Who owed Virginia communications sales tax on satellite TV and pay-per-view services supplied to hotels and their guests?

Plain-English summary

Virginia treated the communications company as the provider and the hotel as its customer. The company therefore had to register, collect communications sales tax from the hotel, and remit it monthly.

The taxable services were the company's free-to-guest satellite programming and its pay-per-view movies, music, and video games. Internet access fell within a statutory category of nontaxable communications services.

The tax base was the amount the hotel remitted to the company after subtracting the hotel's sales commission, not the full amount charged on the guest's hotel bill. The Department's hotel policy avoided imposing communications tax directly on guests for transactions that were also subject to retail sales tax.

The ruling says House Bill 568 did not change the retail-sales-tax treatment addressed in earlier public documents, but it does not restate those earlier holdings.

What this means for you

• A communications provider's contract structure and control over equipment, programming, and prices can determine who is treated as the provider and customer.
• Under this ruling, the hotel collected guest charges in trust but was itself the communications-tax customer.
• Internet access was treated differently from satellite TV and pay-per-view entertainment.
• The quoted rules date to Virginia's 2007 communications-tax transition; verify current statutes and guidance.

Common questions

Did hotel guests owe communications sales tax on these charges?

No. Under the Department's stated hotel policy, the provider charged the hotel rather than the transient guest.

Were all of the company's services taxable?

No. Satellite TV and pay-per-view entertainment were taxable, while internet access was identified as nontaxable.

What amount was taxed?

The amount remitted by the hotel after its sales commission, rather than the total guest charge.

Citations and references

• Va. Code §§ 58.1-647 and 58.1-648(A), (C).
• 2006 Va. Acts ch. 780 (House Bill 568).
• Virginia Communications Taxes Guidelines and Rules (Nov. 1, 2006).
• P.D. 96-306 and P.D. 99-31 are named in the source for the separate retail-sales-tax treatment.

Subject

Businesses that provide communications services to hotels and their guests

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-34

Original ruling text

April 9, 2007

Re: Ruling Request: Communications Sales and Use Tax

Retail Sales and Use Tax

Dear ****:

This is in response to your letter requesting a ruling on the application of the communications sales and use tax and the retail sales and use tax to the services provided by * (the "Taxpayer") to hotels and their guests.

FACTS

The Taxpayer provides satellite television programming to hotel guests. The programming is free to guests ("FTG"). The hotel generally pays the Taxpayer a specified monthly rate per room, per channel for this service.

The Taxpayer also provides pay-per-view (PPV) movies, PPV music, PPV video games and Internet connectivity to hotel guests. The PPV services are provided by the means of a central control unit linked by wires to guest room televisions. The control unit contains digital file servers that allow guests to make movie, music or game selections. The digital file server obtains its content via satellite. In a few older systems, a rack of video cassette players is used instead of digital file servers. Using the television remote control, guests select PPV products from a menu of available titles appearing on the guest room television. When guests select PPV products, the control unit is electronically accessed and begins to run the PPV product selected. Although the hotel supplies physical space for the central control unit, the hotel's staff have no access to or control of the unit. The control unit is owned, installed and maintained by the Taxpayer, including the unit controls in the hotel rooms. In many hotels, the Taxpayer also owns the televisions in the guest rooms.

The control unit monitors and reports to the hotel the services purchased by guests. The information sent not only includes the price of the services, but also the amount of tax the Taxpayer wants the hotel to collect on its behalf. According to the contract between the Taxpayer and the hotel ("the contract"), the hotel is required to collect a specified charge from the guest. Although the contract does not specify the method the hotel must use to collect the funds from the guest, as a practical matter, most hotels place this charge on the guest folio along with other hotel charges. According to the contract, these funds are held by the hotel in trust for the Taxpayer. The hotel earns a sales commission on each service sold at the hotel. All movie, game and music content is owned or licensed by the Taxpayer, which is subject to licensing agreements that restrict it from selling these items on a wholesale basis to the hotel. In addition to having full control of the equipment and the programming, the Taxpayer also has full control regarding the price to be charged for each particular product sold.

The Taxpayer requests a ruling regarding the application of the Communications Sales and Use Tax and the Retail Sales and Use Tax to these transactions.

DETERMINATION

Effective January 1, 2007, 2006 House Bill 568 (Acts of Assembly 2006, Chapter 780) replaces many of the state and local communications taxes and fees with a centrally administered communications sales and use tax. On November 1, 2006, the Department of Taxation ("TAX") issued Guidelines and Rules for the Virginia Communications Taxes ("Guidelines") to provide guidance to taxpayers and local governments regarding the new law.

Va. Code § 58.1-648 A imposes "in addition to all other taxes and fees of every kind imposed by law, a sales or use tax on the customers of communications services." Va. 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 Guidelines set forth a non-exclusive list of specific communications services meeting this definition that includes cable television, satellite television and satellite radio services. All of the services provided by the Taxpayer discussed above meet this broad definition of "communications services." Internet access service, however, is considered a non-taxable communications service under Va. Code § 58.1-648 C. As none of the other services provided by the Taxpayer discussed above meet the criteria for any of the exemptions or exclusions from the communications sales and use tax, they would be subject to the communications sales and use tax.

The Guidelines address the application of the communications sales tax to communications services purchased by hotel guests and other transients by providing that the following services are not subject to the communications sales tax:

Communications services purchased by and billed to transients by any hotel, motel, inn, tourist camp, tourist cabin, camping grounds, club, or any other place in which rooms, lodging, space, or accommodations are regularly furnished to transients for a consideration. This does not relieve the obligation of the facility to pay communications sales tax to its provider (or to remit communications use tax if services are purchased from a provider who lacks nexus and is not registered for the collection of the tax) on its purchases of communications services.

This provision reflects a policy decision by TAX that businesses that provide communications services to hotels and their guests should be considered the true providers of communications services, rather than the hotels. This policy also prevents the application of the communications sales tax to guests in transactions that are also subject to the retail sales tax.

Accordingly, the Taxpayer is required to register with TAX as a provider of communications services, collect the communications sales tax from hotels and similar facilities and remit the communications sales tax collected to TAX on a monthly basis. As the Taxpayer is deemed to be the provider of the communications services and the hotel is deemed to be the customer, the communications sales tax would be based on the amount remitted to the Taxpayer by the hotel for taxable communications services (after subtracting the hotel's sales commission) rather than the total amount charged to guests for communications services.

The application of the retail sales and use tax to the services provided by the Taxpayer have been addressed in Public Document (P.D.) 96-306 (10/25/96) and P.D. 99-31 (3/17/99). House Bill 568 does not affect the application of the retail sales and use tax to the services provided by the Taxpayer.

CONCLUSION

The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line in the Tax Policy Library section of TAX's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact * in the Office of Policy and Administration, Policy Development, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

PDO/1-1095787509