingly, the Commissioner ruled that the transaction charge was for services only and was not taxable.

For Further Information

Virginia Department of Taxation – Rulings of the Tax Commissioner #13-51