Sales Tax Slice: Virginia Dodges ITFA, Taxes Internet Activation and Reactivation Fees


 

Many states have wrestled with defining what types of services are protected by the Internet Tax Freedom Act’s (IFTA) prohibition against taxes on Internet access. This month, Virginia issued guidance on the applicability of its communications sales tax to Internet activation and reactivation fees.

In two related rulings, Virginia Ruling of the Commissioner PD 14-130 and 14-131, 8/7/2014, Virginia’s Tax Commissioner determined that activation and reactivation fees for Internet access are subject to communications sales tax. The Internet service providers (ISPs) that charged these fees supply cable, internet, telephone and text messaging services to various retail and commercial customers.

In both rulings, the ISPs argued, among other things, that taxing activation and reactivation fees is not permitted under the Communications Sales and Use Tax Act. Specifically, they argued that Internet activation and reactivation fees are related to Internet access services, which falls outside the definition of communications services. But the commissioner found that Internet access services are not excluded from the definition of communications service. Rather, the statute merely states how the tax should be applied with respect to those services.

The ISPs also contended that taxing and reactivation fees is prohibited under the Internet Tax Freedom Act (ITFA), which bars federal, state and local governments from taxing Internet access. The commissioner clarified that while the ITFA bars the application of state tax on Internet access service, it does not prohibit Virginia from deeming connectivity charges subject to the communications sales tax.

Additionally, the commissioner explained that these connectivity services are not the kind of incidental Internet services barred from taxation. The ITFA provides clear examples of incidental services, including e-mail, instant messaging, video clips and personal electronic storage, but connectivity related services are not included in the list, the commissioner concluded.

“The Commissioner took a results-oriented interpretation of the law defining communications service and Internet access,” Michael T. Dillon, Esq., President of Dillon Tax Consulting LLC, said to Bloomberg BNA on September 3. “In an environment in which taxation of interstate service transactions are becoming difficult on which to impose jurisdiction, define and situs, they wanted to impose tax on the service fees, saw an opportunity to interpret something one narrow way, and did. I don't agree with it and reasonable minds would certainly disagree with it,” Dillon said. 

As a reminder, the ITFA is scheduled to expire on November 1, 2014, unless it is extended by Congress.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What practical purpose does the ITFA serve when state tax departments make such “narrow” interpretations? What effect do these types of taxes truly have on cable, Internet and mobile phone industries?

For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library. 

By Mark J. Kennedy

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