Tax Type
Retail Sales and Use Tax
Description
Telecommunications; Telecommunications equipment used by Internet provider
Topic
Taxability of Persons and Transactions
Date Issued
07-18-1997
July 18, 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 the sales and use tax to your client, the "Taxpayer," regarding the provision of Internet access services. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is headquartered outside Virginia and is engaged primarily in the provision of Internet access services. The Taxpayer also provides on-line incidental products and services to customers. You question the tax application regarding on-line Internet access services and incidental services and products offered by your client to Virginia customers.
RULING
Internet Access Services
The Taxpayer provides Internet access services to individuals and businesses on a subscription basis for a flat monthly fee. The Taxpayer provides services using a Point of Presence (POP) network consisting of leased office locations throughout the United States. Each location houses telecommunications switching and routing equipment. The Taxpayer maintains several POP locations in Virginia. There are no employees at the Virginia POP locations and technical or equipment problems are corrected by remote access or a repair technician is sent to the location.
The Taxpayer provides dial-up and network accounts to its customers. A dial-up customer connects to the Taxpayer's POP by dialing a local telephone number via personal computer. The connection is routed through telephone lines maintained by a regional bell operating company (RBOC) that directly bills the customer a charge for the connection service, unrelated to the monthly fee charged by the Taxpayer. Once connected to the POP and transmitted via the RBOC, the customer is routed to the Taxpayer's Hub (server) outside Virginia. From the Hub, the customer is routed to the Taxpayer's main operations center, also outside Virginia, for identification and password verification. The customer is routed back to the POP and through the Hub to a network access point (NAP) for connection to the Internet.
The network customer is not continuously routed as the dial-up customer, but instead is routed from the POP through dedicated connection lines for direct access to the Internet. The dedicated connection lines are leased and billed to the customer or the Taxpayer by the RBOC, independent of the monthly fee charged by the Taxpayer.
Application of the Tax
Code of Virginia § 58.1-609.5(1) provides an exemption from the sales and use tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made...."
The department traditionally has held that transactions involving data accessed on-line by personal computers are nontaxable service transactions under Code of Virginia § 58.1-609.5(1). This is also true of information sent via fax, Internet, or other electronic means. Intangible property or services generally are exempt from the tax unless provided in connection with the sale of tangible personal property.
The services, as described above, involve electronic communications activity transmitted and routed through a number of connection points in and outside Virginia. Because there is no exchange of tangible personal property regarding Virginia connection points, the services are deemed nontaxable service transactions. The Taxpayer, therefore, is not required to collect the Virginia sales tax on the charge to Virginia customers for such services.
The Taxpayer maintains POP locations in Virginia in order to provide Internet access services to customers. As a service provider, the Taxpayer is deemed the user and consumer of all tangible personal property used in Virginia in the provision of the services. See Title 23 of the Virginia Administrative Code (VAC) 10-210-4040.
Code of Virginia § 58.1-604 imposes the use tax on the "use and consumption of tangible personal property in this Commonwealth, or the storage of such property outside the Commonwealth for use or consumption in this Commonwealth...." The Taxpayer, in accordance with the Code, is subject to the use tax on the cost price of the telecommunications switching and routing equipment placed in use at the Virginia POP locations. The Taxpayer must pay the Virginia tax at the time of purchase; however, if the vendor fails to collect the tax or is not registered to collect the Virginia tax, the Taxpayer must remit such tax directly to the department using Form ST-7. See 23 VAC 10-210-030.
Other Services/Products
The following incidental services and products are offered by the Taxpayer to customers, generally at no extra cost.
Electronic Mail (E-mail): The Taxpayer offers customers electronic mail for communication among individuals throughout the world via the Internet.
Personalized Daily Electronic Newsletter: The Taxpayer contracts with an unrelated third party (Company X) to provide an electronic news service delivered to the Taxpayer's customers daily via E-mail. The customer may customize the content of the newsletter by selecting up to ten topics and receive headlines and news summaries on a daily basis. The customer may contract with Company X for expanded service offerings and pay an additional fee directly to Company X.
Personal Finance Services: The Taxpayer contracts with another unrelated party (Company Y) to provide access for the Taxpayer's customers to personal finance tools for use in developing and managing a personal investment portfolio. The customer may contract with Company Y to upgrade the service for an additional fee.
Web Site Creation: The Taxpayer provides customers the opportunity to create a web site. The customer enters data on an electronic template which is processed by the Taxpayer using its own software. The customer may also create a web site using hypertext markup language (HTML) which does not require any processing by the Taxpayer. In both instances, the customized web site is stored on a computer outside Virginia.
1-800 Telephone Services: The Taxpayer provides a 1-800 telephone service for customer inquiries. In addition, customers who are not geographically located near a POP may use the 1-800 number to access the Taxpayer's Internet services.
Various Internet Software Tools: The Taxpayer provides customers with various software tools such as web browers for scanning the World Wide Web, E-mail readers, and filtering software to allow parental control over children's access to the Internet. The customers access the software tools by downloading a copy of the product to their personal computer. The Taxpayer pays a royalty to the third party provider (Company Z) based on usage by the Taxpayer's customers. The filtering software is provided to customers free of charge conditioned upon the customer purchasing a six month subscription to monthly updates of the product directly from Company Z.
Application of the Tax
According to your discussions with a member of the Tax Policy Staff, the above services are accessed by customers on-line and the various products are provided in electronic form or downloaded for further on-line usage by the customer. As the above transactions do not involve the exchange of tangible personal property, the incidental services and products provided by the Taxpayer also constitute nontaxable service transactions exempt under Code of Virginia § 58.1-609.5(1).
In the event the Taxpayer provides products in tangible form (i.e., CD-Rom (compact disc), diskette, etc.) to Virginia customers, a “sale" of tangible personal property would occur and the transaction would be subject to the tax. "Sale" is defined in Code of Virginia § 58.1-602 as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property....” Because the Taxpayer has a physical presence in Virginia through its POP locations, the Taxpayer would be required to collect the Virginia tax on sales of any products provided in tangible form. This is consistent with prior rulings of the department which distinguish between information provided in tangible form and that which is provided electronically. See P.D. 91-224 (9/23/91) and P.D 95-68 (3/30/95).
The locations of Companies X, Y, and Z have not been disclosed. If these entities maintain a physical presence in Virginia or engage in any of the activities described in Code of Virginia § 58.1-612, which defines a dealer for sales and use tax purposes, the Virginia tax may apply to tangible personal property sold by such entities in Virginia. The use tax would apply to tangible personal property used by these entities in the provision of on-line services to the Taxpayer or the Taxpayer's customers in Virginia in accordance with Code of Virginia § 58.1-604. It is recommended that Companies X, Y, and Z seek rulings from the department regarding their specific activities, if any, in Virginia.
Conclusion
Based on the facts presented and the additional information provided, the Taxpayer's provision of Internet access services and incidental services and products to customers in Virginia does not involve the exchange of tangible personal property and therefore the transactions constitute nontaxable service transactions. The Taxpayer is not required to collect the Virginia tax on the flat monthly fee charged to its customers for such services. The Taxpayer maintains a physical presence in Virginia and as a service provider is deemed the user and consumer of all tangible personal property used and consumed in the provision of services. The Taxpayer, therefore, is subject to the use tax on the cost price of the telecommunications equipment used at the Virginia POP locations.
The ruling in this case is consistent with recent rulings issued by the department dealing with Internet related transactions. The department, in Public Document (P.D.) 97-213 (4/30/97) addressed certain services provided via the Internet. In addition, P.D. 97-117 (3/6/97) addressed the provision of a map service via the Internet; and most recently, the department, in P.D. 97-239 (5/23/97), addressed the creation and placement of a web site on the Internet. In all three instances, the department deemed the transactions nontaxable service transactions and the taxpayers were not required to collect the Virginia tax on the charges for such services.
I hope the foregoing has responded to your inquiry. I am enclosing copies of the cited statutes, regulations, public documents, and a Combined Registration Form R-1 with instructions. If you have additional questions, please contact *********at*************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11624J
Rulings of the Tax Commissioner