Tax Type
Retail Sales and Use Tax
Description
Telecommunications; Calling cards or other tangible personal property
Topic
Taxability of Persons and Transactions
Date Issued
05-27-1997
May 27, 1997
Re: Request for Ruling: Retail Sales and Use Tax
Dear*****************
This is in reply to your letter in which you seek information on the application of various Virginia taxes to telecommunication services provided by ********** (the "Taxpayer”).
FACTS
The Taxpayer, a corporation headquartered outside Virginia, is a repeller of domestic long distance telecommunication services. The Taxpayer does not own telephone facilities or equipment in Virginia, but will resell long distance services provided through other telecommunication common carriers. The Taxpayer will not maintain an office in Virginia.
You request information regarding the imposition of gross receipts, income, and sales and use taxes by Virginia.
Gross Receipts/Income Taxes
Effective for taxable years beginning on or after January 1, 1989, Virginia imposes the corporate income tax on companies providing telecommunication services. In addition, certain companies meeting the definition of a 'telecommunications company" are subject to a minimum tax on gross receipts in lieu of the corporate income tax, in years where the minimum tax exceeds the corporate income tax. Code of Virginia § 58.1-400.1 defines a telecommunications company as:
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- ... a telephone company or other person holding a certificate of convenience and necessity granted by the State Corporation Commission authorizing local exchange telephone service, interexchange service, radio common carrier system or a cellular mobile radio communications system; or a person authorized by the Federal Communications Commission to provide commercial mobile service as defined in § 332(d)(1) of the Communications Act of 1934, as amended, where such service include cellular mobile radio communications services or personal communications services; or a person holding a certificate issued Pursuant to § 214 of the Communications Act of 1934, as amended, authorizing telephone service; or a telegraph company or other person operating the apparatus necessary to communicate by telegraph. (Emphasis added.)
Under Virginia law, telephone resellers are not required to obtain a certificate of convenience and necessity from the State Corporation Commission to operate in Virginia. Nevertheless, a telephone repeller holding a certificate issued pursuant to § 214 of the Communications Act of 1934 will be subject to the minimum tax on gross receipts.
Based upon the information provided, it is unclear if the Taxpayer meets the definition of a telecommunications company under Virginia law. Companies meeting this definition must have their gross receipts certified annually to the Department of Taxation by the State Corporation Commission. See Title 23 of the Virginia Administrative Code (VAC) 10-120-80 through 10-120--89.1. Further information regarding the certification of gross receipts can be obtained by contacting the State Corporation Commission, Public Service Taxation, 1300 E. Main Street, Richmond, Virginia, 23219 or by calling (804) 371-9679.
Corporate Income Tax
Every corporation having income from Virginia sources is subject to the corporate income tax. A taxpayer will have income from Virginia sources when sales are made to customers located in Virginia. Based upon the facts presented, the Taxpayer has income from Virginia sources and is therefore subject to Virginia corporate income tax.
However, Public Law (P.L.) 86-272, codified at 15 U.S.C.A. §§ 381-384, prohibits a state from imposing a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. In this situation, the Taxpayer is engaged in the sale of services, which are clearly outside the federal statutory protection of P.L. 86-272. However, the department applies P.L. 86-272 type standards to solicitation of other than tangible personal property. See Public Document (P.D.) 93-75 (3/17/93).
The department's historical policy is to extend the "solicitation test" of P.L. 86-272 to situations involving the sale of intangible personal property. However, the department limits the scope of P.L. 86-272 to only those activities that constitute solicitation, are ancillary to solicitation, or are de minimis in nature.
The information you have provided is insufficient to determine whether the Taxpayer's activities in Virginia exceed P.L. 86-272 protection. You have indicated the Taxpayer will not own telephone facilities or equipment in Virginia, and will not maintain an office in Virginia. You have not, however, indicated whether the Taxpayer will employ a Virginia sales force or will market its services by having its employees contact potential customers via telephone.
We have therefore provided a general overview of the Virginia corporate income tax based upon the assumption that the Taxpayer's activities in Virginia will exceed P.L. 86-272 protection.
The Taxpayer will utilize the three factor formula of property, payroll and sales to apportion its Virginia taxable income. Below is a brief explanation of each apportionment factor as each would apply to the Taxpayer.
Sales Factor; Sales of domestic long distance telecommunications services are sales not involving the sale of tangible personal property, and are apportioned based on "cost of performance" pursuant to 23 VAC 10-120-230. Because the Taxpayer's costs of performance are likely to be greater outside than inside of Virginia, the Taxpayer is not likely to have a positive Virginia sales factor as a result of its services.
Property Factor: The Virginia property factor is based on real and tangible personal property used in Virginia. See 23 VAC 10-120-160. Should the Taxpayer have automobiles assigned to traveling employees, they may be included in the numerator of the property factor of the state to which the employees' compensation is assigned under the payroll factor. See 23 VAC 10-120-170 (D).
Payroll factor: Because the information provided does not indicate if the Taxpayer will employ a sales force in Virginia, it is unclear if the Taxpayer would have a positive payroll factor. See, however, 23 VAC 10-120-200(A)(3).
Corporate Income Tax Filing Requirement
A corporation whose income from Virginia sources is not subject to tax because of P.L. 86-272 must file a return if it is registered with the State Corporation Commission for the privilege of doing business in Virginia. See 23 VAC 10-120-310.
Sales and Use Taxes
Telecommunications services are generally exempt from the sales and use tax in accordance with Code of Virginia § 58.1-609.5(1). The statute provides an exemption from the sales and use tax for "[p]rofessional, insurance, or personal service transaction which involve sales as inconsequential elements for which no separate charges are made...." The Taxpayer's provision of domestic long distance telecommunications services would not be subject to the sales tax based on the information provided.
The department has previously responded to a similar situation regarding the application of the sales tax to long distance telephone services provided by a repeller located outside Virginia. See P.D. 95-40 (3/17/95) and attachments. The ruling deemed certain long distance services purchased by a repeller and resold to Virginia customers to be services purchased for resale and exempt from the sales tax. The ruling also determined the charges by the service provider for plastic calling cards to be taxable to the repeller as tangible personal property consumed by the repeller in the provision of services to Virginia customers. The same is true in this instance. The Taxpayer would be responsible for payment of the tax on calling cards or any other tangible personal property provided to Virginia customers in conjunction with exempt telecommunications services.
I hope the foregoing has responded to your inquiry. I am enclosing copies of the cited statutes, regulations, public documents, and the department's Combined Registration Form R-1. If you need further information regarding the income issues in this ruling, you may contact ******** at********* . Questions concerning sales tax issues should be directed to **********at********* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11715J
Rulings of the Tax Commissioner