Was BPOL a net-income tax excluded from the Internet Tax Freedom Act's internet-access protection?

Plain-English summary

Virginia rejected the city's argument that BPOL should be treated as a net-income tax outside the Internet Tax Freedom Act's protection. BPOL generally taxes whole gross receipts without deductions, unlike Virginia's corporate income tax, so the Department did not view it as a tax on net income.

The Department also maintained that the federal Act could apply to BPOL and cited Dulles Duty Free for looking at a tax's operation and effect. But the remaining issue was whether the city's BPOL tax qualified for grandfather protection. Following P.D. 18-24, Virginia declined to order correction, and the 2017 assessment stood.

Common questions

Did the city win its net-income-tax argument? No.

Did the taxpayer receive assessment relief? Also no. The unresolved grandfather issue prevented an order for correction.

Citations and references

• Va. Code §§ 58.1-3703.1, 58.1-3700.1, and 58.1-400 et seq.
• Internet Tax Freedom Act, 47 U.S.C. § 151 note
• Dulles Duty Free, LLC v. County of Loudoun, 294 Va. 9 (2017)
• P.D. 17-94 and P.D. 18-24

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-98

Original ruling text

May 21, 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 by you on behalf of * (the “Taxpayer”) with the Department of Taxation. You appeal an assessment of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the *** (the “City”) for the 2017 tax year.

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 issued an assessment to the Taxpayer for additional BPOL tax due for the 2017 tax year. The Taxpayer appealed to the City, contending that the federal Internet Tax Freedom Act (the “Act”), codified at Title 47 U.S.C. § 151 note, preempted imposition of the City's BPOL tax on gross receipts attributable to internet access services. The City denied the Taxpayer's appeal and upheld the assessment. The Taxpayer filed an appeal with the Department, repeating its contention that the Act preempts imposition of the City's BPOL tax on gross receipts attributable to internet access services.

ANALYSIS

The City contends that the Act was only intended to apply to transactional taxes on internet access services, not taxes of general application such as the BPOL tax. Alternatively, the City argues that the BPOL tax should be considered an income tax for purposes of the exemption from the Act for net income, capital stock, net worth or property value. In addition, even if the Act applies to the BPOL tax generally, the City argues that its BPOL tax was grandfathered. The Taxpayer presents arguments to refute each of these contentions and asserts that the Act precludes imposition of the BPOL tax on gross receipts attributable to internet access services.

In Public Document (P.D.) 17-94 (6/9/2017), the Department concluded that the Act applied to the BPOL tax. That determination addresses the City's arguments that the Act was only intended to apply to transactional taxes directly imposed on internet access services or alternatively, that the BPOL tax should be considered an income tax for purposes of the exemption from the Act for taxes on net income, capital stock, net worth or property value under 47 U.S.C. § 151 note § 1105 (10)(B).

In addition, since the publication of P.D. 17-94, the Supreme Court of Virginia ruled in Dulles Duty Free, LLC vs. County of Loudoun , 294 Va. 9 (2017), that the Import-Export Clause of the United States Constitution prevented the county from imposing BPOL tax on the taxpayer's export goods in transit. The Court rejected the county's argument, at least in the context of the Import-Export Clause, that the BPOL tax was a tax on the privilege of doing business and was not the same as a tax on goods. See id . at 21-22. The Court observed that the characterization of a tax for state law purposes does not control whether a tax violates the Import-Export Clause and concluded that the BPOL tax was “in its ‘operation and effect’ a direct tax on export goods in transit.” See id . at 22. Although the Department analyzed other reasons in P.D. 17-94 why the ITFA should not apply merely to transactional taxes on the service itself, Dulles Duty Free suggests that courts may look more to the operation and effect of a tax rather than its state law characterization in determining whether it is preempted by a federal law.

Further, even if the BPOL tax has been considered to be an income tax in certain contexts, in the Department's opinion the BPOL tax, as a tax generally on “the whole, entire, total receipts, without deduction” is not a tax on “net income.” See Virginia Code § 58.1-3700.1. As a broad-based gross receipts tax, the BPOL tax is unlike Virginia's net corporate income tax generally applicable to businesses under Virginia Code § 58.1-400 et seq .

Finally, the Department has declined to issue any orders for correction on the basis that a Virginia locality failed to prove it qualified for grandfather protection under the Act. See P.D. 18-24 (3/14/2018).

DETERMINATION

Because the remaining issue involves a dispute between the Taxpayer and the City regarding whether the City was grandfathered under the Act, the Department declines to issue an order for correction in this case pursuant to P.D. 18-24. Therefore, the City's assessment stands.

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/1511.M