Virginia Computer, Software, and SaaS Tax Guide

Prepared by Sales Tax Helper

Table of Contents

1. Introduction
2. Nexus Considerations
3. General Rules and Compliance Considerations
4. Specific Exemptions
5. Sourcing Rules
6. Audit Considerations
7. Voluntary Disclosure Agreements (VDAs)
8. Conclusion
9. References & Resources

1. Introduction

Virginia’s sales tax treatment of software and digital services is nuanced and evolving—especially for companies operating in hybrid delivery models or providing tech solutions across multiple states. While Virginia shares some common frameworks with other states (e.g., taxing prewritten software on physical media), its firm stance on electronic delivery exemptions and explicit cloud service exemptions create unique opportunities and compliance challenges. For software developers, SaaS vendors, and IT consultants, Virginia’s tax code distinguishes not only by delivery method but also by intent and customization. Understanding these distinctions is key to avoiding costly audit assessments and leveraging valuable exemptions.

Purpose of This Guide

This guide is designed to help businesses navigate Virginia's sales and use tax rules related to
software and technology services. It focuses on:

• Nexus Considerations: Understanding when businesses must register and collect
  Virginia sales tax due to physical or economic presence.
• Taxability of Software & Services: Clarifying the tax treatment of prewritten vs. custom
  software, cloud computing services, and related technology offerings.
• Sourcing Rules: Determining how and where transactions are taxed based on customer
  location and method of software delivery.
• Audit Considerations: Identifying common tax audit triggers and best practices for
  compliance.
• Voluntary Disclosure Agreements (VDAs): Explaining the process for businesses to
  rectify past noncompliance while mitigating penalties and limiting back-tax liability.

Why This Matters for Technology Companies

Virginia's sales tax laws impact software companies, SaaS providers, and technology firms in
multiple ways:

• Sales Tax Obligations: Businesses that sell software or related services to Virginia
  customers may have a duty to collect and remit Virginia sales tax, depending on how the
  product is classified.
• Cloud Computing & SaaS Complexity: Virginia does not impose sales tax on SaaS,
  IaaS, or PaaS when delivered electronically, but misclassification of transactions can lead
  to tax liabilities.
• Compliance Risks: Failure to correctly assess and collect sales tax can result in
  significant penalties, interest, and extended audit exposure.

This guide will walk through Virginia's specific sales tax rules governing software, SaaS, and
technology-related services while referencing applicable statutes, administrative rules, and
Virginia Department of Taxation guidance. Throughout the guide, official Virginia Department of Taxation sources will be linked for further reference.

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