June 23, 2020
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License (BPOL) 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 seek a reconsideration of Public Document (P.D.) 20-3 (1/7/2020) and request the abatement of Business, Professional and Occupational License (BPOL) taxes assessed to the Taxpayer by ***** (the “County”) for the 2013 through 2016 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 online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.
FACTS
In P.D. 20-3, the Department determined that all of the Taxpayer’s gross receipts were properly sitused to the County because no services were performed at a definite place of business outside the County. The Taxpayer requests a reconsideration, contending that the Department misinterpreted the facts and erroneously sitused all gross receipts to the County. In the alternative, the Taxpayer contends that the BPOL tax is a franchise fee which is limited by the Cable Act or the Consumer Sales and Use (CSU) tax.
ANALYSIS
Situs
The Taxpayer contends that the Department’s conclusion that all gross receipts must be sitused to the County is erroneous because the franchise agreement does not limit cable services to the Taxpayer. It argues that a portion of gross receipts should be sitused to affiliates located outside the County because such cable services were performed by the affiliates outside the County.
The Department is not persuaded by the argument that the agreement does not prohibit other related entities from providing cable services. The franchise agreement is between the County and the Taxpayer. These are the only parties identified as obligees under the contract. Under the agreement, the Taxpayer is the only entity authorized to provide, add, drop, or modify the services provided through the cable network.
Further, while the content and video signals may have been provided by related entities located outside Virginia, subscribers’ access to the programming was provided through the Taxpayer’s cable from a facility within the locality. One of the Taxpayer’s definite places of business in the County serves as the headend or master distribution center where programming from providers (including related entities) is received, processed into cable quality signals, and then distributed to subscribers in the County and a neighboring locality. No evidence has been provided that would indicate service distribution to County subscribers was conducted by the Taxpayer from any other location. Because the Taxpayer’s only definite places of business were located within the County, the services could not have been directed and controlled outside the County. The only definite places of business to which the gross receipts could be sitused were located within the County.
The Taxpayer also asserts that the Department incorrectly applied P.D. 05-168 (12/12/2005) by concluding that all the gross receipts must be sitused to the County. It argues the facts in that determination are materially the same as this case in that gross receipts were sitused outside the locality. The County asserts that the Taxpayer performed numerous services within the County spelled out in the franchise agreement subjecting all of its gross receipts to the BPOL tax.
As discussed in P.D. 20-3, the businesses in P.D. 05-168 had definite places of business in two localities. In this case, however, the Taxpayer’s only definite places of business were located within the County. Consequently, its services could not have been directed and controlled outside the County.
Cable Act
The Taxpayer believes it is protected from paying BPOL tax under the Cable Communications Policy Act of 1984 (Cable Act). The Cable Act, passed by Congress on October 30, 1984, was enacted to promote competition and deregulate the cable television industry. Under the Cable Act, franchise fees paid by a cable company to any governmental entity empowered to grant a cable franchise are limited to 5% of the yearly gross revenues. See 47 U.S.C § 542(b). Pursuant to 47 U.S.C § 542(g)(1) a franchise fee includes “any tax, fee, or assessment of any kind imposed by a franchising authority or other governmental entity on a cable operator or cable subscriber, or both, solely because of their status as such . . . ” A franchise fee, however, does not include “any tax, fee, or assessment of general applicability (including any such tax, fee, or assessment imposed on both utilities and cable operators or their services but not including a tax, fee, or assessment which is unduly discriminatory against cable operators or cable subscribers . . .” See 47 U.S.C § 542(g)(2)(A).
Franchise Fee
The franchise agreement required that the Taxpayer pay a 5% franchise fee. The Taxpayer contends that because a franchise fee includes a tax imposed by a locality, the County cannot levy an additional BPOL tax. The County asserts that the franchise fee only applies to fees charged for access to right-of-ways.
Virginia Code § 15.2-2108.1:1 B defines a franchise as:
an initial authorization, or renewal thereof, issued by a franchising authority, including a locality or the Commonwealth Transportation Board, whether such authorization is designated as a franchise, permit, license, resolution, contract, certificate, agreement, or otherwise, that authorizes the construction or operation of a cable system, a telecommunications system, or other facility in the public rights-of-way, including either a negotiated cable franchise or an ordinance cable franchise.
Therefore a franchise fee, with respect to cable providers, is a fee to allow a cable service provider to build or operate a cable system in a locality’s rights-of-way. A right-of-way is a term used to describe a right belonging to a party to pass over land of another. See Ryder v. Petrea, 243 Va. 421, 416 S.E.2d 686 (1992). As such, a franchise fee is remitted by a cable provider to a locality in order to run its cables and other equipment on the localities property.
According to the Taxpayer, FCC 19-80 (the “Order”) broadly defines a franchise fee to include any assessment on a cable operator for the constructing, managing and operating a cable system. Because BPOL statutory provisions authorize localities to require a business, professional, and occupational license to operate a cable system within the County, it qualifies as a franchise fee.
In Chesterfield Cablevision, Inc. v. County of Chesterfield, 241 Va. 252, 401 S.E.2d 628 (1991), the Virginia Supreme Court ruled a BPOL tax assessed on a cable provider’s business operations is not targeted at the cable system. Rather, the BPOL tax under Virginia Code § 58.1-3703 provides for a broad range of taxation on businesses, trades, professions, occupations, callings, and upon persons, firms, and corporations. While labeled as a license tax under Virginia law, no conditions are placed upon an entity’s right to operate its business. See also Cox Cable Hampton Rds. v. City of Norfolk, 242 Va. 394, 410 S.E.2d 652 (1991). Thus, while the Taxpayer may assert the Order has expanded its interpretation of a franchise fee to include assessments not limited solely to cable operators, the BPOL tax is merely a revenue raising mechanism that allows a locality to support an economic environment in which an entity can freely and effectively conduct its affairs.
Under this authority, the County enacted ordinances imposing a BPOL tax on a broad range of businesses. Because, both the Commonwealth’s enabling legislation and the County’s ordinances assess a business license tax against a wide range of business operations, neither Virginia nor the County have targeted the cable providers as prohibited under the Order.
The Taxpayer also presents a discriminatory tax argument. According to the Taxpayer, satellite television and other over-the-top providers are not subject to BPOL tax, or if they are, they are not subject to the same situsing rules. Under this reasoning, the Taxpayer believes the BPOL tax is unduly discriminatory against its business. Different tax treatment of two entities resulting solely from differences between the nature of their business operations does not constitute discrimination. See Medlock v. Leathers, 311 Ark. 175, 177 (1992), and DirecTV, LLC v. Commonwealth, 31 Mass. L. Rep. 48 (2012). Furthermore, a satellite television service with its only definite place of business in the same locality would be subject to the same situsing rules as the Taxpayer.
The Taxpayer contends that federal law defines a franchise fee for cable operators and that the Federal Communications Commission (FCC) specifically limits the amount of franchise fees state and local governments may assess. The County asserts that the BPOL tax is not a franchise fee because it applies to all businesses, with certain exceptions, and is imposed on businesses for the privilege of operating in a locality.
In City of Eugene v. Comcast of Or. II, Inc., 359 Ore. 528, 375 P.3d 446 (2016), the Oregon Supreme Court held that Eugene’s 7% telecommunications right-of-way fee imposed on the provision of broadband services over a franchised cable system was not a franchise fee for purposes of the Cable Act because it was “generally applicable” in that it applied to all telecommunications providers. The FCC, however issued the Order which, among other things, narrowed the scope of what constituted a franchise fee. The Order explicitly overruled City of Eugene in so far as preempting any assessment of fees on a franchised cable operator of any affiliate using the same facilities franchised to the cable operator that exceeds the 5% franchise fee.
The BPOL tax, however, is a tax on the privilege of doing business within a locality. A local government body, by ordinance, may levy and provide for the assessment and collection of BPOL taxes on businesses, trades, professions, occupations and callings and upon persons, firms, and corporations engaged in business within the locality. See Virginia Code § 58.1-3703. As such, the BPOL tax is a tax of general applicability because it is imposed on businesses that have a definite place of business in a locality and is not limited to cable companies.
As a matter of convenience, the local cable franchise fee, as well as a number of other local communications taxes, were replaced by the CSU tax effective January 1, 2007. See P.D. 06-138 (11/1/2006). For franchise agreements in force prior to January 1, 2007, which includes the agreement at issue in this case, Virginia Code § 15.2-2108.1:1 C 2 provides a grandfather clause. Under this clause, the monthly franchise fee is included in the monthly CSU return and is distributed to localities by the Department. See P.D. 17-27 (3/17/2017).
DETERMINATION
After carefully reexamining all the facts of this case and the applicable statutes, federal law and rulings, I reaffirm the determination in P.D. 20-3. Accordingly, the County properly sitused all of the Taxpayer’s gross receipts to its definite places of business and the assessments of BPOL tax for the 2013 through 2016 tax years are upheld.
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/3330.B