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
Follow us on Twitter:@BBNAtax
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)