Reed Smith Client Alert

Authors: Michael A. Jacobs

If you are located in Virginia and use a cloud computing service, and you (or your cloud provider) received a disk, manual, or other incidental tangible property in connection with your purchase of the service, you may have been spooked by a ruling that the Virginia Department of Taxation issued late in December.1

The ruling (P.D. 12-215) concludes that the cloud computing services purchased by the taxpayer were not subject to Virginia sales or use tax under the following situation: (1) the taxpayer was located in Virginia; (2) the taxpayer purchased a license to use software developed by Company A (located outside of Virginia); (3) the taxpayer contracted separately with Company B, a cloud computing provider located outside of Virginia, to host the software purchased from Company A; (4) Company A shipped the software directly to Company B on a disk rather than by electronic delivery. So far so good, right? Cloud services provided from a location outside of Virginia are not taxable, even when tangible personal property is involved.

Hold on a minute … in determining that the cloud computing services were not taxable, the ruling focused on the taxpayer’s representation that Company A and Company B are both located outside Virginia. This implies that location of delivery of the disk was determinative. But the Department’s focus on the delivery location of the disk is, in our view, a "red herring." Under Virginia law, sales and use tax is applied to mixed transactions based upon the "true object" test.2 In fact, in previous rulings, the Department has determined that purchases of cloud computing services are nontaxable3, and that the true object test applies to purchases of canned software.4 Under these rulings, location and mode of delivery should be irrelevant – the true object of a purchase of cloud computing services is to obtain services; the provision of tangible personal property in the form of a disk should not impact the taxability of the services, because the disk is not "critical to the transaction."

In any purchase of cloud computing services, it is highly unlikely that the "true object" of the transaction would be the receipt of software on a tangible disk. So no matter where your cloud service provider is located, your company should never pay, or have paid, tax on those services, even if the cloud provider is located inside Virginia.

If your business has paid Virginia sales or use tax on cloud computing services based merely on the delivery of a software disk or other incidental tangible personal property (like manuals, flash drives, etc.) in Virginia, it may be entitled to a refund.

If you have questions about this issue or a general question on Virginia tax law, please contact the authors of this alert, or the Reed Smith lawyer with whom you usually work. For more information on Reed Smith's Virginia tax practice, visit

1. Va. P.D. 12-215 (Dec. 21, 2012).
2. See 23 VAC 10-210-4040(D).
3. E.g., Va. P.D. 12-191 (Nov. 29, 2012).
4. See Va. P.D. 01-61 (May 15, 2001) (true object of electronic delivery accompanied by hard copy manual is
software, not the manual).



Client Alert 2013-008