Did a taxpayer win reconsideration because the city had not proved that its BPOL tax on internet access was grandfathered under federal law?

Plain-English summary

The taxpayer asked Virginia to reconsider city BPOL assessments that included gross receipts from internet-access charges. An earlier determination found that the federal Internet Tax Freedom Act generally applied but that the city had grandfather protection based on pre-October 1998 collection evidence.

On reconsideration, Virginia agreed that the locality asserting the federal grandfather exception bears the burden of proving it. The Department nevertheless declined to order correction because Virginia's local-tax administrative appeal structure presumes the locality's determination is correct and does not contemplate making the locality prove its own exception. The city assessments therefore remained in place.

Citations and references

• 47 U.S.C. § 151 note, § 1104(a)(1)
• Va. Code § 58.1-3703.1 A 5 b and A 6 a
• Va. Code § 58.1-1822
• 23 VAC 10-500-770 A
• P.D. 17-94

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-24

Original ruling text

March 14, 2018

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 on behalf of * (the “Taxpayer”) with the Department of Taxation. You seek a reconsideration of Public Document (P.D.) 17-94 (6/9/2017) concerning the Business, Professional and Occupational License (BPOL) tax assessments 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, regulations and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.

FACTS

In Public Document (P.D.) 17-94 (6/9/2017), the Department determined that the Internet Tax Freedom Act (the “Act”) applied to the City's assessments of BPOL tax which included gross receipts derived from the Taxpayer's charges for internet access. The Department, however, determined that the City qualified for grandfather protection because it submitted evidence that it collected BPOL tax on charges for internet access prior to October 1, 1998. The Taxpayer requested a reconsideration, contending that the Department's determination failed to demonstrate that the City met its burden of proving it qualified for grandfather protection.

ANALYSIS

47 U.S.C. § 151 note § 1104(a)(1) of the Act 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 -

(A) the tax was authorized by statute; and

(B) either —

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

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

The Taxpayer has provided three trial court opinions from other states, not previously provided or otherwise available to the Department, that analyze the exception under § 1104(a)(1)(B)(ii) in far more detail than any case previously cited or the Department undertook in P.D. 17-94. The cases are City of Eugene v. Comcast of Oregon II, Inc. , No. 16-08-03280 (Or. Cir. Ct. Lane, Aug. 25, 2010), Comcast of Colorado IX, LLC v. City of Golden , No. 13CV31253 (Co. Dist. Ct. Jefferson, July 1, 2014), and City of Thornton v. Verizon Wireless, LLC , No. 2014CV34249 (Co. Dist. Ct. Denver, March 31, 2016). Each of these cases makes it clear that the party asserting an exception to a federal statute bears the burden of proving the exception applies.

Because the Department determined in P.D. 17-94 that the Act generally applied to the BPOL tax, the burden now rests with any Virginia locality assessing BPOL tax on gross receipts derived from charges for internet access to prove it qualified for exemption under the Act's grandfather provisions. The sole issue under reconsideration is whether the City generally collected BPOL tax on charges for internet access so as to be grandfathered under § 1104(a)(1)(B)(ii).

In administrative appeals to a locality, the locality's assessment is deemed prima facie correct, and the taxpayer has the burden to prove it was erroneous. See Virginia Code § 58.1-3703.1 A 5 b. The local appeals process is intended to ensure the fair and uniform application of local tax ordinances to all affected taxpayers, and in this context it is expected that the local commissioner of the revenue or other chief tax official undertake a fair and impartial review of the taxpayer's appeal. This review requires the local official to determine whether the taxpayer satisfied a burden of proof that in theory exists for all like taxpayers to demonstrate the locality's assessment was erroneous. The local appeals process does not contemplate scenarios in which a locality must determine whether it satisfied its own burden of proof.

In addition, the extraordinary burden shifting caused by the Act is also incompatible with the administrative appeals process at the state level for the same reason. Just as an assessment is deemed prima facie correct in a local appeal, Title 23 of the Virginia Administrative Code (VAC) 10-500-770 A requires the Department to presume that a local assessing officer's final determination is correct.

Virginia Code § 58.1-3703.1 A 6 a requires that a local appeal proceed in the same manner as an application pursuant to Virginia Code § 58.1-1821 and the Department “may” issue an order under Virginia Code § 58.1-1822 correcting such assessment. Significantly, the language of Virginia Code § 58.1-1822 permits, but does not require, the Department to order an erroneous or improper assessment to be corrected. In the Department's opinion, the permissive language of Virginia Code § 58.1­-3703.1 A 6 and Virginia Code § 58.1-1822 gives the Department the discretion, in the appropriate circumstances, to decline to issue an order for correction. The Department believes appropriate circumstances exist in this case. As explained above, the administrative appeals process does not contemplate a scenario in which a Virginia locality is the answering party bearing the burden of proof.

DETERMINATION

For the reasons stated above, the Department will decline to issue any orders for correction on the basis that a Virginia locality failed to prove it qualified for grandfather protection under the Act. As a result, the City's assessments stand.

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/1388.M