Were broadband recovery, activation, and early-termination fees taxable when charged only with Internet access service?

Plain-English summary

Virginia upheld communications sales and use tax on three fees charged with the provider's Internet service: a broadband recovery fee, a service activation fee, and an early-termination fee. The Department had already addressed the same provider and same fees in an earlier audit appeal and applied that determination again because the facts were unchanged.

The fees were treated as charges for taxable communications services, not exempt Internet access. The provider's reliance on a different public document failed because that ruling involved different activation-fee facts under Virginia's statutory definitions.

The Internet Tax Freedom Act did not change the result. Virginia acknowledged that the federal law barred state tax on Internet access service itself, but concluded it still permitted communications tax on related connectivity charges classified as communications services.

Common questions

Was Internet access itself the item being taxed? The ruling treated the disputed fees as communications services related to Internet access, not as the exempt Internet-access service itself.

Which fees were upheld as taxable? The broadband recovery fee, service activation fee, and early-termination fee.

Did the Internet Tax Freedom Act bar the assessment? No. The Department found the tax on these communications charges remained within the federal law's limits.

Why did the prior appeal matter? It involved the same provider, fees, and facts, so Virginia followed the earlier determination.

Citations and references

• Va. Code § 58.1-647
• Internet Tax Freedom Act
• Va. Code § 58.1-1821

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-209

Original ruling text

December 18, 2018

Re: § 58.1-1821 Application: Communications Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you seek correction of the communications retail sales and use tax assessment issued for the period December 2013 through October 2016. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer provides local telephone service and high speed Internet access to its customers located in Virginia. Relying on Public Document (P.D.) 14-64 (5/14/14), the Taxpayer contests the assessment of the communications sales tax on the broadband recovery fee, the service activation fee, and the early termination fee (the “Fees”) charged to its customers. The Taxpayer states that the Fees are imposed only in conjunction with the purchase of Internet access services by its customers. The Taxpayer was assessed tax in the audit on the Fees because the Fees were determined to be communications services that are subject to the tax in accordance with the Virginia Communications Sales and Use Tax Act.

DETERMINATION

Virginia Communications Sales and Use Tax

In the prior audit, for the period September 2010 through November 2013, the Taxpayer was assessed communications sales tax on the same Fees that are at issue in the audit addressed herein. The Taxpayer appealed the assessment and the Department issued a determination letter on December 8, 2015 to the Taxpayer. See P.D. 15-217 (12/08/2015). In accordance with Virginia Code § 58.1-647 (definitions of Internet access service and communications services), P.D. 06-138 (11/1/06), P.D. 12-148 (9/17/12) and P.D. 14-131 (8/7/14), it was determined in P.D. 15-217 that the Fees at issue were for taxable communications services, and the assessment was upheld. It was further determined that the ruling in P.D. 14-64 did not apply to the facts presented in the Taxpayer’s prior appeal because the fees at issue were not for the activation of communications services as considered in Virginia Code § 58.1-647. The facts presented in the current appeal are the same as those addressed by the Department in the prior appeal. Based upon the determination in P.D. 15-217, the Fees at issue in the current audit, are likewise deemed to be for taxable communications services. Accordingly, the assessment is upheld as issued.

Internet Tax Freedom Act (the “Act”)

The Taxpayer also maintains that the communications sales tax assessment is barred by the Act, in that the Fees are imposed solely for the subscribers’ ability to access the World Wide Web or public Internet. In the appeal for the prior audit period, the Taxpayer likewise contended that the prior assessment was barred by the Act.

In P.D. 15-217, it was determined that while the Act bars the application of the state tax on Internet access service, the Act does not prohibit the Commonwealth from deeming the connectivity charges subject to the communications sales tax. The determination further provides that the Commonwealth is authorized by the Act to apply the communications sales tax to communications services, as long as such application does not violate the provisions of the Act. As determined in P.D. 15-217, the Commonwealth operated well within the confines of the Act by enacting law that applies the communications sales tax to the sale of communications services related to the provision of Internet access services, as well as other communications services. In accordance with the determination issued in P.D. 15-217, the communications sales tax assessed in this instance is not barred by the Act.

CONCLUSION

Based on the analysis and determination in P.D. 15-217, the assessment at issue is upheld. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit payment to: Virginia Department of Taxation, 600 E. Main Street, 15 th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1543P