Are a provider's broadband recovery fee, service activation fee, and early termination fee subject to Virginia's communications sales and use tax, or barred by the Internet Tax Freedom Act?

Plain-English summary

A company that sells local telephone service and high-speed Internet access appealed a communications sales and use tax assessment covering December 2013 through October 2016. It contested tax on three charges to customers -- a broadband recovery fee, a service activation fee, and an early termination fee -- arguing they relate only to customers' Internet access.

The Department upheld the assessment.

• Same taxpayer, same fees, already decided. For an earlier audit period (September 2010 through November 2013), the Department had assessed communications tax on these very fees and, on appeal, upheld it in P.D. 15-218. The current facts were the same, so the same result followed.
• The fees are taxable communications services. Under Va. Code § 58.1-647 (definitions of Internet access service and communications services), the fees are for taxable communications services, not for the activation of Internet access. That is why the ruling the taxpayer relied on, P.D. 14-64, did not apply -- the fees there were for activating communications services, a different situation.
• The Internet Tax Freedom Act does not bar the tax. The Act prevents a state from taxing Internet access itself, but it does not stop Virginia from applying its communications sales tax to connectivity charges and communications services. Virginia stayed within the Act by taxing communications services related to providing Internet access, rather than the access itself.

A revised bill with interest was to be mailed, with no further interest if paid within 30 days.

What this means for you

Labeling a charge as "Internet-related" does not make it exempt. Whether a fee escapes the communications sales tax turns on what it is for under § 58.1-647 -- a charge for a communications service is taxable even if it appears on an Internet customer's bill.

Internet Tax Freedom Act protection is narrow. The Act shields the charge for Internet access. It does not shield separately stated communications-service or connectivity fees, which a state may still tax.

Prior determinations on your own account carry forward. Where the Department has already ruled against a taxpayer on the same fees, re-presenting identical facts for a later period yields the same outcome.

Common questions

Q: Why are these fees taxed when Internet access isn't?

A: Virginia (like the Internet Tax Freedom Act) does not tax Internet access itself, but under § 58.1-647 these fees are charges for taxable communications services, which the communications sales tax reaches.

Q: Didn't P.D. 14-64 say activation fees were exempt?

A: P.D. 14-64 addressed fees for activating communications services on different facts. Here the fees were not for that, so it did not control; P.D. 15-218 -- the Department's prior ruling for this same taxpayer -- did.

Q: Does the Internet Tax Freedom Act override Virginia's tax here?

A: No. The Act bars taxing Internet access, not communications services related to providing it. Virginia's assessment stayed within the Act.

Citations and references

• Va. Code § 58.1-1821 -- taxpayer application to the Commissioner to correct an assessment
• Va. Code § 58.1-647 -- defines Internet access service and communications services for the communications sales and use tax
• Internet Tax Freedom Act -- bars state taxation of Internet access, but not communications services related to providing it
• P.D. 15-218 (12/08/15) -- the Department's prior determination for this taxpayer upholding the same fees as taxable
• P.D. 14-64 (5/14/14); P.D. 06-138 (11/1/06); P.D. 12-148 (9/17/12); P.D. 14-131 (8/7/14) -- prior public documents on activation fees and the definitions

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-210

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. 15-218 (12/08/15). 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. 15-218 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. 15-218, 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. 15-218, 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. 15-218, 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. 15-218, the communications sales tax assessed in this instance is not barred by the Act.

CONCLUSION

Based on the analysis and determination in P.D. 15-218, the assessment 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/1544.P