United States

Virginia: Internet Reactivation Fees Subject to Communications Sales and Use Tax

Apr 06, 2015
From KPMG TaxWatch

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The Virginia Tax Commissioner recently addressed whether Internet reactivation fees were subject to the Commonwealth’s Communications Sales and Use Tax. Under Virginia law, communications sales and use tax is imposed on communications services, which is broadly defined and includes “the connection, movement, change, or termination of communications services.” Certain communications services, including Internet access services, are specifically not subject to tax. Further, the sales price of communications services is defined as the total amount charged to a customer, which is not to be reduced by any “separately identified components of the charge that constitute expenses of the communications services provider.”

The taxpayer provided high-speed Internet services, and at times, charged subscribers for reactivating their Internet services after they were disconnected. On audit, the Department assessed communications sales tax on the reactivation fees. The taxpayer contested the audit assessment, arguing that the tax violated the Virginia Communications Sales and Use Tax Act, as well as the Internet Tax Freedom Act (ITFA). The Commissioner rejected both arguments, noting that Internet access services are not excluded from the definition of communications services, but are simply communication services that are not taxed. However, the connection, movement, change, or termination of communications services (including Internet access services) are subject to communications sales and use tax. This conclusion was consistent with earlier Tax Commissioner Rulings. With regard to the ITFA, the taxpayer argued that the reactivation services were incidental to Internet access and were thus protected from tax under the Act. The ITFA prohibits federal, state and local taxation of charges for internet access, which is defined as “A service that enables users to connect to the Internet to access content, information, or other services offered over the Internet.” Further, the ITFA provides that Internet access includes services that are incidental to the provision of the services, such as home page, email, instant messaging, video clips, and personal electronic storage capacity. The Commissioner concluded that the reactivation fees were not of the kind of incidental services considered under the ITFA. Therefore, imposing tax on the Internet reactivation fees was not prohibited under the federal law. For more information on Virginia Public Document 15-44 (Mar. 18, 2015), please contact Sarika Bakshi at (703) 286-8467 or Duane Dobson at (703) 286-8637.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.