My telecom subsidiaries are disregarded entities owned by companies in my combined Virginia return -- do they compare their minimum tax to their own liability, or to the whole group's? And can Virginia tax our internet-access gross receipts at all?

Plain-English summary

A telecommunications company and its affiliates filed combined Virginia corporate income tax returns for 2018 through 2020, reporting no corporate income tax liability on a combined basis for any of those years. Several pass-through entities (PTEs) -- wholly owned by corporations within the affiliated group and treated as disregarded entities for federal tax purposes -- separately remitted telecommunications company minimum tax. The dispute was over how that minimum tax should be calculated, plus a separate federal-law argument about internet-access receipts.

Issue 1: whose income tax liability do you compare the minimum tax to? Virginia imposes a minimum tax on telecommunications companies' gross receipts, in lieu of the corporate income tax, whenever the income tax would be lower (Va. Code § 58.1-400.1 A) -- and PTEs are subject to it too. A noncorporate telecom company is "deemed to have paid" corporate income tax, for this comparison, "to the extent that its income is subject to Virginia income tax" (23 VAC 10-120-89 A) -- computed as if the PTE were a corporation (23 VAC 10-120-89 B). Separately, 23 VAC 10-120-86 says that when affiliated corporations file a consolidated or combined return, a telecom company's separate liability must be compared to the group's total combined liability, with the lesser amount controlling.

The taxpayer compared each PTE's minimum tax to that PTE's own hypothetical separate-company income tax liability, ignoring the fact that the PTEs' corporate owners were part of a combined filing group. The Department disagreed, extending its reasoning from P.D. 19-124 (11/15/2019): because the PTEs, if they had been corporations, would have been required to join the affiliated group's combined return (23 VAC 10-120-320 B requires conformity to the group's consolidated/combined election), each PTE's minimum tax must be compared to the group's combined income tax liability, not a hypothetical standalone number. The Department explained the stakes plainly: if PTEs could instead compare to their own separate liability while ignoring the group's actual combined losses, the whole group would pay little more than a fraction of the intended minimum tax -- defeating the General Assembly's purpose in creating the tax. Result: the combined-group comparison method controls, and the additional minimum tax assessed for 2018-2020 was upheld on this point (subject to the internet-access adjustment below, and two conceded gross-receipts corrections not addressed in this ruling).

Issue 2: can the minimum tax reach internet-access gross receipts? The federal Internet Tax Freedom Act (ITFA, 47 U.S.C. § 151 note) generally bars state and local governments from taxing internet access. Because Virginia's telecommunications minimum tax is levied on gross receipts (not net income), the Department agreed it generally can't be imposed on gross receipts from internet access -- consistent with the Department's prior treatment of the BPOL tax on gross receipts (P.D. 17-94; Coxcom, LLC v. Fairfax County, 875 S.E.2d 75 (2022)). But ITFA has a grandfather exception: a tax that was authorized by statute and generally imposed/collected on internet access before October 1, 1998 stays valid -- and Virginia's telecommunications minimum tax was first enacted in 1988 and was generally applied to (and collected on) internet-access charges before that date. So the tax was validly grandfathered -- until the grandfather clause itself expired under federal law after June 30, 2020.

Applying the dates. Because the grandfather protection covered 2018 and 2019 in full, the auditor properly included the PTEs' internet-access gross receipts in the taxable base for those years. For 2020, only receipts through June 30 remain properly taxable; internet-access receipts after that date should be excluded. Because the State Corporation Commission (which certifies telecom gross receipts to the Department) can't itself make that split, the Department gave the taxpayer 60 days to provide an accounting of its post-June-30-2020 internet-access receipts, with the auditor to adjust the 2020 assessment accordingly -- but if the taxpayer doesn't provide that information in time, the original 2020 assessment stands as correct.

Bottom line. Updated bills for 2018 and 2019 were issued (interest accruing; 30 days to pay), while the 2020 assessment awaits the taxpayer's post-June-2020 internet-receipts accounting.

What this means for you

Telecommunications companies with pass-through subsidiaries in an affiliated group that files combined/consolidated returns

Don't compute each PTE's minimum tax against its own hypothetical standalone liability if its corporate owner is part of a group filing combined or consolidated Virginia returns. Compare it to the group's actual combined income tax liability instead -- the methodology here (extending P.D. 19-124) is what the Department will apply, and it can produce a materially higher minimum tax than a separate-company comparison would.

Telecom or internet-access providers with gross-receipts-based Virginia taxes

The Internet Tax Freedom Act generally protects internet-access gross receipts from state/local taxation, but check whether the specific tax you're facing predates and was actually collected before October 1, 1998 -- if so, it may still be grandfathered, and you'll need to separately track receipts before and after the federal grandfather clause's expiration (June 30, 2020).

Anyone asked to substantiate excluded receipts within a Department-set deadline

Treat that deadline seriously -- here, the Department made clear that a missed 60-day window means the original assessment simply stands, with no further opportunity implied.

Common questions

Q: My telecom PTE's owner files as part of a combined Virginia return -- how do I compute the PTE's minimum tax?
A: Compare the PTE's minimum tax to the combined group's income tax liability (computed with the PTE included as if it were a corporate affiliate), not to the PTE's own separate hypothetical liability.

Q: Does the Internet Tax Freedom Act mean my gross-receipts-based Virginia tax can never reach internet-access charges?
A: Not necessarily. If the tax existed and was generally collected on internet access before October 1, 1998, it may be grandfathered -- but that grandfather protection itself expired under federal law after June 30, 2020, so post-that-date receipts are protected regardless of the tax's age.

Q: What happens if I don't provide the receipts breakdown the Department requests within its deadline?
A: The original assessment is treated as correct -- as this ruling makes explicit for the 2020 tax year here.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-400.1 A -- telecommunications company minimum tax, in lieu of income tax, on gross receipts when the corporate income tax is less than the minimum tax; PTEs are subject to it too
• 23 VAC 10-120-89 A/B -- a noncorporate telecom company is deemed to have paid corporate income tax only to the extent its income is subject to Virginia tax; comparison computed as if it were a corporation
• 23 VAC 10-120-86 -- for affiliated corporations filing a consolidated/combined return, the telecom company's separate liability is compared to the group's total combined/consolidated tax liability
• Va. Code § 58.1-442 and 23 VAC 10-120-320 -- affiliated corporations must conform to the group's election to file consolidated or combined returns
• 47 U.S.C. § 151 note §§ 1101(a)(1), 1104(a), 1105(8), 1105(10) -- Internet Tax Freedom Act: bars state/local taxes on internet access, subject to a pre-October 1998 grandfather exception that expired after June 30, 2020

Case law: Coxcom, LLC v. Fairfax County, 875 S.E.2d 75 (2022) (cited alongside P.D. 17-94 on gross-receipts-based local taxes and internet access).

Authorities the Department relied on (described here, not linked): P.D. 19-124 (11/15/2019) (minimum tax of a noncorporate telecom company compared to its share of the group's combined liability); P.D. 13-149 (7/31/2013) (return instructions/regulatory examples don't cover every nuance of the law); P.D. 17-94 (6/9/2017) (BPOL gross-receipts tax and the Internet Tax Freedom Act). A later ruling, P.D. 25-88 (6/25/2025), addresses a related but distinct scenario -- a telecom PTE whose corporate owner filed a Virginia return separately rather than as part of a combined group -- and holds the PTE's deemed-paid income tax is capped at what its owner actually paid, drawing on the Virginia Supreme Court's Kohl's "subject to tax" reasoning; that separate-filer methodology is different from the combined-group methodology applied in this ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-120

Original ruling text

November 14, 2024

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will respond to your letter in which you seek correction of the corporate income tax assessments issued to * (the “Taxpayer”) for the taxable years ended December 31, 2018, through December 31, 2020. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer and its affiliates filed combined Virginia corporate income tax returns for the taxable years at issue. For each taxable year, the Taxpayer reported no corporate income tax liability on a combined basis. In addition, several pass-through entities (PTEs), which were 100% owned by corporations that were part of the Taxpayer’s Virginia affiliated group and treated as disregarded entities for federal income tax purposes, remitted telecommunication company minimum tax. In computing the minimum tax due, the Taxpayer compared each PTE’s minimum tax to its separate corporate income tax liability as if it were reporting on a separate company basis. If the minimum tax was greater, the Taxpayer paid the difference of the minimum tax over the separate corporate income tax liability. If the minimum tax was less, the Taxpayer paid zero as reported on the combined income tax return.

Under review, the Department determined that the minimum tax should have been compared to the combined corporate income tax liability of the Taxpayer and its affiliates. As a result, the Department assessed the Taxpayer for the entire amount of minimum tax computed for each taxable year and for each of the PTEs at issue. The Taxpayer filed an application for correction, contending that the Department’s regulations require that the minimum tax of a noncorporate telecommunications company be compared only to that entity’s income tax liability computed as if it were a corporation. In addition, the Taxpayer contends that the minimum tax cannot be applied to gross receipts that are attributable to the provision of internet access under the Internet Tax Freedom Act (the “Act”), codified at Title 47 U.S.C. § 151 note.

In its application, the Taxpayer also argued that the Department had miscalculated the minimum tax with respect to three of the PTEs. The auditor has corrected the error relating to the combination of gross receipts for two of the PTEs, and the Taxpayer has agreed to contact the State Corporation Commission (SCC), which certifies telecommunications gross receipts to the Department, regarding the alleged error in the reported gross receipts of the third PTE. This determination, therefore, will not address those issues.

DETERMINATION

Calculation of Minimum Tax Liability

Virginia Code § 58.1-400.1 A provides that a telecommunications company is subject to a minimum tax, in lieu of the corporate income tax, based on its gross receipts for the calendar year that ends during the taxable year if the corporate income tax is less than the minimum tax. Telecommunications companies that are treated as PTEs for federal income tax purposes are also subject to the minimum tax.

Under Title 23 of the Virginia Administrative Code (VAC) 10-120-89 A, for purposes of determining its minimum tax, a noncorporate telecommunications company will be deemed to have paid corporate income tax to the extent that its income is subject to Virginia income tax at the entity level or in the hands of its partner or other person for whom the income retains its character. If the income of the noncorporate telecommunications company is thus deemed to be subject to Virginia income tax, then the minimum tax liability shall be compared to the income tax liability of the entity computed as if it were a corporation. See Title 23 VAC 10-120-89 B. If the minimum tax exceeds the entity’s income tax computed as if it were a corporation, the entity must pay the difference between the minimum tax and the corporate income tax. If the corporate income tax is greater than the minimum tax, the entity is not required to pay the minimum tax.

Title 23 VAC 10-120-86 addresses the application of the minimum tax to affiliated companies. It provides that, when affiliated corporations file either a consolidated or combined return, the separate income tax liability of the telecommunications company must be compared to the total tax liability shown on the consolidated or combined return. The lesser amount is deemed the telecommunication company’s income tax liability.

In Public Document (P.D.) 19-124 (11/15/2019), the Department concluded that the minimum tax of a noncorporate telecommunications company must be compared to the lesser of its separate liability computed as if it were a corporation or its share of the combined tax liability of the affiliated group of which it would be a member if it were a corporation.

The Taxpayer argues that the Department’s reasoning in P.D. 19-124 was erroneous. The Taxpayer contends that the Form 500T instructions and the examples in Title 23 VAC 10-120-89 B make it clear that the separate liability of the noncorporate telecommunications company is not determined by taking into account the income of its corporate owners. Neither the form instructions nor the examples, however, address a situation where the corporate owner is a member of an affiliated group that files a combined or consolidated return. Further, information provided in Virginia’s tax return instructions and regulations is intended to provide helpful guidance to taxpayers. It is not intended to provide a detailed explanation of every provision or nuance of Virginia’s tax law. See P.D. 13-149 (7/31/2013).

Title 23 VAC 10-120-89 B requires that the income tax liability that is compared to the minimum tax liability of noncorporate telecommunications companies be “. . . computed as if it were a corporation .” [Emphasis added]. This is similar to the language in Title 23 VAC 10-120-86 B 1, which requires each corporation included in a combined or consolidated return to recompute its tax as if it were a separate entity.

Pursuant to Title 23 VAC 10-120-86 A, the requirements under Virginia Code § 58.1-442 and Title 23 VAC 10-120-320 et seq . apply to the income tax filing status of affiliated corporations that are telecommunications companies. Title 23 VAC 10-120-320 B requires that members of an affiliated group of corporations must conform to the affiliated group’s election to file their returns on a consolidated or combined basis. If the PTEs had been corporations, they would have been required to be included in the combined Virginia income tax return filed by the Taxpayer.

As a separate corporation, a telecommunications company would pay the greater of the income tax or the minimum tax but never both. As a member of an affiliated group filing a combined Virginia return, a telecommunications company would pay only the difference between the separate minimum tax and its portion of the combined income tax liability.

The purpose for having a noncorporate telecommunications company compare its minimum tax to its income tax computed as if it were a corporation, under Title 23 VAC 10-120-89 B, is to avoid collecting both the minimum tax from the telecommunications PTE and an income tax from the PTE’s owner arising from income earned by the PTE. The regulation does this by ensuring that the total paid by both entities equals the amount that would be paid by a separate telecommunications enterprise. If the separate income tax liabilities of the PTEs were not compared to the income tax shown on the combined return computed as if they were corporations, the Taxpayer and the PTEs would not pay an income tax, because of the group’s losses, and would pay only a small percentage of the full minimum tax. This is contrary to the General Assembly’s intent to impose a minimum tax on entities conducting a telecommunications business.

Internet Tax Freedom Act

Tax on Internet Access

The Act prohibits a state or political subdivision thereof from imposing taxes on internet access. See 47 U.S.C. § 151 note § 1101(a)(1). Under 47 U.S.C. § 151 note § 1105(8)(A), the term “tax” is defined as:

(i) any charge imposed by any governmental entity for the purpose of generating revenues for governmental purposes and is not a fee imposed for a specific privilege, service, or benefit conferred; or (ii) the imposition on a seller of an obligation to collect and to remit to a governmental entity any sales or use tax imposed on a buyer by a governmental entity.

A “tax on Internet access” is defined as “a tax on Internet access, regardless of whether such tax is imposed on a provider of Internet access or a buyer of Internet access and regardless of the terminology used to describe the tax.” 47 U.S.C. § 151 note § 1105(10)(A). The Act provides a general exception such that the term “tax on Internet access” does not include a tax levied upon or measured by net income, capital stock, net worth, or property value. See 47 U.S.C. § 151 note § 1105(10)(B).

The telecommunications minimum tax is levied on gross receipts, not net income, and therefore, the Department agrees that it may not be imposed on gross receipts from internet access. This determination is consistent with the Department’s determination that the local business, professional, and occupational license (BPOL) tax imposed on gross receipts is also prohibited subject to the Act’s grandfather provisions. See P.D. 17-94 (6/9/2017). See also, Coxcom, LLC v. Fairfax County , 875 S.E.2d 75 (2022).

Although the Department agrees that the telecommunications minimum tax may not be imposed on gross receipts from internet access charges, this determination does not apply to income subject to the corporate income tax. For example, if the exclusion of internet access gross receipts reduces a taxpayer’s minimum tax below its corporate income liability, the taxpayer remains liable for the full corporate income tax without reduction for internet access service income.

Grandfather Provisions

A tax on internet access is allowed, as a grandfathered tax, if it was generally imposed and actually enforced prior to October 1, 1998. 47 U.S.C. § 51 note § 1104(a)(1) 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 -

(i) 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

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

Virginia’s telecommunications minimum tax was first enacted in 1988 and generally applied to all of a taxpayer’s gross receipts. As such, the tax was authorized by statute at that time. The tax was also generally collected on charges for internet access prior to October 1, 1998. This grandfather clause, however, terminated after June 30, 2020. See 47 U.S.C. § 51 note § 1104(a)(2)(A).

CONCLUSION

For the reasons discussed above, even though the PTEs were disregarded entities, they must conform to the election made by the Taxpayer’s affiliated group for purposes of determining their minimum tax. Thus, in calculating each PTE’s income tax as if it is a corporation, it must be treated as an affiliate in the combined group. Therefore, the PTEs’ separate minimum tax liabilities were properly compared to the group’s combined income tax liability and the additional minimum tax assessed for the 2018 through 2020 taxable years is upheld subject to adjustment as discussed below.

The Department agrees that the Act generally prevents the Department from levying the minimum tax on gross receipts attributable to internet access services. The Department also concludes, however, that the telecommunications minimum tax was grandfathered under the Act through June 30, 2020. The auditor, therefore, properly included the PTEs’ gross receipts derived from internet access services in the measure of taxable gross receipts for the 2018 and 2019 taxable years. Because the grandfather provision terminated June 30, 2020, and because the SCC is unable to adjust the receipts reported to the Department to account for the Act for purposes of the telecommunications company minimum tax, the Taxpayer is directed to provide an accounting of internet access receipts received after June 30, 2020, to the auditor within 60 days. The auditor will review the information provided, request additional information if necessary, and adjust the 2020 assessment as appropriate. If the Taxpayer does not provide the requested information within the time allowed, the assessment will be considered correct.

The Taxpayer will receive updated bills for the 2018 and 2019 taxable years shortly. The Taxpayer should remit the balance due within 30 days of the bill dates to avoid the accrual of additional interest and possible collection actions. An updated bill for the 2020 taxable year will be issued once the further review process as to that taxable year is complete.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, , at **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4448.X

Related Documents

13-149

17-94

19-124