Did the Virginia Tax Commissioner grant reconsideration of a prior determination that denied a sales tax refund based on the Internet Service Provider exemption and the electronically delivered software exemption?

Subject

Administration: Appeal; Reconsideration - Misstatement of Facts, Misapplication of Policy; Conference - Right to In-Person Meeting; Research - Sharing Exemption : Internet Service Providers (ISP) for electronically delivered software

Plain-English summary

A seller of telecommunications equipment, software, and related services (the "Taxpayer") had previously issued a credit memo and filed a refund claim with the Department on behalf of its customer (the "Customer"), covering sales tax the Customer paid from December 2011 through March 2015. The Customer argued that the Internet Service Provider (ISP) exemption in Va. Code § 58.1-609.6 2 applied to many of its equipment purchases, and that the exemption for electronically delivered software applied to certain software purchases. The Department denied the refund claim, the Taxpayer appealed, and the Tax Commissioner issued a determination letter finding that the Customer did not qualify as a retail ISP for the equipment at issue and that the software had not been shown to be delivered electronically. The Taxpayer then asked the Tax Commissioner to reconsider that determination under Title 23 VAC 10-20-165 F, arguing the original decision rested on a misstatement of facts and a misapplication of policy, that it had been denied an in-person conference, and that the Department improperly relied on outside research without sharing it.

The Tax Commissioner denied reconsideration on every point. On the ISP exemption, the ruling found no misstatement of facts: the determination had been based on a thorough review of the Management Agreement between the Customer and a wireless company (the "Company"), which showed the Customer managed the Company's network and sales operations and received revenue net of a management fee retained by the Company, rather than operating as a retail ISP selling Internet access directly to end users. The Customer's own Form 10-K disclosures reinforced this reading of the relationship. Because the Customer did not use the equipment to provide Internet services at retail to end users, and because exemption statutes are strictly construed against the taxpayer, the Commissioner found no misapplication of policy either. On the conference issue, the ruling found the Taxpayer had, in fact, received a teleconference with the Department's analyst on October 12, 2018, and that the Taxpayer's own follow-up email thanking the analyst undercut any claim that the process was deficient; an in-person meeting is not required by Title 23 VAC 10-20-165 E. On the research objection, the Commissioner held that Department staff may conduct independent research when reviewing appeals and are not required by statute or regulation to share that research with taxpayers, though the ruling did identify the websites consulted (fiercewireless.com, shentel.com, prnewswire.com). Finally, on the software exemption, the Commissioner found the Taxpayer had not met the documentation standard from P.D. 05-44 -- an invoice, contract, or sales agreement expressly certifying electronic-only delivery with no tangible medium furnished -- distinguishing the Taxpayer's download procedures and license-key materials from the vendor emails that supported taxpayers in P.D. 15-153 and P.D. 20-65. The reconsideration request was denied in full, and the ruling states this was the Department's final word on the matter.

What this means for you

Requesting reconsideration of a Virginia determination

Title 23 VAC 10-20-165 F sets a high bar for reconsideration: a taxpayer must show the original determination misstated the facts, misapplied the law or policy, rests on law that has since changed, or that new evidence has surfaced that could change the outcome -- and the request must arrive within 45 days of the final determination. Simply disagreeing with the outcome, or re-arguing points already considered, is not enough. Here, the Tax Commissioner walked through the same Management Agreement and Form 10-K evidence already cited in the original determination and found nothing had been misstated or misapplied.

ISP exemption claims depend on the actual contractual relationship

Businesses that manage network operations, sales, or customer service for a wireless carrier under a management-fee arrangement are not automatically "Internet Service Providers" entitled to the retail ISP exemption in Va. Code § 58.1-609.6 2, even if they interact with end users. What matters is whether the entity itself sells Internet access at retail, which the ruling found this Customer did not do based on the terms of its Agreement with the Company.

Electronically delivered software still needs the right paperwork

Consistent with the Department's long-standing policy under P.D. 05-44, a taxpayer claiming the software-delivery exemption needs a sales invoice, contract, or agreement that expressly certifies electronic-only delivery with no tangible medium furnished. Download instructions and license keys alone were not sufficient here, in contrast to cases like P.D. 15-153 and P.D. 20-65 where a vendor email specifically confirmed electronic delivery.

Common questions

Q: Did the Tax Commissioner grant the reconsideration request?
A: No. The Commissioner denied reconsideration on all issues raised -- the ISP exemption, the electronically delivered software exemption, the conference process, and the use of Department research -- and confirmed that the prior denial of the refund claim would stand as the Department's final determination.

Q: Why didn't the Customer qualify for the ISP exemption?
A: The Management Agreement showed the Customer managed the wireless Company's network and sales operations and was paid net of a management fee retained by the Company, rather than selling Internet access at retail to end users. The Customer's Form 10-K filings for fiscal year 2014 supported this characterization of the relationship.

Q: Was the Taxpayer denied a fair appeal conference?
A: No. The ruling found the Department held a teleconference with the Taxpayer's representatives on October 12, 2018, and that Title 23 VAC 10-20-165 E does not require an in-person meeting -- only that a conference be offered, which normally occurs at the Department's Richmond office when in person.

Q: Can the Department use its own research in deciding an appeal without sharing it with the taxpayer?
A: Yes, according to this ruling. The Commissioner found no statutory or regulatory requirement to share independent research conducted during an appeal, although in this case the specific websites relied upon (fiercewireless.com, shentel.com, and prnewswire.com) were disclosed in the ruling itself.

Q: What documentation is needed to prove software was delivered electronically?
A: Per P.D. 05-44, at minimum a sales invoice, contract, or sales agreement must expressly certify that the software was delivered electronically and that no tangible medium was or would be furnished. Download procedures and license keys, without that express certification, were not sufficient in this case.

Q: Could the Taxpayer raise these same issues again?
A: The ruling states that this was "the final time that the Department will address these matters," indicating the Department considered the reconsideration process exhausted on these facts.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-1821 (application for correction of assessment/refund)
• Va. Code § 58.1-609.6 2 (Internet Service Provider exemption)
• Va. Code § 58.1-609.5 1 (electronically delivered software exemption)
• Title 23 VAC 10-20-165 E (right to a conference on appeal)
• Title 23 VAC 10-20-165 F (grounds for reconsideration of a determination)

Related public documents discussed:

• P.D. 05-44 (4/4/2005) -- documentation standard for electronically delivered software
• P.D. 15-153 (7/16/2015) -- vendor email sufficient to prove electronic delivery
• P.D. 20-65 -- vendor email sufficient to prove electronic delivery

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-204

Original ruling text

December 11, 2020

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

Dear Messrs. *:

This will reply to your letter in which you seek reconsideration of the determination letter issued to * (the “Taxpayer”) for the period December 2011 through March 2015. I apologize for the delay in responding to your request.

FACTS

The Taxpayer sells telecommunications equipment, software and related services. The Taxpayer received a refund claim from * (the “Customer”) for sales tax paid on purchases of telecommunications equipment, software and various services from the Taxpayer. The Customer claimed that the collection of the sales taxes was erroneous, contending that the exemption for Internet Service Providers (ISP) in Virginia Code § 58.1-609.6 2 applies to many of its purchase transactions with the Taxpayer. In addition, the Taxpayer claims that the exemption for electronically delivered software applies to other transactions with the Customer.

The Taxpayer issued a credit memo to the Customer for the sales tax refund amount claimed, and filed a refund claim with the Department. Based upon a review of the refund claim, the exemption claimed by the Customer on the purchases of telecommunications equipment was not allowed. Further, the refund of sales tax paid on certain software purchases was denied because it could not be confirmed that the transactions qualified for the sales and use tax exemption for electronically downloaded software. The Taxpayer filed an appeal of the denied refund with the Department. In response to the appeal, the Tax Commissioner issued a determination letter to the Taxpayer and found that ISP exemption did not apply to the transactions at issue and that the software at issue had not been electronically delivered. Accordingly, the denial of the refund was upheld by the Tax Commissioner.

Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-20-165 F, the Taxpayer maintains that the determination letter is based on a misstatement of facts and misapplication of policy.

DETERMINATION

Title 23 VAC 10-20-165 F 1 provides that:

In order for the Tax Commissioner to grant a request for reconsideration, the request must be received by the department not later than 45 days after the final determination and the taxpayer must demonstrate one of the following:

a. The facts upon which the original determination is based are misstated by the Tax Commissioner or are inaccurate, and the determination would have a different result based on a correction of the Tax Commissioner's misstatement of the facts presented or a clarification of the original facts presented in the taxpayer's administrative appeal;

b. The law upon which the original determination is based has been changed by legislation, court decision or other authority effective for the tax period(s) at issue;

c. The policy upon which the original determination is based is misapplied, and the determination would have a different result based on the application of the proper policy; or

d. The taxpayer has discovered additional evidence or documentation that was not available to the taxpayer at the time the original administrative appeal was filed with the department, and the additional evidence or documentation could produce a result different from the original determination.

If at least one of the four requirements listed above is satisfied, and the request for reconsideration includes the information required for a complete appeal, the Tax Commissioner will grant a taxpayer's request for reconsideration.

ISP Exemption

The Taxpayer maintains that the determination regarding the ISP exemption is based on a misstatement of facts and misapplication of policy. The Taxpayer also maintains that the determination letter did not explain how, under the Management Agreement (the “Agreement”) between the Customer and the Company, the Customer does not qualify as an ISP. The Taxpayer further contends that it was not granted a conference to discuss the appeal. The Taxpayer also objects to research performed by Department employees and the use of such research in rendering the determination at issue.

Misstatement of Facts and Misapplication of Policy

I disagree that the determination is based upon a misstatement of facts. The determination letter is based upon a thorough review of the entire Agreement, and cites the terms and conditions from the Agreement to support the decision that the Customer does not qualify as a retail ISP. Specifically, the Agreement states that the Customer manages * (the “Company’) Service Area Network that offers the Company’s products and services. The Customer distributes the Company’s products and services under the Company’s brands. The Company holds licenses for the operation of the wireless network in the Customer’s service territory. The Customer manages the sales operations for the Company. The Customer entered into the Agreement with the Company to help construct, operate, manage and maintain for the Company a portion of the Company’s network in the Service Area Network. The Agreement further provides that the Customer designed and operated its systems to seamlessly interface with the Company’s Network. Based upon the foregoing, I find the Taxpayer has not demonstrated that the determination is based on a misstatement facts as required by Title 23 VAC 10-20-165.

The Customer’s relationship with the Company is further described by the information provided in the Customer’s Form 10K filed for fiscal year 2014. The Form 10K provides that a portion of the Customer’s total operating revenues in 2014, 2013 and 2012 were generated by or through the Company and its customers using the Customer’s portion of Company’s nationwide PCS network. The Customer records its postpaid revenues based on the net PCS revenues billed by the Company. Net PCS revenues billed by the Company consist of gross monthly recurring charges net both recurring and nonrecurring credits, account write-offs and other billing adjustments. The Customer receives revenues from the Company for subscribers that obtain services in the Company’s network coverage area. Postpaid revenues received from the Company are recorded net of certain fees retained by the Company. The Company retains a management fee on prepaid revenues. Prepaid revenues received from the Company are reported net the cost of the management fee. Additionally, the Company provides the Customer significant support services, such as customer service, billing, collections, and use of the * brand names.

I further disagree that the determination is based upon a misapplication of policy. In order to qualify for the exemption on equipment purchased to provide Internet services, it must be demonstrated that the equipment is used to provide Internet services at retail to end-users. The Taxpayer has not demonstrated that the Customer used the equipment at issue to provide Internet services at retail to end-users. Rather, the facts in this matter support that the Customer is the manager of the Company’s wireless business operations, and not a retail ISP.

Under the doctrine of strict construction, “Statutes granting tax exemptions are construed strictly against the taxpayer.” Commonwealth v. Community Motor Bus Co., Inc. , 214 Va. 155, 198 S.E.2d 619 (1973). “Exemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption.” Golden Skillet Corp. v. Commonwealth , 214 Va. 276, 199 S.E.2d 511 (1972). Accordingly, the statutory exemption is not applicable to the equipment that was purchased by the Customer during the period at issue.

Appeal Conference

The Taxpayer maintains that it was not granted an in-person conference to discuss the appeal as provided by Title 23 VAC 10-20-165 E. The regulation provides that a conference will normally be held in the Department’s main office in Richmond, Virginia. However, the regulation does not require that an in-person conference be held in order to meet the requirements of the regulation. A teleconference was held by the Department’s analyst and the Taxpayer’s representatives on October 12, 2018. In an email dated October 15, 2018, one of the Taxpayer’s representatives wrote to thank the analyst for his time. The representative further stated, “I believe we left our conversation with you having everything that you need to begin your review of the * claims. If I am mistaken or if there is any additional documentation that we can provide, please let know. I am happy to answer any questions that may come up.” Based upon the foregoing, I find that the Taxpayer was properly granted a conference in accordance with Title 23 VAC 10-20-165 E.

Research

The Taxpayer objects to the use of research by the Department’s analyst be used in making the determination regarding the application of the sales tax to the equipment at issue. The Taxpayer further requests copies of all such information.

Department staff are not precluded from conducting independent research when reviewing appeals filed with the Department. Further, the Tax Commissioner is not precluded from using such research to render determinations in response to appeals filed with the Department. There is also no statutory or regulatory requirement that the results of independent research conducted by the Department be shared with taxpayers during the appeal process. Notwithstanding, the research information referred to in the determination letter was found on the following websites: fiercewireless.com, shentel.com, prnewswire.com.

Electronically Delivered Software

Regarding the misapplication of policy relating to this issue, the Taxpayer maintains that the information previously provided to the Department’s auditor confirms that the software at issue was delivered electronically. The Taxpayer further contends that the denial of the refund for the software is in conflict with P.D. 05-44 (4/4/2005). The Taxpayer asks that the Tax Commissioner reconsider the application of the Department’s documentation policy to the information presented and acknowledge that the evidence submitted established that the software at issue was delivered electronically and approve the refund.

The prior determination was based upon an application of the Department’s long-standing policy regarding the application of the sales tax on sales of software. The ruling in P.D. 05-44 provides that at a minimum, a sales invoice, contract or other sales agreement must expressly certify the electronic delivery of the software and that no tangible medium for that software has been or is to be furnished to the customer. In the prior determination, I found that the software documentation provided with the Taxpayer’s appeal was not conclusive to establish that the software was available for delivery by electronic means only. The information submitted by the Taxpayer included procedures to download software and software license keys. Accordingly, I found that this information did not meet the minimum criteria set out in P.D. 05-44, that the exemption did not apply to the software at issue and that Taxpayer was not due a refund as requested.

The prior determination is supported by other Department rulings that likewise address the Department’s long-standing policy regarding the application of the sales tax on purchases of software. In P.D. 15-153 (7/16/2015), the taxpayer contested the assessment of tax on sales of software, maintaining that the software was delivered electronically and that the exemption provided for by Virginia Code § 58.1-609.5 1 applied. With the appeal, the taxpayer provided an email from the vendor stating that the software at issue was electronically downloaded based upon the product codes provided. The email was deemed sufficient to support the taxpayer’s contention that the software was delivered electronically, and the transactions were removed from the audit. Similarly, in P.D. 20-65, the taxpayer provided an email from the vendor explaining the vendor’s process for delivering the software at issue in the audit. The email was likewise deemed sufficient to support the taxpayer’s contention that the software at issue was delivered electronically. These public documents also support the finding in the determination letter that the documentation provided by the Taxpayer does not expressly certify the electronic delivery of the software and that no tangible medium for that software has been or is to be furnished to the customer, as required by P.D. 05-44.

Pursuant to Title 23 VAC 10-20-165 F, in order for the requested reconsideration to be granted, the Taxpayer must demonstrate that the policy at issue was misapplied. Based upon a review of the information provided and the aforementioned public documents, I find that the Taxpayer has not met its burden of proving that the policy was misapplied in the prior determination or that the refund was erroneously denied. Accordingly, the reconsideration requested in denied.

CONCLUSION

In accordance with this determination, the Taxpayer’s request for reconsideration cannot be granted. Further, there is no basis to issue a refund to the Taxpayer based on the ISP exemption or the exemption for electronically delivered software. Please be advised that this is the final time that the Department will address these matters.

The Code of Virginia , regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions concerning this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/2139P

Related Documents

05-44

15-153

20-65