Document Number
14-92
Tax Type
Retail Sales and Use Tax
Description
Internet Service Provider (ISP) Exemption
Topic
Exemptions
Records/Returns/Payments
Date Issued
06-16-2014

June 16, 2014



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

Dear *****:

This is in response to the letter submitted on behalf of ***** (the "Taxpayer") to appeal the denial of a refund request for retail sales and use tax submitted for the period January 2010 through June 2010. I apologize for the delay in responding to your request.

FACTS

The Taxpayer submitted a tax refund claim of ***** which was subsequently denied by the Department's audit staff. As a result, the Taxpayer requests reconsideration of such refund denial contending that it is erroneous because the Taxpayer is an Internet service provider (ISP) that provides Internet access as well as access to a package of specific services including proprietary information and electronic mail sold to end users.

According to its website, the Taxpayer provides advanced communications, managed network, and hosted IT infrastructure services for business and wholesale customers. As a communication service provider, it exclusively serves businesses, large enterprises and other telecommunications companies. The Taxpayer has paid sales tax on certain assets used in the provision of Internet services as defined in Va. Code § 58.1-602 and claims that those assets qualify for an exemption from the retail sales and use tax pursuant to Va. Code § 58.1­-609.6 2. Although headquartered in *****, Virginia, it was not disclosed whether the assets at issue were used in such locality or in another Virginia locality.
ISSUES

Internet Service Provider (ISP) Exemption

Virginia Code § 58.1-609.6 2 provides an exemption from the retail sales and use tax for the following:
    • Broadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies, wired or land based wireless cable television systems, common carriers or video programmers using an open video system or other video platform provided by telephone common carriers, or concerns which are under the regulation and supervision of the Federal Communications Commission 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. [Emphasis added.]

This statute was last amended in 1999 by the General Assembly to add a new exemption applicable to certain Internet service providers. Such amendment became effective on and after July 1, 1999, and defined the emphasized words and phrases set out in the above exemption with respect to the new exemption. Such words and phrases (and the terms Internet and Internet service) are defined in Va. Code § 58.1-602 as follows:
    • "Amplification, transmission and distribution equipment" is defined to mean, but is not limited to, 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;
    • "Internet' means collectively, the myriad of computer and telecommunications facilities, which comprise the interconnected worldwide network of computer networks;
    • "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;
    • "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...;
    • "Video programmer" is defined to mean a person or entity that provides video programming to end-user subscribers; and
    • "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. [Emphasis added.]

In interpreting the exemption, the Department has applied the rule of strict construction as adopted by the courts and as required by Virginia's constitution. Based on the statutory definitions cited above and the application of the strict construction rule to the exemption, the Department has long interpreted the above ISP exemption as applicable only to retail ISPs and not wholesale ISPs. A retail ISP is one that provides Internet services as defined above to end-users who subscribe or contract with an Internet service provider to receive all of the services listed in the statute, i.e., access to proprietary content, other content, information electronic mail ("e-mail") and the Internet. The rationale for this policy is set out in Public Document (P.D.) 13-179 (10/11/13).


The Department has also determined that web hosting activities do not qualify for the above ISP exemption. In P.D. 00-18 (3/17/00), the Tax Commissioner determined that a web hosting business did not provide Internet services to end-user subscribers. Rather, the web hosting business sold services to customers who in turn made their web sites available to end-user subscribers. In effect, the web hosting and data center services were not part of a package of services sold to end-user subscribers.

The Taxpayer cites P.D. 10-12 (2/9/10) as support for its reconsideration request. Such determination appropriately states that the ISP exemption is limited to certain tangible personal property used or to be used by ISPs that provide Internet access to end-user subscribers, as well as, access to a package of specific services including proprietary information and e-mail sold to end-users. Such determination concluded that the taxpayer in such case provided Internet access "in a retail manner." Because the taxpayer in such case provided access to the Internet, proprietary and other content, and e-mail as part of a package of services sold to end-user subscribers, such taxpayer qualified for the exemption.

With these authorities in mind, I will now address the issues raised in the Taxpayer's appeal.

Proprietary Content

The Taxpayer indicates that it provides proprietary information via an online portal (the "Business Center") that is accessible only by end user subscribers with a user identity and password. The content is privately developed and exclusively owned and controlled by the Taxpayer. For example, the screen pages contain statements that all rights are reserved to the Taxpayer. Based on these facts, it appears that such content is proprietary content.

The Business Center proprietary content allows users to perform the following (not an all inclusive list):
    • View, download and analyze bills and invoice and data usage reports,
    • Preview repair and networking activity,
    • Create trouble tickets and view/update their status,
    • View and receive network outage and maintenance notifications,
    • Set up call forwarding,
    • Reset voicemail passcodes,
    • Configure hunt groups1 and incoming call routing,
    • Manage contact center,
    • Monitor throughput on each Internet access circuit,
    • Update website online,
    • Search for and view details of each network alert, trouble ticket or billing inquiry,
    • Access the Taxpayer's online knowledge base for troubleshooting, and
    • Control account access.

The Taxpayer also presents documentation of its cloud-based customer portals and a web hosting customer gateway. These services, accessible through portal logins, include interactive demos. One customer portal features a web-based interface by which subscribers can store data in a cloud. This portal also provides for the ability to configure virtual local area networks or VLANS between servers, configure access control list (ACL) based firewalls, and manage administrative usage. The web hosting gateway allows users to send and receive e­mail and publish websites and includes the Taxpayer's proprietary software.

Based on these facts and the documentation presented, it appears that the Taxpayer provides its proprietary content to businesses that contract with the Taxpayer for the provision of web hosting, administrator tools thereof (via the Business Center), portals, and other services. These business customers, but not their subscribers, appear to be the only customers that are able to view the Taxpayer's proprietary content. As such, the Taxpayer does not appear to be providing its proprietary content only to end-user subscribers who contract with the Taxpayer's business customers for Internet services.

Electronic Mail Services

The Taxpayer claims to provide its customers with e-mail services and describes its customers as the end-users. As support for this claim, the Taxpayer submits a copy of its online web hosting features and specifications. According to such information, all web hosting accounts include the ability to send and receive e-mail. This information specifically lists that the e-mail services offered by the Taxpayer include, among other things, "reliable, professional e-mail branded to your domain name." The information also demonstrates that the Taxpayer "offers a range of website hosting packages for a variety of web, email and DNS needs."2 According to this information, all web hosting accounts also include a website and applications and support for e-mail, domain names and DNS needs, and site maintenance. Based on this documentation, it appears that the Taxpayer provides its e-mail services directly to businesses that have contracted with the Taxpayer for web hosting services.

Because the Taxpayer provides e-mail services in connection with its web hosting services, it appears that the e-mail services are furnished to accommodate business customers who in turn resell the Taxpayer's services (such as Internet access, e-mail services, etc.) at retail to end users who subscribe with the Taxpayer's business customers. In such instances, the e-mail services are not for use ultimately by the Taxpayer's business customers. For this reason, it is unclear from the facts and documentation submitted as to whether such business customers of the Taxpayer actually make any internal business use of the Taxpayer's e-mail services.

DETERMINATION

Notwithstanding the Department's interpretations and its correct application of the strict construction rule adopted by the courts for interpreting an exemption, the circuit court for Fairfax County, Virginia in Cisco Systems et al v. Thorson Tax Commissioner, at Law Number 219609 (8/17/05), ruled that the ISP exemption was applicable to both retail and wholesale ISPs that offer Internet services as defined in Va. Code § 58.1-602. The Department, however, has declined to apply the circuit court's interpretation on a statewide basis because the Virginia Supreme Court has not reviewed the issue and issued an opinion addressing the scope of the ISP exemption.

Accordingly, it is my determination that the ISP exemption may apply to the extent that the Taxpayer's assets at issue were used for Internet services in the locality of Fairfax County, Virginia, regardless of whether used in retail or wholesale Internet service activities. On the other hand, if any of the assets at issue were used outside of such locality, they will not receive the same treatment. Rather, assets used outside the locality of Fairfax County to provide web hosting or any other wholesale Internet service will not qualify for the ISP exemption. However, if it can be shown that any of those assets are used in a "retail" capacity, then the exemption applies. Property used in both wholesale and retail Internet service activities outside of Fairfax County will constitute dual use property. The tax on such dual use property must be prorated between the percentage of time the property is used in taxable activities (wholesale Internet services) and the percentage of time used in exempt activities (retail Internet services).

The auditor will take into consideration this determination in deciding how to treat the assets at issue. Upon conclusion of the auditor's review, any sales tax determined to be overpaid will be refunded to the Taxpayer as soon as practical. Such refund will include refund interest computed in accordance with Va. Code § 58.1-1833. Such refund, however, will not include any dealer's discount taken by the vendors on the sales tax paid on the assets at issue because such monies were never remitted to the Commonwealth.

The Code of Virginia sections and public documents 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 determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,



Craig M. Burns
Tax Commissioner


AR/1-5488532819.R
1. As used in this context, a hunt group appears to be a "method of distributing phone calls from a single telephone number to a group of several phone lines." http://en.wikipedia.org/wiki/Line hunting, 01/14/2014. For instance, "When an incoming call is received, the PBX or IP-PBX uses the hunt group or group of extensions that are defined to 'hunt' for an available or open line, extension, or channel that can be used to receive the call." http://technet.microsoft.corn/en-us/library/cc526584.aspx, 01/14/2014.
2.As used in this context, “DNS” appears to be an abbreviation for “domain name systems.”

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46