Did the federal Internet Tax Freedom Act bar a Virginia city from including an internet provider's access-service receipts in its BPOL gross-receipts base for 2010 and 2011?

Plain-English summary

Virginia reached two distinct conclusions about a city's BPOL tax on an internet-access provider's gross receipts:

1. A BPOL charge measured by internet-access receipts was a tax on internet access within the broad federal Internet Tax Freedom Act definition; but
2. This city's tax was grandfathered because the city produced evidence that it generally collected BPOL tax on internet-access services before October 1, 1998.

The city therefore properly included those receipts in the taxpayer's BPOL base for 2010 and 2011.

Why the federal act reached BPOL tax

The city argued that the federal act targeted sales tax on customers' monthly internet bills. The Department read the statute more broadly. Its definition covered governmental revenue charges regardless of whether the tax was imposed on the provider or buyer and regardless of the terminology used.

The act expressly excluded certain taxes based on net income, capital stock, net worth, property value, and specified state gross-receipts systems. The Department reasoned that the absence of a comparable exclusion for local business-license tax supported treating BPOL as covered when measured by internet-access receipts.

Why the grandfather provision saved this assessment

A covered tax could continue if it was authorized and generally imposed and actually enforced before October 1, 1998, with the statutory notice or collection conditions satisfied. The Department did not accept that the broad wording of the city ordinance alone was the required public proclamation.

The city nevertheless supplied evidence that it had actually collected BPOL tax on internet-access services before the cutoff date. That evidence satisfied the alternative grandfather route.

What this means for internet providers and localities

• The federal act's reach was not limited to conventional sales and use taxes.
• Grandfather status depended on the particular locality's pre-October 1998 history, not merely the general form of Virginia BPOL law.
• Historical collection records could decide the outcome.
• The ruling addressed 2010 and 2011 and discussed a then-future expiration of the grandfather provisions, so it should not be treated as a current-period answer.

Common questions

Did Virginia say BPOL tax was outside the Internet Tax Freedom Act?

No. It said BPOL tax was a tax on internet access to the extent measured by receipts from internet-access services.

Why did the taxpayer still lose?

The city proved that it generally collected the tax on internet-access services before October 1, 1998, bringing the assessment within the grandfather provision.

Would every Virginia locality have received the same result?

Not necessarily. The ruling's grandfather analysis depended on evidence about this city's own pre-1998 tax collection.

Citations and references

• Va. Code § 58.1-3703.1 — BPOL appeals and administration
• Internet Tax Freedom Act, 47 U.S.C. § 151 note §§ 1101, 1104, and 1105
• City of Eugene v. Comcast of Oregon II, Inc., 263 Or. App. 116, 333 P.3d 1051 (2014)
• Level 3 Communications, LLC v. State Corporation Commission, 282 Va. 41, 710 S.E.2d 474 (2011)
• Related Virginia rulings cited: P.D. 01-43 and P.D. 04-138

Subject

Gross receipts from Internet access services

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-94

Original ruling text

June 9, 2017

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business, Professional and Occupational License Tax

Dear *:

This final state determination is issued upon the application for correction filed by you on behalf of * (the “Taxpayer”) with the Department of Taxation. You appeal assessments of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the *** (the “City”) for the 2010 and 2011 tax years.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e. , the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.

FACTS

The City audited the Taxpayer for the 2010 and 2011 tax years and concluded that the Taxpayer had underreported its gross receipts. As a result, the City issued assessments for additional BPOL tax due. The Taxpayer appealed to the City, contesting a number of issues. In its final determination, the City rejected each of the Taxpayer's contentions and upheld the assessments.

The Taxpayer filed an appeal with the Department. Subsequent to filing with the Department, the Taxpayer and the City were able to resolve most of the audit issues. The Taxpayer, however, contends that gross receipts from internet access services were not subject to BPOL tax pursuant to the Internet Tax Freedom Act (the “Act”), codified at Title 47 U.S.C. § 151 note.

Internet Access Services

The City contends that the Act only prevents the imposition of a sales tax on the monthly payments consumers make to their internet service provider (ISP). The Taxpayer, however, contends that the BPOL tax is a prohibited “tax on Internet access,” as that phrase is defined by the Act.

The Act prohibits a state or political subdivision thereof from imposing taxes on internet access. See 47 U.S.C. § 151 note § 1101(a)(1). Under § 47 U.S.C. § 151 note § 1105(8)(A), the term “tax” is defined as:

(i) any charge imposed by any governmental entity for the purpose of generating revenues for governmental purposes, and is not a fee imposed for a specific privilege, service, or benefit conferred; or (ii) the imposition on a seller of an obligation to collect and to remit to a governmental entity any sales or use tax imposed on a buyer by a governmental entity.

The Act's original definition of “tax on Internet access” was a “tax on Internet access, including the enforcement or application of any new or preexisting tax on the sale or use of Internet services unless such tax was generally imposed and actually enforced prior to October 1, 1998.” See P.L. 105-277, Title XI , § 1104(10), 112 Stat. 2681, 2726 (1998). The definition of “tax on Internet access” was subsequently amended to “a tax on Internet access, regardless of whether such tax is imposed on a provider of Internet access or a buyer of Internet access and regardless of the terminology used to describe the tax.” See P.L. 108-435, § 2, 118 Stat. 2615 (2004) (current version at 47 U.S.C. § 151 note § 1105(10)(A)).

The broad definitions of “tax” and “tax on Internet access” do not support the City's position that the Act only applies to sales tax chargeable to monthly payments consumers make to their ISPs. Further, the reference to “sales or use tax” in the definition of tax under 47 U.S.C. § 151 note § 1105(8)(A)(ii) stands in contrast to the broad language used in 47 U.S.C. § 151 note § 1105(8)(A)(i): "any charge ... for the purpose of generating revenues for government purposes." The close proximity of these contrasting phrases in the statute suggests that Congress intended that the Act apply to more taxes than just sales and use tax.

The City argues that various Congressional Research Service (CRS) reports and a report by the Joint Committee on Taxation support its conclusion that the primary focus of the Act was transaction taxes, such as sales taxes, not business privilege taxes such as BPOL. While such reports may provide general information about the history, purpose and implementation of legislation, they are not controlling. Regardless, several of the reports cited by the City state the following: “the taxation of internet access most commonly refers to the application of state and local sales taxes to the monthly charge that subscribers pay for access to the Internet through Internet service providers.” See Nonna A. Noto, Internet Tax Bills in the 108 th Congress at 4 (October 14, 2003), Steven Macguire and Nonna A. Noto, Internet Taxation: Issues and Legislation in the 108th Congress at 6 (December 17, 2004), and Steven Macguire and Nonna A. Noto, Internet Taxation: Issues and Legislation in the 109 th Congress at 6 (February 2, 2006). Just because the Act may have been primarily aimed at such transaction taxes does not preclude the possibility that the Act could apply to other types of taxes as well.

The City also argues that the recent decision in Dulles Duty Free, LLC v. County of Loudon , Case No. 90613 (April 26, 2016) and prior cases cited therein, including Town of Ashland v. Board of Supervisors , 202 Va. 409 (1961), support its position that the BPOL tax is not a tax on internet access. Although these cases concluded that the BPOL tax cannot be considered a direct tax on property, the Act is not expressly limited to direct taxes on Internet access. In fact, later amendments to the Act seem to indicate Congress believed that indirect taxes on internet access did come within the original scope of the Act.

The Act currently provides that the term “tax on Internet access” does not include a tax levied upon or measured by net income, capital stock, net worth, or property value. See 47 U.S.C. § 151 note § 1105 (10)(B). Further specific exemptions exist for a state tax expressly levied on commercial activity, modified gross receipts, taxable margin, or gross income of the business, by a State law specifically using one of those terms, and which fulfills several further conditions described in 47 U.S.C. § 151 note § 1105 (10)(C). This provision was intended to exclude four specific taxes from the scope of the Act: Washington's business and occupation tax, Michigan's gross receipts tax, Ohio's commercial activity tax, and Texas's margin tax. All such taxes are broad based gross receipts taxes which such states have in lieu of corporate income tax.

Typically, taxes levied upon or measured by a taxpayer's net income, capital stock, net worth or property value would not be taxes assessed on internet access directly. Because these types of taxes would normally encompass all of a taxpayer's net income, capital stock, net worth or property value regardless of the extent they were derived from Internet access services, they would effectively be indirect taxes on internet access.

In the Department's opinion, these exceptions to the Act should be interpreted with reference to the canon of statutory construction, expressio unius est exclusio alterius , which provides that the mention of a specific item in a statute implies that other omitted items were not intended to be included within the scope of the statute. See Smith Mtn. Lake Yacht Club v. Ramaker , 261 Va. 240, 246, 542 S.E.2d 392, 396 (2001). In this case, therefore, because the Act specifically excludes certain types of indirect taxes, but not a local business license tax based on gross receipts, in the Department's opinion, the Act generally prohibits BPOL taxation on gross receipts derived from internet access services.

The City also points out that several early versions of the Act contained a list of taxes that the Act would not apply to, including fairly apportioned business license taxes. See S. 442, 105 th Cong. § 3 (1998). The City argues that the exclusion of such a list in the final version does not mean Congress intended that the Act should apply to all the taxes named therein. The City asserts that these lists were effectively condensed into that group of all taxes that were generally imposed and actually enforced prior to October 1, 1998, and thus grandfathered under the Act. The Department does not disagree with the City's position that any tax on internet access, regardless of the specific type of tax, that was generally imposed and actually enforced prior to October 1, 1998, is grandfathered under the Act. The threshold issue, however, is whether the Act applies to the BPOL tax at all. The issue is important because, even if the City's BPOL tax was grandfathered, the grandfather provisions are set to expire in 2020. As such, any tax on internet access that is covered by the Act will be prohibited from that time forward.

It has been a longstanding principle of statutory construction that every part of a statute should be interpreted so as to give it some effect, and that interpretations that render words or phrases in a statute superfluous or repetitious should be avoided. See Platt v. Union P.R. Co. , 99 U.S. 48, 58-59, 25 L.Ed. 424, 427 (1878) and PSINet, Inc. v. Chapman , 362 F.3d 227, 232 (4 th Cir. 2004). If “tax on internet access” should be interpreted to apply only to state and local sales and use tax on monthly service charges from an ISP, then the later amendments specifically exempting taxes against net income, capital stock, net worth, or property value and certain other state taxes using gross receipts as the tax base would have been superfluous. It has been stated that “the very fact that [a] prior act is amended demonstrates the intent to change the pre-existing law, and the presumption must be that it was intended to change the statute in all the particulars touching which we find a material change in the language of the act.” See United States v. Bashaw , 50 F. 749, 754 (8 th Cir. 1892) (reversed on other grounds by United States v. Bashaw , 152 U.S. 436, 14 S.Ct. 638 (1894)). Thus, the later amendments show that the Act was changed to exclude other tax types besides sales and use tax that must have originally come within the Act's scope.

In addition, taxes on net income, capital stock, net worth or property value were expressly exempted from the Act under an early version of the bill. See S. 516, 105 th Cong. § 3 (1998). Fairly apportioned business license taxes were also exempt under that version. See id . The version originally enacted, however, dropped the entire list, but the exemption for taxes on net income, capital stock, net worth or property value was added back in the 2004 amendment and the exemption for business license taxes was not. Thus, the Act's legislative history strongly suggests that the Act applies to business license taxes unless they were to be specifically exempted.

Grandfather Provisions

The issue becomes, therefore, whether the City's BPOL tax was grandfathered from application of the Act. A tax on internet access is grandfathered if it was generally imposed and actually enforced prior to October 1, 1998. Section § 1104(a)(1) specifically provides:

In general. —Section 1101(a) does not apply to a tax on Internet access that was generally imposed and actually enforced prior to October 1, 1998, if, before that date-

the tax was authorized by statute; and

either —

(i) a provider of Internet access services had a reasonable opportunity to know, by virtue of a rule or other public proclamation made by the appropriate administrative agency of the State or political subdivision thereof, that such agency has interpreted and applied such tax to Internet access services; or

(ii) a State or political subdivision thereof generally collected such tax on charges for Internet access.

The City's BPOL tax generally applied to all of a taxpayer's gross receipts that were properly sitused to the City. As such, the tax was authorized at that time by statute. The City contends that its ordinance also satisfied the requirement of (B)(i) because it put a service provider on notice that its BPOL tax applied to Internet access services. In the Department's opinion, however, (B)(i) requires a specific rule or public proclamation to have been made beyond the mere language of the ordinance. Otherwise, the requirement of (B)(i) would always be met if (A) is met, creating a redundancy in the statute. As stated above, it has been a longstanding principle of statutory construction that every part of a statute should be interpreted so as to give it some effect, and that interpretations that render words or phrases in a statute superfluous or repetitious should be avoided. See Platt v. Union P.R. Co. , 99 U.S. 48, 58-59, 25 L.Ed. 424, 427 (1878). The Department's opinion is supported by City of Eugene vs. Comcast of Oregon II, Inc. , 263 Ore. App. 116, 143-144, 333 P.3d 1051, 1066-67 (2014). In Eugene , the court rejected the City of Eugene's position that (B)(i) was satisfied merely because the applicable ordinance and accompanying rules were broad enough to encompass internet access services as of October 1, 1998. See id . at 263 Ore. App. 143-44, 333 P.3d 1066-67. Because the City of Eugene could provide no evidence that it had issued a public proclamation that it had interpreted and applied its tax to internet access services, (B)(i) was not satisfied. Id .

In the case at issue, the City cites a Congressional Research Service (CRS) Report for Congress on internet tax bills in the 105 th Congress to support its argument that it did not have to take any special action to affirm a tax that was grandfathered. The City quotes the following passage from the report: “S. 442 (Senate) and final Act (P.L. 105-277) permit taxes on Internet access that ‘were generally imposed and actually enforced prior to October 1, 1998.’ This encompasses local as well as state taxes. It does not require states to enact any legislation affirming such a tax.”

Again, secondary source reports, while they may be informative, do not control a statute's application. The Department does not dispute the report's assertion that states were not required to enact further legislation affirming the tax. The (B)(i) requirement, however, does not require legislation. It merely required a “rule” or “public proclamation” to be made by the appropriate administrative agency to the effect that whatever tax legislation was already in place applied to internet access services.

In its final determination, the City also cited prior public documents issued by the Department to support its position that gross receipts from internet access services should be included in the local BPOL tax base. See Public Document (P.D.) 01-43 (4/16/2001) and P.D. 04-138 (9/16/2004). Each of these cases, however, solely involved questions of Virginia law. Under the statutes and regulations governing the BPOL tax in Virginia, there is no exemption for receipts derived from internet access services. The Department has never issued an opinion or determination addressing whether the Act applies to any locality's BPOL tax, and if so, whether it is grandfathered. In addition, the Virginia Supreme Court has avoided ruling whether another gross-receipts based tax, the minimum tax on telecommunications companies under Va. Code § 58.1-400.1, comes within the scope of the Act. See Level 3 Communication v. SCC , 282 Va. 41, 710 S.E.2d 474 (2011). In that case, the Court merely determined that the State Corporation Commission (SCC) had no statutory authority to determine whether such receipts were exempt or not. As such, the Act did not reach the SCC's function under Virginia law, which was merely to certify the gross receipts to the Department. See id . at 282 Va. 48, 710 S.E.2d 477.

Even if the City did not issue a public proclamation expressly interpreting the BPOL tax to apply to internet access services, it may nevertheless be grandfathered if it generally collected such tax on charges for internet access prior to October 1, 1998. In this case, the City has submitted evidence showing it collected BPOL tax on internet access services prior to that date.

DETERMINATION

After carefully considering all of the arguments and information presented, I conclude that the City's BPOL tax should be considered a tax on internet access under the federal Internet Tax Freedom Act, to the extent the tax is derived from gross receipts for internet access services. I also conclude, however, that the City's BPOL tax was grandfathered under the Act. The City, therefore, properly included the Taxpayer's gross receipts derived from internet access services in the measure of taxable gross receipts for the 2010 and 2011 tax years.

If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/667.M