March 18, 2015
Re: § 58.1-1821 Application: Communications Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** and ***** (the "Taxpayers"), in which you seek correction of the communications sales and use tax assessments issued for the period September 2009 through December 2013. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers provide high-speed Internet services to residential and commercial subscribers in Virginia. The Taxpayers are contesting the audit assessments of the communications sales tax on Internet reactivation fees. The Taxpayers state that the reactivation fees are charged to subscribers for reactivation of Internet services after disconnection. The Taxpayers state that the reactivation fees are separate from any fees collected on other services, including voice or video programming services. The Taxpayers maintain that the assessments of tax violate the Virginia Communications Sales and Use Tax Act, as well as the Internet Tax Freedom Act.
DETERMINATION
Virginia Communications Sales and Use Tax
The Taxpayers contend that the Department erroneously assessed tax on the Internet reactivation fees. The Taxpayers state that prior rulings of the Tax Commissioner incorrectly expanded the Tax Code, and contend that the ruling in Public Document (P.D.) 14-64 (5/14/14) applies in this instance. The Taxpayers further state that the reactivation fees are incidental to the provision of Internet access service and, therefore, fall outside of the scope of the communications services that are subject to the communications sales tax. Finally, the Taxpayers maintain that the Internet reactivation fees are excluded from the definition of sales price for 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.]
Virginia Code § 58.1-647 defines sales price as:
The total amount charged in money or other consideration by a communications services provider for the sale of the right or privilege of using communications services in the Commonwealth, including any property or other services that are part of the sale. The sales price of communications services shall not be reduced by any separately identified components of the charge that constitute expenses of the communications services provider, including but not limited to, sales taxes on goods or services purchased by the communications services provider, property taxes, taxes measured by net income, and universal-service fund fees.
P.D. 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 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. Additionally, the charges for the reactivation of the services at issue are not excluded from the definition of sales price, as considered in Va. Code § 58.1-648. The Department has previously addressed the application of tax to activation and reactivation charges in P.D. 12-148 (9/17/12), P.D. 14-130 (8/7/14) and P.D. 14-131 (8/7/14). In these public documents, it was determined that the tax assessed on such charges is proper. Accordingly, the communications sales tax assessed in this instance is correct.
The determination in P.D. 14-64 does not apply in this instance because the fees in that case are not for activation fees similar to those being contested by the Taxpayers. In P.D. 14-64, the taxpayer was a cellular telephone service provider. The taxpayer was assessed tax in the audit on "activation" fees charged by the taxpayer to its customers. The taxpayer maintained that the separate activation fee charged to its customers was an equipment charge and not a fee associated with activating an account. The Tax Commissioner determined that the fees at issue were not for the activation of communications services as considered in Va. Code § 58.1-647. As such, the fees were not subject to the communications sales tax.
Internet Tax Freedom Act
The Taxpayers contend that the Department is prohibited from taxing reactivation fees under the Internet Tax Freedom Act (the "Act"). The Taxpayers maintain that the reactivation fee is a charge that follows or accompanies the obtaining of Internet access. As such, the Taxpayer asserts 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.
CONCLUSION
Based upon this determination, the assessments are correct. The assessments at issue have been paid in full and no further action is required.
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 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
TaxCommissioner
[1] Pub. L. No. 105-277, 112 Stat. 2681-719. § 1105(5)(A).
[2] Id at § 1105(5)(C).
[3] Id at § 1101(b).
[4] See, § 1105(5)(C) above for examples of incidental services.