Did an ISP's servers, software, and distribution equipment qualify for Virginia's Internet-service-provider exemption?

Subject

Taxpayer offers email services, content, and the Internet services end-user subscribers

Plain-English summary

Virginia allowed the Internet-service-provider exemption for equipment used to deliver the taxpayer's bundled email, content, and Internet access. Subscribers could post news, reviews, articles, and blogs on access-only pages. The Department treated that embedded information as the taxpayer's proprietary content.

That proprietary content, combined with email, other content, and Internet access sold as a package, satisfied the statutory Internet-service definition. The audit therefore had to remove contested purchases and leases of equipment used to provide Internet access.

Equipment used for accounting, management, or other administration remained taxable. Mixed-use equipment had to be prorated between exempt Internet-service use and taxable use. The taxpayer was entitled to a refund of erroneous tax, penalty, and interest, with refund interest.

What this means for you

• The exemption depended on the provider's service package and statutory definitions, not merely its ISP label.
• Subscriber-created content was sufficient proprietary content on these facts.
• Track equipment by exempt access-service use versus taxable administrative use.
• Mixed-use assets required a reasonable usage proration.

Common questions

Q: What made the service qualify?
A: It bundled subscriber access to proprietary content, email, other content, and the Internet.

Q: Was every computer asset exempt?
A: No. Assets used for accounting, management, or other administration remained taxable.

Q: How were mixed-use items treated?
A: Tax was prorated according to the percentage of exempt and taxable use.

Citations and references

• Va. Code §§ 58.1-609.6 2, 58.1-602, and 58.1-1833.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-133

Original ruling text

July 30, 2008

Re: § 58.1-1821 Application: Retail Sales and Use! Tax

Dear *:

This is in response to your letter of January 3, 2008, requesting correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period October 2003 through December 2006. The Taxpayer has paid the contested assessment.

FACTS

The Taxpayer provides Internet services to its customers. The Taxpayer offers email services, content, and the Internet as part of a package of services sold to end-user subscribers. The Taxpayer's Internet service provides links and other click through information. Because it was not clear whether the Taxpayer offered proprietary content, the Taxpayer was assessed tax on purchases of computer hardware and software, servers, hosting equipment, and distribution equipment used to provide Internet services to end users.

Based on 1999 amendments to the Code of Virginia , the Taxpayer claims eligibility for the Internet service provider ("ISP") exemption as set out in Va. Code § 58.1-609.6 2 via specially defined terms in Va. Code § 58.1-602. The Taxpayer contends that the prior auditor informed the Taxpayer that it qualified for such exemption. The Taxpayer also leased computer equipment to provide Internet services in 2001, which is outside the audit period, but was told that tax was due on it because the lease is paid monthly and is paid during the audit period.

DETERMINATION

Virginia Code § 58.1-609.6 2 provides an exemption for:

Broadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies, wired or land based wireless cable television systems, common carriers or video programmers using an open video system or other video platform provided by telephone common carriers, or concerns which are under the regulation and supervision of the Federal Communications Commission and amplification, transmission and distribution equipment used or to be used by wired or land based wireless cable television systems, or open video systems or other video systems provided by telephone common carriers.

Virginia Code § 58.1-602 was amended effective July 1, 1999, to define many words and phrases applicable to the above exemption, as follows:

"video programmer" is defined to mean "a person or entity that provides video programming to end-user subscribers;"

"video programming" is defined to mean "video and/or information programming provided by or generally considered comparable to programming provided by a cable operator including, but not limited to, Internet service;"

"open video system" is defined to mean "an open video system authorized pursuant to 47 U.S.C. § 573 and, for purposes of this chapter only, shall also include Internet service ...;"

"amplification, transmission and distribution equipment" is defined to mean "production, distribution, and other equipment used to provide Internet-access services, such as computer and communications equipment, and software used for storing, processing and retrieving end-user subscribers' requests;" and

"Internet service" is defined to mean "a service that enables users to access proprietary and other content, information electronic mail, and the Internet as part of a package of services sold to end-user subscribers."

I understand that a Department's Audit Supervisor was given temporary access to the subscriber's access-only web pages, which show that the Taxpayer's subscribers have the ability to post news, reviews, and articles on any topic and to participate in on-line journals (user blogs). In essence, this embedded information becomes the proprietary content of the Taxpayer. The fact that the Taxpayer provides access to proprietary content is sufficient, in combination with its provision of subscriber's access to electronic mail, other content, and the Internet, to qualify for the ISP exemption.

As such, all of the contested purchases and leases of equipment used in the provision of Internet access services will be removed from the audit. The Taxpayer remains liable for the tax on all items of equipment that are used in other activities (not related to the provision of Internet access services), such as accounting, managerial and other administrative activities. If an item is used in both taxable and exempt activities, the tax due on the item will be prorated between the percentage of time the item is used in a taxable manner and the percentage of time used in an exempt manner.

CONCLUSION

The audit will be revised in accordance with this determination. Once the revision is completed, a refund of the erroneously assessed tax, penalty and interest will be issued to the Taxpayer. The refund will include interest in accordance with Va. Code § 58.1-1833.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2104113501.R