Did Virginia tax Internet access or telecommunications purchased by Internet service providers after the 2007 federal amendments?

Subject

Internet Tax Freedom Act Amendments Act of 2007

Plain-English summary

Virginia stated that it complied with the federal Internet Tax Freedom Act amendments. Its retail sales and use tax did not apply to telecommunications services, and its communications sales and use tax excluded Internet access service and telecommunications purchased, used, or sold by an Internet access provider to provide Internet access.

The ruling distinguished that transaction tax treatment from Virginia's minimum tax on telecommunications companies. Earlier public documents had included Internet-service revenue in a qualifying telecommunications company's gross receipts because the statutory definition covered “all revenue.” That minimum-tax question was being litigated before the State Corporation Commission when this 2008 letter was issued.

What this means for you

• Internet access and the telecommunications used by a provider to furnish that access were excluded from Virginia communications sales tax under the provisions discussed.
• The federal moratorium and Virginia's own statutory definitions worked together in the Department's analysis.
• A transaction-tax exclusion does not necessarily remove the same receipts from a separate gross-receipts or minimum-tax base.
• This ruling describes law and pending litigation as of 2008; verify later federal extensions, statutory changes, and case outcomes for current periods.

Common questions

Q: Did Virginia communications sales tax apply to Internet access service?
A: No. The cited Virginia statute excluded Internet access and specified incidental services.

Q: What about telecommunications bought by an ISP to provide access?
A: The ruling treated those telecommunications as part of excluded Internet access to the extent purchased, used, or sold to provide access.

Q: Were Internet-service receipts excluded from every Virginia tax?
A: Not necessarily. The Department's earlier position included them in the minimum-tax gross receipts of a qualifying telecommunications company, and that issue was then in litigation.

Citations and references

• U.S. Const. art. VI, para. 2.
• Va. Code §§ 58.1-647, 58.1-648(C)(vii), and 58.1-400.1.
• P.D. 99-240 (Aug. 25, 1999).
• P.D. 07-147 (Sept. 12, 2007).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-166

Original ruling text

August 29, 2008

Dear *:

This is in response to your recent letter inquiring how the Internet Tax Freedom Act Amendments Act of 2007 affects the Commonwealth of Virginia's state taxes on telecommunications services purchased by Internet Service Providers. You ask whether Virginia will comply with these changes.

Commencing October 1, 1998, the 1998 Internet Tax Freedom Act imposed a moratorium on state and local taxes on Internet access. Telecommunications taxes were not subject to the ban because the Internet Tax Freedom Act's definition of "Internet access" excluded telecommunications services. The moratorium was set to expire November 1, 2003, but was renewed until November 1, 2007 by the 2003 Internet Tax Nondiscrimination Act, which also continued the grandfather clause for state and local jurisdictions that imposed taxes on Internet access and expanded the definition of "Internet access" to include telecommunications services "to the extent such services are purchased, used, or sold by a provider of Internet access to provide Internet access."

On October 31, 2007, the President of the United States signed into law the Internet Tax Freedom Act Amendments Act of 2007, which extended the moratorium on state and local taxes on Internet access to November 1, 2014. The Internet Tax Freedom Act Amendments Act of 2007 also applies the definition of "Internet access" given in the 1998 Internet Tax Freedom Act to the grandfather clause for pre-October 1998 taxes, and the definition of "Internet access" given in the 2003 Internet Tax Nondiscrimination Act to the grandfather clause for pre-November 2003 taxes beginning June 30, 2008.

Under Article VI, Paragraph 2 of the United States Constitution, the "Supremacy Clause," Virginia is obligated to comply with federal law. Virginia is in conformity with this important federal legislation.

The Virginia Retail Sales and Use Tax, Title 58.1, Chapter 6 of the Va. Code , does not apply to the sale of any telecommunications services, regardless of the purchaser. Similarly, the Virginia Communications Sales and Use Tax, Title 58.1, Chapter 6.2 of the Va. Code , is not imposed on Internet access service or telecommunications services purchased, used, or sold by a provider of Internet access to provide Internet access. "Internet access service" is defined in Va. Code § 58.1-647 as "a service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users. 'Internet access service' does not include telecommunications services, except to the extent telecommunications services are purchased, used, or sold by a provider of Internet access to provide Internet access." Va. Code § 58.1­648(C)(vii) provides that "[c]ommunications services on which the tax is hereby levied shall not include the following: ... vii) Internet access service, electronic mail service, electronic bulletin board service, or similar services that are incidental to Internet access, such as voice-capable e-mail or instant messaging."

In response to a request for a ruling on the taxability of gross receipts derived from the sale of Internet access services by a telecommunications company for purposes of the Minimum Tax on Telecommunications Companies imposed pursuant to Va. Code § 58.1-400.1 subsequent to the enactment of ITFA, in Public Document ("PD") 99-240 (August 25, 1999), TAX opined:

The revenue generated from providing Internet service would be included in the gross receipts of a company meeting the definition of a telecommunications company in Code of Virginia Sec. 58.1-400.1. The definition of gross receipts includes "all revenue." There is no special provision in the Code of Virginia or any of the corresponding regulations which would serve to exclude the revenue for providing Internet service.

This ruling was affirmed in PD 07-147 (September 12, 2007). Currently, this issue is being litigated before the State Corporation Commission in * (PST-2007-

00019) and * (PST-2007-00018).

I hope this has answered your questions regarding the Internet Tax Freedom Act Amendments Act of 2007. Thank you again for your letter.

Sincerely,

Janie E. Bowen

Tax Commissioner