13-17 | Virginia Tax

Tax Type

Communications Sales and Use Tax

Description

Taxpayer provides "digital product, delivered electronically" to its customers that are excluded from the communications tax by statute.

Topic

Collection of Tax

Communications Sales and Use Tax

Payment and Refund

Records/Returns/Payments

Date Issued

02-05-2013

February 5, 2013

Re: § 58.1-1821 Application: Communications Sales and Use Tax

Dear *****:

This is in response to the letters submitted on behalf of ***** (the "Taxpayer"), in which you seek correction of the communications sales and use tax assessments issued for the period November 2010 through August 2011 and for the audit period September 2011 through December 2011. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer provides an Internet-based service to its customers, which allows its customers to search for, select and view television and movie content (the "content") through the Taxpayer's website. The Taxpayer contends that the service it provides is not subject to the communications sales and use tax (the "communications tax") because it does not constitute a communications service. The Taxpayer further maintains that it provides "digital product, delivered electronically" to its customers that are expressly excluded from the communications tax by statute. The Taxpayer also maintains that the ruling rendered in Public Document (P.D.) 08-64 (5/19/08) provides no basis to assess tax on the sale of the content to its customers.

DETERMINATION

Application of the Communications Tax

Virginia Code § 58.1-648 A imposes the five percent communications sales and use tax on the customers of communications services providers. Virginia Code § 58.1647 defines communications services, in pertinent part, as:

- The electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including cable services, to a point or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for the transmission or conveyance.

Virginia Code § 58.1-648 C provides, in pertinent part, that the communications services on which the communications tax is levied shall not include "digital products delivered electronically, such as software, downloaded music, ring tones and reading materials."

In P.D. 08-64, the taxpayer requested a ruling regarding the application of the communications sales tax to sales of audio-visual content ("content services") transferred to its customers via cellular telephones. The content services included news, songs, ring tones, sports live video, sports scores, astrology, stock information, recipes, travelogue, short stories, exam results, reality shows and humorous content. The customer would be charged on a per minute basis for listening to or viewing the content services. There would also be an additional fixed fee charge to download the content services for future use and reuse. The content services would be paid for on either a prepaid or post paid basis. It was ruled that digital products delivered electronically do not include any products that require continued payments from the purchaser or products that are without the right of permanent use granted by the seller. It was further ruled that content services downloaded by a consumer for future use and reuse constitute digital property delivered electronically and would not be subject to the communications sales tax.

Based upon the information provided, sales of the content at issue to the Taxpayer's customers are deemed digital products that are downloaded electronically to the Taxpayer's customers. The provision of the content to the Taxpayer's customers does not constitute a sale of communications services. In accordance with the aforementioned authorities, the sales at issue are not subject to the communications sales tax.

For the purpose of applying the communications sales tax, this determination serves to overturn the portion of P.D. 08-64 that makes a distinction between digital products that are downloaded electronically and charged to customers on a monthly recurring basis and those digital products that are downloaded electronically and customers are charged a one-time fee.

Tax Paid / Assessment

For the periods November 2010 through August 2011, the Taxpayer filed communications tax returns and remitted payment of the tax from its own funds to the Department. The Taxpayer was assessed penalty and interest for these periods, and likewise remitted payment to the Department. The Taxpayer requests a refund of the tax, penalty and interest paid to the Department. In accordance with this determination letter, the Taxpayer will receive a refund of the tax, penalty and interest paid, plus refund interest accrued to date. In this instance, the refund is authorized to the Taxpayer, without the Taxpayer having to show proof of refunding its customers because the Taxpayer remitted the tax from its own funds. Had the tax been collected from the Taxpayer's customers, the Taxpayer would have been required to show proof that the tax had been refunded to its customers before a refund from the Department would have been authorized.

For the period September 2011 through December 2011, the Taxpayer was assessed tax and interest by the Department. In accordance with this determination, the assessment for this period is abated in full.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

Craig M. Burns

- - - - Tax Commissioner

AR/1-5076395045.P

Rulings of the Tax Commissioner