Tax Type
Communications Sales and Use Tax
Description
Internet Tax Freedom Act (the "Act")
Topic
Communications Sales and Use Tax
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 ***** ********* (collectively the "Taxpayers") in which you seek correction of the communications sales and use tax assessments issued. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers are engaged in the business of providing mobile communications services to end-user retail customers, including telephonic voice service, text messaging service, and Internet access service. The charges at issue are activation fees that are charged by the Taxpayers to customers who entered into a service agreement that exclusively provided Internet access service. Upon entering into a plan, the customer would agree to purchase Internet access service for a particular term in exchange for an upfront fee (the activation fee) and monthly plan charges, all of which are billed to the customer.
In the audit, the Taxpayers were assessed tax on the activation fees charged to its customers with respect to the Internet access agreements. The Taxpayers maintain that the assessments are incorrect and violate both the Virginia Communications Sales and Use Tax Act and the Internet Tax Freedom Act. The Taxpayers state that each presents the same issues on appeal and request that the appeals be consolidated and addressed in one determination letter from the Department.
DETERMINATION
Virginia Communications Sales and Use Tax
The Taxpayers maintain that the assessments of tax on the activation fees charged to customers are not allowed by the Communications Sales and Use Tax Act. The Taxpayers maintain that because the communications tax is not applied to sales of Internet access services, the tax should also not be applied to the activation fees that are charged with respect to sales of Internet access services.
Virginia Code § 58.1-647 defines Internet access service as:
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- 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:
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- 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 that "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 email or instant messaging." [Emphasis added.]
In accordance with 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, charge, or termination of communications services as communications services that are subject to the tax.
The Department has previously dealt with the application of the tax on activation and reactivation charges in P.D. 12-148 (9/17/12). In that public document, the tax assessed on such charges was upheld. Accordingly, the communications sales tax assessed in this instance is correct.
Internet Tax Freedom Act (the "Act")
The Taxpayers maintain that even if the communications tax statute is construed to tax an activation fee for Internet access services, this imposition is barred by the Act. The Taxpayers maintain that the Act prohibits state tax on Internet access service and extends to all charges, including activation fees.
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, and other services offered over the Internet.”2
The Act further provides that the term 'Internet access’:
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- 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.3
- 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.3
Finally, the Act provides that:
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- 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.] 4
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.5
The Act provides clear examples of what are considered incidental services, and connectivity related services are not included in those examples.
Based upon this determination, the assessments are correct. Revised bills, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessments are paid within 30 days from the date of the bills. Please remit your 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 assessments, you may contact ***** at *****.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions about this response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5436697907P
2. Pub.L. No. 105-277, 112 Stat. 2681-719 § 1105(5)(A).
3. Id at § 1105(5)(C).
4.Id at § 1101(b).
5See, § 1105(5)(C) above for examples of incidental services.
Rulings of the Tax Commissioner