Key Details: Virginia’s Commissioner Ruling25‑98 clarifies how the state applies sales and use tax to software, emphasizing that software integrated with or essential to hardware is generally taxable—even when delivered electronically. While Virginia relaxed certain documentation requirements for proving e‑delivery, it reaffirmed that software provided in connection with tangible property remains taxable. The ruling also addresses how maintenance contracts are treated, distinguishing labor‑only, mixed, and hardware‑related agreements. In the case reviewed, the Department removed two transactions lacking tangible components but upheld tax on two others involving hardware‑software integration. This ruling highlights a broader trend: taxability depends on the true nature of the transaction, not just invoice language or delivery method.
New Ruling:
The Virginia Department of Taxation’s Commissioner Ruling 25‑98provides fresh guidance on how the Commonwealth treats software for sales and use tax purposes—especially when that software is integrated with, or necessary for, hardware functionality. The ruling also relaxes certain documentation requirements related to electronic delivery while reaffirming that software tied to the sale of tangible property can still be taxable.
This ruling arose from an audit of a supplier of staffing and supply chain management services. The Department assessed tax on untaxed purchases of software, maintenance contracts, and licensing fees. After paying, the taxpayer sought correction, asserting the charges were not taxable. TheDepartment’s analysis focused on how software was delivered, whether it was connected to hardware, and the nature of the maintenance contracts.
How Virginia Treats Software Transactions
Virginia distinguishes software taxability largely by delivery method and transaction substance:
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Electronic delivery: Access to or use of the internet and related e‑communication services—including electronically delivered software, data, and digital content—are generally exempt from sales and use tax.
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Tangible delivery: Software delivered in physical ortangible form is treated as taxable tangible personal property, along with related charges.
To evaluate mixed transactions that involve both property and services, theDepartment applies the “true object” test. If the purchaser’s primary aim is to acquire tangible property (e.g., a device), then the entire charge—including software provided with or integrated into that device—can be taxable.
Conversely, if the principal objective is software or services, and any tangible component is incidental and not critical, the transaction may be exempt.
Documentation: Relaxed, but Still Evidence-Driven
Recognizing the ubiquity of e‑commerce, the Department no longer requires a specific certification stating that software was delivered electronically. However, it emphasizes that software provided in connection with a sale of tangible property remains taxable, regardless of e‑delivery. In disputes, the Department may still request proof that software was not bundled with tangible property aspart of the same transaction.
Maintenance Contracts: The 50% Rule—and Its Limits
Virginia generally taxes 50% of the sales price for mixed maintenance contracts that cover both labor and repair or replacement parts. A “maintenance contract” is an agreement to maintain or repair tangible personal property for a set period for a pre‑agreed fee. Contracts may be labor‑only, parts‑only, or mixed—each category has distinct tax implications. The ruling highlights that where maintenance connects to hardware with integrated software, broader taxability can apply depending on the facts.
What the Department Decided in This Case
Theaudit reviewed four transactions:
- Two were removed: In each, the Department found no evidence that tangible property was provided with the software, or it was a labor‑only maintenance arrangement not tied to hardware—rendering the transactions nontaxable.
- Two were upheld as taxable: Both involved hardware paired with integrated software that was essential to the hardware’s continued operation.
- Maintenancewith installed/integrated software: The auditor included the entire price in the tax base because software was delivered in tangible form and updates were integrated with the equipment. The taxpayer argued that only 50% should be taxed under the mixed‑maintenance rule. The Department disagreed, stating that “when computer equipment is sold with the software and software updates installed, the software and software updates are a component part of the taxable sale of computer equipment.” Separate invoice line items or e‑delivery of updates did not render any portion nontaxable.
- Subscription tied to hardware (purported labor‑only): Although the taxpayer characterized the purchase as labor‑only maintenance, the Department agreed with the auditor that the subscription license functioned as a maintenance contract for both hardware and software, and it was sold in conjunction with hardware, making it taxable.
Why This Matters
This ruling reinforces a practical takeaway: substance controls. Where software is integrated with hardware—or is necessary for that hardware to function—Virginia is likely to treat the entire arrangement as taxable, irrespective of e‑delivery, separate line items, or subscription labels. Clarity in contracts, statements of work, and invoicing—aligned with the actual delivery and use of the solution—is critical to achieving the intended tax outcome.
Broader SALT Context (and Why to Act Now)
While this decision sharpens how Virginia views hardware–software integrations, it’s only one of many state and local tax (SALT) issues that can impact technology procurement, pricing, and compliance. SALT rules differ significantly across jurisdictions and can affect sales and use tax, income/franchise tax, nexus determinations, marketplace facilitator rules, sourcing for digital goods, and more. If your organization operates in multiple states, you should evaluate your full SALT exposure to avoid surprises.
At Ryan & Wetmore, our dedicated SALT team supports businesses with multistate compliance, planning, risk assessments, and representation. We help clients interpret rulings like this, understand their operational implications, and proactively manage SALT exposure across jurisdictions.
Action Items
- Evaluate hardware–software configurations to identify whether similar integration could affect your Virginia sales and use tax obligations.
- Review multistate taxability of software, SaaS, and digital products to ensure treatment aligns with current SALT rules in each jurisdiction.
- Assess nexus created by software deployment, remote workforce, or service delivery in additional states.
- Conduct a sales & use tax exposure review to surface liabilities before they accumulate into larger assessments.
- Confirm exemption certificates, invoicing, and product descriptions accurately reflect how your solutions are delivered and consumed.
- Examine contracts and SOWs to clearly distinguish taxable hardware, software, and services, especially in bundled offerings.
- Stay current on evolving SALT guidance as states continue to refine interpretations of software, digital goods, and technology deployments.
Conclusion
This is just one SALT issue. If you sell, buy, or maintain integrated hardware–software solutions—or if you operate across multiple states—now is the time to review your tax positions. Contact Ryan & Wetmore’s to analyze yourVirginia exposure, align contracting and invoicing with defensible tax positions, and build a scalable multistate framework that supports growth.
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About Peter Ryan
Partner, Co-founder, & CPA
Peter T. Ryan co-founded Ryan & Wetmore in 1988 with business partner Michael J. Wetmore. Peter provides clients with the best strategies for success. His expertise extends across various industries. Peter obtained a Master of Business Administration in Finance from the University of Baltimore and a Bachelor of Arts in Accounting from the Catholic University of America.
