May 21, 2018
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License Tax
Dear *****:
This final state determination is issued upon the application for correction filed by you on behalf of ***** (the “Taxpayer”) with the Department of Taxation. You appeal the denial of refunds of Business, Professional and Occupational License (BPOL) tax paid to the ***** (the “City”) for the 2013 through 2015 tax years.
The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e., the local assessment will stand unless the taxpayer proves that it is incorrect.
The following determination is based on the facts presented to the Department summarized below. 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.
FACTS
The Taxpayer requested a refund of BPOL taxes paid for the 2013, 2014 and 2015 tax years, contending that the federal Internet Tax Freedom Act (the “Act”), codified at Title 47 U.S.C. § 151 note, preempted imposition of the City's BPOL tax on gross receipts attributable to internet access services. The City issued a final determination denying the Taxpayer's refund request. The Taxpayer filed an appeal with the Department, repeating its contention that the Act preempts imposition of the City's BPOL tax on gross receipts attributable to internet access services.
ANALYSIS
The City contends that the Act was only intended to apply to transactional taxes on internet access services, not taxes of general application such as the BPOL tax. In addition, even if the Act applies to the BPOL tax generally, the City argues that its BPOL tax was grandfathered. The Taxpayer presents arguments to refute these contentions and asserts that the Act precludes imposition of the BPOL tax on gross receipts attributable to internet access services.
In Public Document (P.D.) 17-94 (6/9/2017), the Department concluded that the Act applied to the BPOL tax. That determination addresses the City's arguments that the Act was only intended to apply to transactional taxes directly imposed on Internet access services. The Department, however, recognizes that the issue of whether the Act was intended to apply to a tax such as the BPOL tax is controversial. The Department even acknowledged in P.D. 17-94 that the Act may have been primarily aimed at transactional taxes such as sales and use taxes. The text of current and prior versions of the Act, however, together with the history of amendments to the Act, indicated that taxes other than just transactional taxes directly imposed on internet access services came within the scope of the Act.
In addition, since the publication of P.D. 17-94, the Supreme Court of Virginia ruled in Dulles Duty Free, LLC vs. County of Loudoun, 294 Va. 9 (2017), that the Import-Export Clause of the United States Constitution prevented the county from imposing BPOL tax on the taxpayer's export goods in transit. The Court rejected the county's argument, at least in the context of the Import-Export Clause, that the BPOL tax was a tax on the privilege of doing business and was not the same as a tax on goods. See id. at 21-22. The Court observed that the characterization of a tax for state law purposes does not control whether a tax violates the Import-Export Clause and concluded that the BPOL tax was “in its ‘operation and effect’ a direct tax on export goods in transit.” See id. at 22. Although the Department analyzed other reasons in P.D. 17-94 why the ITFA should not apply merely to transactional taxes on the service itself, Dulles Duty Free suggests that courts may look more to the operation and effect of a tax rather than its state law characterization in determining whether it is preempted by a federal law.
Further, the Department has declined to issue any orders for correction on the basis that a Virginia locality failed to prove it qualified for grandfather protection under the Act. See P.D. 18-24 (3/14/2018).
DETERMINATION
Because the remaining issue involves a dispute between the Taxpayer and the City regarding whether the City was grandfathered under the Act, the Department declines to issue an order for correction in this case pursuant to P.D. 18-24. Therefore, the City's assessment stands.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1350.M