In a recent series of public letter rulings, the Virginia Department of Taxation ruled that the sale of applications on mobile devices (commonly referred to as apps) are not subject to Virginia sales and use tax. The exclusion of sales and use tax on apps applied whether purchasers were charged a one-time or monthly recurring fee (i.e., subscription basis).
In Public Document 08-64 (May 2008), the department ruled that apps purchased for a one-time fee were not subject to Virginia sales and use tax pursuant to Virginia Code §58.1-648C, which provides that “digital products delivered electronically, such as software, downloaded music, ring tones, and reading materials” are not subject to sales and use tax. The department ruled that sellers who charged a one-time fee delivered those apps to purchasers because purchasers had a permanent right to those apps. However, apps purchased on a subscription basis were subject to sales and use tax because those apps were never delivered to sellers. The logic behind the lack of delivery was that sellers did not transfer a permanent right of use to those apps to purchasers because purchasers had ongoing payments to sellers for the temporary right to use those apps.
Fast-forward nearly five years, and the department—in Public Documents 13-13, 13-14, 13-15, and 13-16—ruled that apps sold on a subscription basis are in fact delivered to customers, thus overruling their prior position. The department determined that payment method is irrelevant in determining whether an app was or was not delivered to a purchaser, because with either method a purchaser has the right to use the app, which according to Virginia constitutes delivery. Consequently, taxpayers who had collected and/or remitted sales and use tax on subscription basis apps should evaluate if they qualify for refunds from Virginia.
If you have any questions, please contact Amol Jain at AmolJain@brg-expert.com or 202.480.2678.
Berkeley Research Group, LLC is not a CPA firm and does not provide audit, attest, or public accounting services. BRG is not a law firm and does not provide legal advice.
The views expressed in this article are those of the authors and do not necessarily reflect the position or policy of Berkeley Research Group, LLC.
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