Tax Type
Retail Sales and Use Tax
Description
Commonwealth's policy of strict construction of exemption statutes.
Topic
Exemptions
Date Issued
08-07-2014
August 7, 2014
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you request reconsideration of the original determination issued on October 11, 2013 in which the refund claims requested by ***** and ***** (Taxpayer 1 and Taxpayer 2, respectively, or the Taxpayers collectively) for the periods October 2005 through September 2008 were denied. I apologize for the delay in responding to your request.
FACTS
The Taxpayers contend that the original determination is misapplied and ignores the application by the Circuit Court of Fairfax County in Cisco Systems, Inc. v. Kenneth Thorson, Tax Commissioner, 68 Va. Cir. 385 (2005). The Taxpayers also contend that the facts upon which the original determination is based are incomplete and ignore the documentation provided. The original determination was issued as Public Document (P.D.) 13-179.
DETERMINATION
In this reconsideration, the abbreviation "ISP" refers to an "Internet service provider." The statutory term "Internet service" and phrases of statutory terms used in this response can be found in Va. Code § 58.1-602, as well as in the prior determination. The exemption at issue is set out in Va. Code § 58.1-609.6 2.
The Cisco Decision
The Taxpayers maintain that the Department has improperly declined to adopt the decision of the Fairfax County Circuit Court's decision in Cisco. The Taxpayer contends that the Cisco decision properly applies the Commonwealth's policy of strict construction of exemption statutes.
From the Cisco decision, the Taxpayers cite the court's conclusion that "the plain language of the statute applies the exemption to the equipment, and does not include language that differentiates the eligibility of one type of ISP from another." While there is no specific reference to "retail" or "wholesale" in the statutory language of the exemption, there are other terms and phrases in the exemption that allow for making such a differentiation. While the court further concluded that "[t]he Commissioner offers no authority or reason that the General Assembly would give one type of ISP preferential treatment over another when purchasing and using the exact same piece of equipment," I offered a number of reasons in the "Scope of the Exemption" section of my prior determination as to why the General Assembly would give such preferential treatment.
The Taxpayers believe that the Cisco decision is precedential throughout the Commonwealth and further believe that it would be highly unusual for a decision of such court to be limited to one local jurisdiction in the Commonwealth. While other lower courts may or may not embrace the Cisco decision, I would note that decisions by a lower court are not always upheld by the Virginia Supreme Court. For example, see Commonwealth of Virginia, Department of Taxation v. Wellmore Coal Company, 228 Va. 149; 320 S.E.2d 509 (1984); Commonwealth of Virginia v. Community Motor Bus Company, 214 Va. 155, 198 S.E.2d 619 (1973); Lawrence Carr, Jr., v. Forst, 249 Va. 66, 453 S.E. 2d 274 (1995); Commonwealth of Virginia, Department of Taxation v. Miller-Morton Company, 220 Va. 852, 263 S.E.2d 413 (1980); Commonwealth of Virginia v. Research Analysis Corporation, 214 Va. 161, 198 S.E.2d 622 (1973); and Commonwealth of Virginia, Department of Taxation v. Progressive Community Club of Washington County, Virginia, 215 Va. 732, 213 S.E.2d 759 (1975). Accordingly, it would be irresponsible to assume that the Virginia Supreme Court would support the Cisco decision or that all other circuit courts in Virginia would readily agree with such decision. Moreover, the Department has not applied the Cisco decision on a statewide basis for the reasons set out in the original determination, and because the Virginia Supreme Court has not reviewed the issue and rendered an opinion addressing the scope of the Internet service provider exemption.
By focusing on the term "end-user subscriber," the Taxpayers contend that the Department's analysis ignores that Taxpayer 1's Internet access enables users, whether they are Taxpayer 1's enterprise customers or the retail ISP's end-users, to access the Internet, content, and email. Taxpayer 1 provides Internet access products to retail ISPs and also to non-ISP enterprise customers. Such enterprise customers are able to access the Internet, content, etc., through Taxpayer 1's Internet access services. With respect to wholesale sales to retail ISPs, Taxpayer 1's Internet access services are turnkey offerings. Without Taxpayer 1's Internet access services and the underlying network and equipment used to provide those services, the Taxpayers contend that a retail ISP would not be able to provide Internet services directly to its end-user subscribers. In effect, the Taxpayers maintain that the wholesale ISP's amplification, transmission and distribution equipment used by retail ISP's allows the retail ISP's end-user subscribers to access proprietary and other content, information, electronic mail, and the Internet as a part of a package of services sold.
While I appreciate and understand the Taxpayers' arguments, I must recognize that the strict construction rule limits the scope of the exemption. In my opinion, the exemption at issue should not be broadly construed as was done in the Cisco decision for the reasons provided in my original determination to the Taxpayers. While the Taxpayers believe that I have misinterpreted the statutory language of the exemption in Va. Code § 58.1-609.6 2, I continue to disagree with your position. The Department's policy is based on the statutory terms and phrases to derive the intended scope of the exemption. The rule of strict construction as constitutionally intended by the Virginia Supreme Court and adopted by the courts for all sales and use tax exemptions has been applied correctly in applying the exemption.
Purchases for Use in Fairfax County, Virginia
The Taxpayer indicates that substantially all (i.e., approximately 90%) of the equipment with respect to which the Taxpayers submitted their refund requests is located in Fairfax County, Virginia. As stated in the original determination, the Department does not acquiesce in or abide by the Cisco decision except where it must, i.e., in Fairfax County, Virginia. To the extent that ISP equipment is used in an exempt manner pursuant to the Cisco decision and is used within the borders of Fairfax County, Virginia, the exemption is applicable. The Department's auditor will need to confirm that all equipment claimed to be used in an exempt manner is indeed used in Fairfax County.
CONCLUSION
Once the auditor has verified the location of the exempt ISP equipment at issue that is used in Fairfax County, Virginia, a refund will be issued in accordance with this determination along with refund interest computed in accordance with Va. Code § 58.1-1833.
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, please 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/1-5565833433.R
Rulings of the Tax Commissioner