Document Number
14-130
Tax Type
Communications Sales and Use Tax
Description
Cable services/High-speed Internet, to residential and commercial customers
Topic
Assessment
Penalties and Interest
Taxable Transactions
Date Issued
08-07-2014

August 7, 2014



Re: § 58.1-1821 Application: Communications Sales and Use Tax

Dear *****:

This is in response to your letter submitted on behalf of ***** ("Taxpayer A"), ***** ("Taxpayer B"), ***** ("Taxpayer C"), and ***** ("Taxpayer D"), in which you seek correction of the communications sales and use tax assessments issued for the periods January 2007 through May 2008 and January 2007 through December 2008. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers provide various communication services, including cable services and high-speed Internet, to residential and commercial customers. As a result of the Department's audits, Taxpayers A, B, and C contest the tax assessed on Internet reactivation charges. In addition, Taxpayer A contests the tax assessed on rights-of­way (ROW) fees. Taxpayer D contests the penalty assessed in its audit. Each issue will be addressed separately below.

DETERMINATION

Internet Reactivation Fees

Taxpayers A, B and C contend that the Department erroneously assessed tax on revenue collected for reactivation services. The Taxpayers assert that the Internet reactivation fees are related to Internet access services and, therefore, fall outside the definition of communications services. The Taxpayers also assert that Internet access services are excluded from the definition of communications services. Therefore, the Taxpayers contend that a charge for reactivation of Internet services is excluded from communications services. Further, the Taxpayers contend that the reactivation fees are excluded from the sales price of the communications services. The Taxpayers state that the reactivation fees are separately stated on customer invoices, and the services are not part of the sale of communications services.

Virginia Code § 58.1-647 defines Internet access service as:
    • A service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users. "Internet access service" does not include telecommunications services, except to the extent telecommunications services are purchased, used, or sold by a provider of Internet access to provide Internet access.

Virginia Code § 58.1-647 broadly defines communications services as:
    • The electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including cable services, to a point or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for the transmission or conveyance. The term includes, but is not limited to, (i) the connection, movement, change, or termination of communications services; (ii) detailed billing of communications services; (iii) sale of directory listings in connection with a communications service; (iv) central office and custom calling features; (v) voice mail and other messaging services; and (vi) directory assistance. [Emphasis added.]

Public Document 06-138 (11/1/06) sets forth the Guidelines and Rules for the Virginia communications taxes and states, in pertinent part, "Taxable communications services also include...connection, reconnection, termination, movement, or change of communications services, including Internet services."

Virginia Code § 58.1-648 imposes the communications sales and use tax and provides in section C that "Communications services on which the tax is hereby levied shall not include...(vii) Internet access service, electronic mail service, electronic bulletin board service, or similar services that are incidental to Internet access, such as voice-capable e-mail or instant messaging." [Emphasis added.]

In accordance with the Va. Code § 58.1-648 C, Internet access service is a communications service upon which the Virginia communications sales tax is not levied. Internet access service has not been excluded from the definition of communications service; rather, the statute merely states how the tax should be applied with respect to these services. Further, the aforementioned authorities define the connection, movement, change, or termination of communications services as communications services that are subject to the tax. The Department has previously dealt with the application of tax on activation and reactivation charges in P.D. 12-148 (9/17/12). In that public document it was determined that the tax assessed on such charges was proper. Accordingly, the communications sales tax assessed in this instance is correct.

The Taxpayers contend that the Department is prohibited from taxing reactivation fees under the Internet Tax Freedom Act. The Taxpayers maintain that the reactivation fee is a charge that follows or accompanies the obtaining of Internet access. As such, the Taxpayers assert that the reactivation services are incidental to Internet access and are not subject to the communications sales tax.

The Internet Tax Freedom Act (the "Act") is the federal law that bars federal, state and local governments from taxing Internet access. The Act defines Internet access as "A service that enables users to connect to the Internet to access content, information, other services offered over the Internet."1

The Act further provides that the term ‘Internet access’:

    • Includes services that are incidental to the provision of the service described in subparagraph A when furnished to users as part of such service, such as a home page, electronic mail and instant messaging(including voice- and video-capable electronic mail and instant message) video clips and personal electronic storage capacity.2

The Act also states:
    • Except as provided in this section, nothing in this title shall be construed to modify, impair, or supersede, or authorize the modification, impairment, or superseding of, any State or local law pertaining to taxation that is otherwise permissible by or under the Constitution of the United States or other Federal law and in effect on the date of the enactment of this Act [Oct. 21, 1998].3

While the Act bars the application of state tax on Internet access service, the Act does not prohibit the Commonwealth from deeming the connectivity charges subject to the communications sales tax. In accordance with § 1101(b) of the Act, the Commonwealth is authorized to apply the communications sales tax to communications services, as long as such application does not violate the provisions of the Act. As such, the Commonwealth operated well within the confines of the Act by enacting a law that applies the communications sales tax to the sale of communications services related to the provision of Internet access services, as well as other communications services. Additionally, the connectivity services provided by the Taxpayers and held taxable in the audit are not of the kind of incidental services that are considered in the Act.4 The Act provides clear examples of what are considered incidental services, and connectivity related services are not included in those examples.

ROW Fees

Taxpayer A states that during the period January 2007 through August 2007 it correctly collected applicable ROW fees, but erroneously filed and remitted the ROW fees to the Commonwealth. Taxpayer A maintains that the error resulted in the Commonwealth receiving ROW fees that should have been remitted to a local jurisdiction. Taxpayer A states that after it was informed that a portion of the ROW Fees was to be paid directly to the ***** (City A), it made the correction and filed and paid ROW Fees to City A. Taxpayer A states that it then deducted these amounts on the July and August 2007 Virginia communications sales tax returns filed with the Department. Taxpayer A contests the assessment of tax in the audit related to these fees.

Virginia Code § 56.1-468.1 B 2 states that "The Public Rights-of-Way Use Fee established by this section is hereby imposed on all cable operators that use the public rights-of-way."

Virginia Code § 56.1-468.1 G states:
    • A provider of local telecommunications service shall collect the Public Rights-of-Way Use Fee on a per access line basis and the cable operator shall collect the Public Rights-of-Way Use Fee on a per subscriber basis by adding the fee to each ultimate end user's monthly bill for local telecommunications service or cable service. A company providing both local telecommunications service and cable service to the same ultimate end user may collect only one Public Rights-of-Way Use Fee from that ultimate end user based on (i) the local telecommunications service if the locality in which the ultimate end user resides has imposed a Public Rights-­of-Way Use Fee on local telecommunications service or (ii) cable service if the locality in which the subscriber resides has not imposed a Public Rights­-of-Way Use Fee on local telecommunications service. The Public Rights-of-­Way Use Fee shall, when billed, be stated as a distinct item separate and apart from the monthly charge for local telecommunications service and cable service. Until the ultimate end user pays the Public Rights-of-Way Use Fee to the local telecommunications service provider or cable operator, the Public Rights-of-Way Use Fee shall constitute a debt of the consumer to the locality, VDOT, or the Department of Taxation, as may be applicable. If any ultimate end user or subscriber refuses to pay the Public Rights-of-Way Use Fee, the local telecommunications service provider or cable operator shall notify the locality, VDOT, or the Department of Taxation, as appropriate. All fees collected in accordance with the provisions of this section shall be deemed to be held in trust by the local telecommunications service provider and the cable operator until remitted to the locality, VDOT, or the Department of Taxation, as applicable. [Emphasis added.]

Virginia Code § 56.1-468.1 I states that "The Public Rights-of-Way Use Fee billed by a cable operator shall be remitted to the Department of Taxation for deposit into the Communication Sales and Use Tax Trust Fund by the twentieth day of the month following the billing of the fee."

P.D. 06-138 provides that "Effective January 1, 2007, cable television providers that use the public rights-of-way will be required to collect a state public rights-of-way fee similar to that currently imposed on providers of landline telephone service. On a monthly basis, each cable television provider will collect the fee from its subscribers and remit the fee to the Department."

The tax was assessed in the audit for the periods at issue because the ROW fees appeared to be understated in comparison to other months. During the performance of the audit and in the appeal process, Taxpayer A has not provided evidence to support its contention that the fees should have been remitted to the locality. Based upon the aforementioned authorities, the ROW fees should have been remitted to the Department and not to the locality. Accordingly, the assessment is correct as issued.

Penalty

Relying on Va. Code § 58.1-635 A, Taxpayer D requests that the penalties assessed in the audit be waived. Taxpayer D maintains that it has acted in good faith, without negligence and with no intent to defraud the Commonwealth. Taxpayer D further states that it filed timely returns and remitted the tax where it was deemed applicable. Additionally, the Taxpayer states that the return on which it did not remit all ROW fees is related to a new filing requirement.

Virginia Code § 58.1-635 A states, in pertinent part:
    • When any dealer fails to make any return and pay the full amount of the tax required by this chapter, there shall be imposed, in addition to other penalties provided herein, a specific penalty to be added to the tax in the amount of six percent if the failure is for not more than one month, with an additional six percent for each additional month, or fraction thereof, during which the failure continues, not to exceed thirty percent in the aggregate. In no case, however, shall the penalty be less than ten dollars and such minimum penalty shall apply whether or not any tax is due for the period for which such return was required. If such failure is due to providential or other good cause shown to the satisfaction of the Tax Commissioner, such return with or without remittance may be accepted exclusive of penalties. All penalties and interest imposed by this chapter shall be payable by the dealer and collectible by the Tax Commissioner in the same manner as if they were a part of the tax imposed.

In this instance, Taxpayer D was assessed the $10 non-filer penalty because the Taxpayer did not file a return for November 2007. Rather, the Taxpayer reported and paid November 2007 and December 2007 communications tax on the December 2007 return. In accordance with Va. Code § 58.1-635 A, the $10 penalty assessment is correct as issued because Taxpayer D failed to file a return with the Department. The Taxpayer has not demonstrated that such failure to file was due to providential or other good cause.

The Taxpayer states that the return on which it did not remit all ROW fees is related to a new filing requirement. However, based upon the information provided by the Taxpayer, it is unclear what new filing requirement the Taxpayer is referencing and how that relates to the penalty at issue. The penalty at issue was not assessed because the Taxpayer failed to remit ROW fees. It was assessed because the Taxpayer failed to file a return. Accordingly, Taxpayer D's request for abatement of the penalty at issue is denied.

CONCLUSION

Based upon this determination, the assessments are correct. Revised bills, with interest accrued to date, will be mailed shortly to the Taxpayers. No further interest will accrue provided the outstanding assessments are paid within 30 days from the date of the bill. Please remit payment to: Virginia Department of Taxation, 600 E. Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,



Craig M. Burns
Tax Commissioner



AR/1-5202244365.P
1Pub. L. No. 105-277, 112 Stat. 2681-719, § 1105(5)(A).
2 Id at § 1105(5)(C).
3Id at § 1101(b).
4See, § 1105(5)(C) above for examples of incidental services.

Rulings of the Tax Commissioner

Last Updated 09/22/2014 13:45