Tax Type
Retail Sales and Use Tax
Description
Internet/Electronic commerce; Internet service provider
Topic
Taxability of Persons and Transactions
Date Issued
03-17-2000
March 17, 2000
Re: Request for Ruling: Retail Sales and Use Tax
Dear ****
This is in response to **** letter requesting a ruling on the application of the retail sales and use tax to **** (the "Taxpayer"). I apologize for the delay in the department's response.
FACTS
The Taxpayer is an Internet service provider ("ISP") and web hosting business. In regard to its ISP operation, the Taxpayer offers Internet access to local businesses and individuals. These Internet access customers receive a package of services from the Taxpayer which includes Internet access, electronic mail, access to proprietary and other content, and help desk services. The Taxpayer no longer offers Internet access services to new customers (except in conjunction with web hosting services), but continues to serve existing customers.
The Taxpayer's web hosting operation provides to business customers worldwide a range of activities and services. These include assistance in designing web sites, the provision of dedicated servers (including server maintenance), multiple connections to Internet backbone providers, and an optional electronic mail service which allows the Taxpayer's customers to correspond electronically with their respective customers. At its data centers, the Taxpayer provides to its web hosting customers an uninterrupted power supply with generator back-up, secure rack space for servers, and 24 hour-a-day monitoring of the servers.
Based on 1999 amendments to the Code of Virginia, the Taxpayer proposes that its purchases of certain tangible personal property, including servers, computer software, routers and switches, and other equipment may be purchased exempt of the sales and use tax
RULING
Code of Virginia § 58.1-609.6(2) provides a sales and use tax exemption for:
Broadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies ... or video programmers using an open video system or other video platform provided by telephone common carriers, ... and amplification, transmission and distribution equipment used or to be used by wired or land based wireless cable television systems, or open video systems or other video systems provided by telephone common carriers.
Code of Virginia § 58.1-602 was amended effective July 1, 1999, to define many words and phrases applicable to the above exemption, as follows:
The Virginia courts have consistently required strict interpretation of sales and use tax exemptions. That is, where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See, for example, Commonwealth v. Community Motor Bus, 214 Va.155,198 S.E.2d 619 (1973).
Under the doctrine of strict construction, l find that this exemption is limited to certain tangible personal property used or to be used by ISPs that provide Internet access to end-user subscribers. The exemption is further limited to those ISPs that, in addition to Internet access, provide access to a package of specific services including proprietary information and electronic mail sold to end-users.
Web hosting: With respect to its web hosting operation, the Taxpayer does not provide Internet services to end-user subscribers. Rather, the Taxpayer's services are sold to customers who in turn make their web sites available to end-user subscribers. In effect, the Taxpayer's web hosting and data center services are not part of a package of services sold to end-user subscribers.
Internet access: I am uncertain if the exemption would apply to the services which the Taxpayer provides to its "access only" customers. The ruling request indicates that these services include "access to" proprietary and other content. Certainly, any Internet access provider will provide its subscribers with access to the wide variety of proprietary content that is available on the Internet. However, the statutory definition of "Internet service" clearly requires access to proprietary and other content in addition to Internet access. Accordingly, the "proprietary and other content" requirement is not the same content which is generally available to all Internet users. It is unclear to me if the Taxpayer provides proprietary content as envisioned in the statute.
Proration: As exemplified in the enclosed Public Document 93-229 (12/15/93), the department has traditionally applied proration to the exemption set out in Code of Virginia § 58.1-602. It may be that the Taxpayer's "access only" service meets all of the requirements of an exempt "Internet service." If so, amplification, transmission and distribution equipment used in that activity will be exempt from the sales and use tax. If equipment is used in both a taxable activity (such as web hosting) and an exempt "Internet service" activity, the tax will be prorated.
Current issues: The Budget Bill for the 2000-2002 biennium requests the Virginia Secretary of Finance and the Virginia Secretary of Technology to study the sales and use taxation of tangible personal property purchased by persons providing Internet services. Results of the study are to be presented by October 1, 2000.
If you have any questions regarding this letter, please contact ***** in the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/23377I
Re: Request for Ruling: Retail Sales and Use Tax
Dear ****
This is in response to **** letter requesting a ruling on the application of the retail sales and use tax to **** (the "Taxpayer"). I apologize for the delay in the department's response.
FACTS
The Taxpayer is an Internet service provider ("ISP") and web hosting business. In regard to its ISP operation, the Taxpayer offers Internet access to local businesses and individuals. These Internet access customers receive a package of services from the Taxpayer which includes Internet access, electronic mail, access to proprietary and other content, and help desk services. The Taxpayer no longer offers Internet access services to new customers (except in conjunction with web hosting services), but continues to serve existing customers.
The Taxpayer's web hosting operation provides to business customers worldwide a range of activities and services. These include assistance in designing web sites, the provision of dedicated servers (including server maintenance), multiple connections to Internet backbone providers, and an optional electronic mail service which allows the Taxpayer's customers to correspond electronically with their respective customers. At its data centers, the Taxpayer provides to its web hosting customers an uninterrupted power supply with generator back-up, secure rack space for servers, and 24 hour-a-day monitoring of the servers.
Based on 1999 amendments to the Code of Virginia, the Taxpayer proposes that its purchases of certain tangible personal property, including servers, computer software, routers and switches, and other equipment may be purchased exempt of the sales and use tax
RULING
Code of Virginia § 58.1-609.6(2) provides a sales and use tax exemption for:
Broadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies ... or video programmers using an open video system or other video platform provided by telephone common carriers, ... and amplification, transmission and distribution equipment used or to be used by wired or land based wireless cable television systems, or open video systems or other video systems provided by telephone common carriers.
Code of Virginia § 58.1-602 was amended effective July 1, 1999, to define many words and phrases applicable to the above exemption, as follows:
- "video programmer" is defined to mean "a person or entity that provides video programming to end-user subscribers;"
- "video programming" is defined to mean "video and/or information programming provided by or generally considered comparable to programming provided by a cable operator including, but not limited to, Internet service;"
- "open video system" is defined to mean "an open video system authorized pursuant to 47 U.S.C. ' 573 and, for purposes of this chapter only, shall also include Internet service ...;@
- "amplification, transmission and distribution equipment" is defined to mean "production, distribution, and other equipment used to provide Internet-access services, such as computer and communications equipment, and software used for storing, processing and retrieving end-user subscribers' requests;" and
- "Internet service" is defined to mean "a service that enables users to access proprietary and other content, information electronic mail, and the Internet as part of a package of services sold to end-user subscribers."
The Virginia courts have consistently required strict interpretation of sales and use tax exemptions. That is, where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See, for example, Commonwealth v. Community Motor Bus, 214 Va.155,198 S.E.2d 619 (1973).
Under the doctrine of strict construction, l find that this exemption is limited to certain tangible personal property used or to be used by ISPs that provide Internet access to end-user subscribers. The exemption is further limited to those ISPs that, in addition to Internet access, provide access to a package of specific services including proprietary information and electronic mail sold to end-users.
Web hosting: With respect to its web hosting operation, the Taxpayer does not provide Internet services to end-user subscribers. Rather, the Taxpayer's services are sold to customers who in turn make their web sites available to end-user subscribers. In effect, the Taxpayer's web hosting and data center services are not part of a package of services sold to end-user subscribers.
Internet access: I am uncertain if the exemption would apply to the services which the Taxpayer provides to its "access only" customers. The ruling request indicates that these services include "access to" proprietary and other content. Certainly, any Internet access provider will provide its subscribers with access to the wide variety of proprietary content that is available on the Internet. However, the statutory definition of "Internet service" clearly requires access to proprietary and other content in addition to Internet access. Accordingly, the "proprietary and other content" requirement is not the same content which is generally available to all Internet users. It is unclear to me if the Taxpayer provides proprietary content as envisioned in the statute.
Proration: As exemplified in the enclosed Public Document 93-229 (12/15/93), the department has traditionally applied proration to the exemption set out in Code of Virginia § 58.1-602. It may be that the Taxpayer's "access only" service meets all of the requirements of an exempt "Internet service." If so, amplification, transmission and distribution equipment used in that activity will be exempt from the sales and use tax. If equipment is used in both a taxable activity (such as web hosting) and an exempt "Internet service" activity, the tax will be prorated.
Current issues: The Budget Bill for the 2000-2002 biennium requests the Virginia Secretary of Finance and the Virginia Secretary of Technology to study the sales and use taxation of tangible personal property purchased by persons providing Internet services. Results of the study are to be presented by October 1, 2000.
If you have any questions regarding this letter, please contact ***** in the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/23377I
Related Documents
Rulings of the Tax Commissioner