Was a Virginia cable, internet, and telephone provider entitled to a sales-and-use-tax refund for thousands of equipment purchases without item-specific proof of exempt use?

Plain-English summary

The telecommunications company did not prove that the denied equipment purchases were used in exempt cable-television or internet activities, so the Commissioner denied the additional refund.

The company provided cable television, internet, and telephone services in Virginia and sought a refund for January 2008 through July 2013. Its spreadsheet listed 7,467 equipment purchases. The Department approved part of the claim for use tax accrued on nontaxable labor and freight, but denied other items for missing invoices, unreported tax, duplicate or offsetting entries, retirement or abandonment costs, and insufficient information about the equipment, labor, or a software contract.

Exemption depended on the service and actual equipment use

Virginia Code § 58.1-609.6(2) exempted qualifying broadcasting and cable equipment and amplification, transmission, and distribution equipment used for cable television and internet-access services. Section 58.1-602 included certain computer, communications, and software equipment used to process end-user internet requests.

Equipment used for the company's telephone products and services did not qualify under that exemption. The former public-service-corporation exemption for property used directly in public service had been repealed effective September 1, 2004.

Because the company supplied all three services, some equipment could be mixed-use. The Department needed records showing the extent to which each item served an exempt cable or internet function rather than taxable telephone or other use.

The spreadsheet and general explanations were not enough

The spreadsheet did not include the invoice descriptions needed to identify the transactions. Audit staff printed and reviewed each invoice and asked for additional records and engineer explanations on unclear items.

The company did not provide the requested item-specific documentation. Its engineers described vendors and services generally but did not explain the particular equipment under review. Data from an earlier refund audit could not fill the gap because the current claim used different product coding.

Without definitive documentation connecting the items to exempt activities, the Commissioner could not grant the refund.

Other authorities did not cure the proof problem

The company cited a data-center ruling, but it offered no evidence that the equipment was purchased for a data center. It also cited an Attorney General opinion about equipment enabling internet access, but the Commissioner found that opinion addressed different issues.

What this means for you

Cable and internet providers

The exemption is equipment- and use-specific. Maintain invoice descriptions, asset records, network diagrams, product codes, and technical explanations that connect each purchase to an exempt cable or internet function.

Providers combining phone, television, and internet networks

Mixed-use equipment requires an allocation supported by evidence. A general statement that the network supports exempt services will not establish the exempt percentage.

Businesses filing large refund claims

Build the refund schedule from the source invoices and include descriptive fields from the start. Prior audit treatment does not replace proof for a new period when product codes or facts differ.

Common questions

Q: Was all telecommunications equipment exempt?
A: No. Qualifying cable and internet equipment could be exempt, while telephone-service equipment was not exempt under the authorities applied here.

Q: Why was the refund denied?
A: The company did not provide item-specific records and explanations proving that the denied purchases were used in exempt activities.

Q: Could the company rely on its earlier refund audit?
A: No. The earlier claim used different product coding, so its verification method could not establish the current purchases.

Q: Did the Department deny the entire original request?
A: No. It had approved refunds for certain nontaxable labor and freight charges; the appeal concerned the denied remainder.

Citations and references

• Va. Code § 58.1-609.6(2) — qualifying broadcasting, cable, and internet equipment
• Va. Code § 58.1-602 — definitions used by the exemption
• P.D. 04-122 — public-service-corporation exemption repeal guidelines
• P.D. 10-121 — data-center ruling found inapplicable on these facts
• Virginia Attorney General Opinion 00-005 — internet-access equipment opinion found to address different issues

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-116

Original ruling text

October 4, 2019

Re: § 58.1-1821 Refund Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) to appeal the denial of a refund request for the retail sales and use tax for the period January 2008 through July 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a telecommunications company that provides cable television, Internet and telephone products and services to its customers in Virginia. The Taxpayer requested a refund from the Department for the period at issue. The Taxpayer submitted a spreadsheet listing 7,467 purchases of equipment that are the subject of the refund request. A refund verification audit was conducted by the Department’s audit staff with respect to these purchases. The refund was approved in part, for use tax accrued on non-taxable labor charges and non-taxable freight or transportation charges. The refund was denied in instances where invoices were not provided, the use tax was not reported, for costs associated with the removal, retirement, or abandonment of equipment, for items listed under the same purchase order that had a credit and a debit for the same amount, and for duplicate invoices. The refund was also denied in instances where the audit staff needed more information to be able to make a determination regarding how the equipment was used, regarding whether the transactions were for taxable or exempt labor, and to determine the taxability of a software contract.

Relying on Virginia Code § 58.1-609.6 2, Public Document (P.D.) 10-121 (6/29/10) and Attorney General Opinion 00-005 (3/15/00), the Taxpayer maintains that the refund request was erroneously denied by the Department’s auditor. The Taxpayer states that for the refund request at issue, it provided the same type data to the Department’s auditor as provided in the prior refund request. In instances where the type of equipment or services was unclear, the Taxpayer states that it tried to provide additional information. The Taxpayer further states that it made company engineers available to answer questions during the performance of the audit. As such, the Taxpayer maintains that the current refund verification audit should have been conducted in the same manner as the prior refund verification audit.

DETERMINATION

Virginia Code § 58.1-609.6 2 provides that the sales and use tax does not apply to:

Broadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies, wired or land based wireless cable television systems, common carriers or video programmers using an open video system or other video platform provided by telephone common carriers, or concerns which are under the regulation and supervision of the Federal Communications Commission and amplification, transmission and distribution equipment used or to be used by wired or land based wireless cable television systems, or open video systems or other video systems provided by telephone common carriers.

Virginia Code § 58.1-602 was amended effective July 1, 1999 to define many words and phrases applicable to the above exemption as follows:

“Amplification, transmission and distribution equipment means, but is not limited to, production, distribution, and other equipment used to provide Internet-access services, such as computer and communications equipment and software used for storing, processing and retrieving end-user subscribers' requests; and

“Internet service is defined to mean a service that enables uses to access proprietary and other content, information electronic mail, and the Internet as part of a package of services sold to end-user subscribers.”

The retail sales and use tax exemption available to public service corporations for the purchase or lease of tangible personal property used or consumed directly in the rendition of their public service was repealed, effective September 1, 2004. See , P.D. 04-122 (8/30/04). (Footnote 1)

The aforementioned authorities provide how exemptions are applied to purchases of equipment used by entities that provide cable television, Internet and telephone services. At issue in the refund request is equipment that is used by the Taxpayer to provide such services and products to its customers. Equipment that is used by the Taxpayer in accordance with the aforementioned authorities to provide cable television and Internet services may qualify for the exemptions. With respect to the equipment purchased for use by the Taxpayer in the provision of its telephone products and services, such equipment is not eligible for an exemption, as provided in P.D. 04-122. Accordingly, the Taxpayer is required to pay the sales tax at the time such equipment is purchased, or accrue and remit the use tax to the Department if the sales tax is not charged by the Taxpayer’s vendors. Additionally, some of the equipment may be mixed use equipment because the Taxpayer provides three services and products to its customers. In order to determine the application of the exemption, it is necessary to determine to what extent the equipment is used in an exempt manner by the Taxpayer.

With the refund request, the Taxpayer provided to the audit staff a spreadsheet that listed the invoice amounts for which the refund was requested. The Taxpayer also provided electronic copies of the invoices. The audit staff found that the spreadsheet did not include information from the invoices that described the transactions. In order to tie the invoices to the amounts included in the spreadsheet, the audit staff printed and reviewed each invoice to obtain the descriptive information that was not included in the spreadsheet. The refund verification audit was a detailed audit that required a review of each invoice at issue, such that it could be determined whether the transaction was exempt, taxable, or contained purchases for taxable and exempt purposes.

Once the review of each invoice was complete, some invoices were approved for a refund, and others were denied a refund because additional information regarding the transactions was needed. The audit staff requested additional documentation from the Taxpayer and that an engineer be made available to provide additional information for invoices that did not have sufficient information to make a determination on whether the transaction was exempt or taxable. The Taxpayer did not provide the additional documentation requested. Additionally, the Taxpayer’s engineers did not provide information regarding the specific equipment at issue. Rather, the engineers provided general information regarding what the vendors sold or the services provided. Without the additional information requested, the audit staff was unable to grant refunds for the invoices.

It was also determined by the audit staff that the data provided by the Taxpayer in the prior refund request used different product coding than the data provided in the current refund request. Due to this inconsistency, data from the prior refund request could not be relied upon in the current request. Accordingly, the method used to verify the prior refund request cannot be used to verify the refund request for the period at issue.

With respect to the denied refund, the documentation provided to the audit staff did not clearly demonstrate that the equipment was used for exempt activities. Likewise, the documentation provided with the Taxpayer’s appeal is insufficient to determine whether the equipment at issue was used for an exempt purpose during the period at issue. Absent definitive documentation and explanation as to the use of the equipment at issue, I am unable to grant the Taxpayer’s refund request.

The Taxpayer references P.D. 10-121 in support of its request that its refund be granted. The taxpayer in that instance requested a ruling regarding the application of the sales and use tax on equipment purchased and leased for use in its data center. The Taxpayer has not provided any evidence to support that the equipment at issue was purchased for a data center. Accordingly, the ruling in P.D. 10-121 is not applicable and the data center exemption does not apply to the equipment at issue.

The Taxpayer also references Attorney General Opinion 00-005 in its appeal. The Opinion addressed the applicability of Virginia Code § 58.1-609.6 2 to equipment used in providing Internet access directly to end users or to equipment and software used to enable other companies to provide such service. The issues addressed in the Opinion are not similar to the issues addressed in the Taxpayer’s appeal. Accordingly, the Opinion is not applicable in this instance.

The Code of Virginia sections, public documents and Attorney General Opinion 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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

(1) Public Service Corporation Exemption Repeal Guidelines

AR/1665P

Related Documents

10-121

04-122