Tax Type
Retail Sales and Use Tax
Description
Taxes on equipment used in Internet operations
Topic
Appropriateness of Audit Methodology
Basis of Tax
Computation of Tax
Property Subject to Tax
Date Issued
08-31-2004
August 31, 2004
Re: § 58.1-1821 Appeal: Retail Sales and Use Tax
Dear *********:
This is in response to your letter in which you seek a refund of taxes paid by ***** (the "Taxpayer") during the period January 1998 through December 2001. At issue in this case is the application of the retail sales and use tax to Internet service providers. I apologize for the delay in the Department's response.
FACTS
Background: The Taxpayer offers a wide range of communications products including telephone, cable television and Internet services. The Taxpayer requested a refund of taxes paid during the period at issue on purchases of property used in providing telephone services, cable television services and, to a lesser extent, used in its Internet operations. The Department's audit staff approved the refund associated with the Taxpayer's telephone services and cable television services under the exemptions set out in Va. Code §§ 58.1-609.3(3) and 58.1-609.6(2), respectively. The audit staff denied the refund of taxes paid by the Taxpayer on equipment used in its Internet operations, thus triggering this appeal to the Tax Commissioner.
Internet operation: You indicate that the Taxpayer began offering high-speed cable Internet service in 1998. At that time, and until early 2002, customers were directed to the home page of ***** (the Internet Service Provider or "ISP"), which offered proprietary content, e-mail, access to the World Wide Web, and other features. While the Taxpayer held some ownership position of the ISP, the ISP was a separate entity that served as the Taxpayer's supplier of Internet service. The ISP provided these same services not only to the Taxpayer, but to several other cable operators as well. The Taxpayer ended its relationship with the ISP in early 2002 and began offering its own home page, proprietary and other content, e-mail, and other Internet services to its end-user customers.
The audit staff agrees that in early 2002 the Taxpayer began providing exempt Internet service. You maintain that the equipment purchased by the Taxpayer prior to 2002 was also used in an exempt activity. You rely in part on the Opinion 00-005 issued March 15, 2000, by the Office of the Attorney General ("OAG"). This opinion holds that:
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- The sales and use tax exemption in § 58.1-609.6(2) is applicable to both equipment used in providing Internet access service directly to end users and to equipment used to enable other companies to provide Internet access service to end users. (Emphasis added.)
You indicate that the contested equipment enabled the ISP to provide Internet access to the Taxpayer's customers.
DETERMINATION
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- Virginia Code § 58.1-609.6(2) provides a sales and use tax exemption for:
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- Broadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies . . . or video programmers using an open video system or other video platform provided by telephone common carriers .... and amplification, transmission and distribution equipment used or to be used by wired or land based wireless cable television systems, or open video systems or other video systems provided by telephone common carriers.
Virginia Code § 58.1-602 was amended effective July 1, 1999, to define many of the words and phrases applicable to the above exemption, as follows:
· "Video programmer" means a person or entity that provides video programming to end-user subscribers;
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- · "Video programming" means video and/or information programming provided by or generally considered comparable to programming provided by a cable operator, including, but not limited to, Internet service;
· "Open video system" means an open video system authorized pursuant to 47 U.S.C. § 573 and, for purposes of this chapter only, shall also include Internet service... ;
- · "Video programming" means video and/or information programming provided by or generally considered comparable to programming provided by a cable operator, including, but not limited to, Internet service;
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The Department is aware of OAG Opinion 00-005 but does not acquiesce in or follow its interpretation. This is because the Department must apply a strict construction to any sales and use tax exemption. That is, where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See, for example, Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973). Under this rule of strict construction, the statutory language makes it very clear that exemption is available only to those ISP's that offer proprietary and other content and electronic mail as part of a package to end-user subscribers.
During the period at issue, the proprietary content and electronic mail were provided to end users by the ISP and not by the Taxpayer. For example, the ISP's home page shows that the content was copyrighted by the ISP and other providers of proprietary content (news, weather, etc.). Beginning in 2002, the proprietary content was copyrighted by the Taxpayer. The evidence is that the Taxpayer began providing exempt "Internet service" as an ISP in 2002.
Based on this determination, the Taxpayer is not entitled to a refund of taxes paid between 1998 and 2001 on purchases used in its Internet operation.
The Code of Virginia sections and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****@tax.state.va.us or at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/46613i
Rulings of the Tax Commissioner