October 13, 2016
Re: § 58.1-1821 Application: Communications Sales and Use Tax
Dear *****:
This is in response to your letters submitted on behalf of ***** (the “Taxpayer”) in which you seek correction of the communications sales and use tax assessment issued for the period January 2007 through December 2009. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a cellular services provider. During the audit period, the Taxpayer offered Picture Mail service (the “Service”) to its customers. The Service is no longer offered by the Taxpayer. Pursuant to Va. Code § 58.1-647 and Public Document (P.D.) 06-138 (11/1/06), the Department's auditor held the Service charges taxable. For the reasons stated below, the Taxpayer contends the assessment of tax on the Service charges violates the Internet Tax Freedom Act, and the charges are not subject to the Virginia Communications Sales Tax.
DETERMINATION
Internet Tax Freedom Act
The Taxpayer states that the Service was a form of picture messaging that allowed users to take digital pictures and instantly send them to any other Service-capable phone or e-mail address while on the Taxpayer's network. Citing the Internet Tax Freedom Act, 47 USC 151 § 1105 C and E (the “Act”), the Taxpayer maintains that the charges at issue are for a service that is incidental to the Taxpayer's provision of Internet access and are not subject to the communications sales tax. The Taxpayer asserts that the amendment made to the Act in 2007 was put in place to exempt services like the one offered by the Taxpayer from taxation by state and local governments. The Taxpayer further maintains that the Service is a type of electronic mail that is exempt of the tax pursuant to the Act.
The Act is the federal law that bars federal, state and local governments from taxing Internet access. The Act defines Internet access as “A service that enables users to connect to the Internet to access content, information, and other services offered over the Internet.”[1]
The Act further provides that the term ‘Internet access’:
Includes services that are incidental to the provision of the service described in subparagraph A when furnished to users as part of such service, such as a home page, electronic mail and instant messaging (including voice- and video-capable electronic mail and instant message video clips and personal electronic storage capacity.[2]
The Act also states that the term ‘Internet access’:
Includes a homepage, electronic mail and instant messaging (including voice- and video-capable electronic mail and instant messaging), video clips, and personal electronic storage capacity, that are provided independently or not packaged with Internet access.[3]
Additionally, the Act states that “The term ‘Internet access service’ does not include telecommunications services, except to the extent such services are purchased, used, or sold by a provider of Internet access to provide Internet access.”[4]
Finally, the Act provides that:
Except as provided in this section, nothing in this title shall be construed to modify, impair, or supersede, or authorize the modification, impairment, or superseding of, any State or local law pertaining to taxation that is otherwise permissible by or under the Constitution of the United States or other Federal law and in effect on the date of the enactment of this Act [Oct. 21, 1998.][5]
Since the Act was signed into law, the U.S. Congress has made amendments to the Act to clarify certain points in the Act. In 2004, the Act was amended to provide clarification to the definition of ‘Internet access’ and to clarify the exception to the definition regarding telecommunications services. In its Report regarding the 2004 amendment, the U.S. House of Representatives stated “in general, taxation of Internet access refers to applying State and local taxes to the monthly charge that subscribers pay for access to the Internet through ISPs [Internet Service Providers].”[6]
Based upon the information provided by the Taxpayer, the Service does not meet the definition of ‘Internet access’ as provided in the Act. The Service does not give the customers access to the Internet as considered in the Act. In fact, the customers must already have access to the Internet in order to use the Service. The charges at issue are not for the monthly charge that subscribers pay for access to the Internet through ISPs; rather, the charges are for using the Service provided by the Taxpayer. Further, the Service is not the type of services that is considered to be incidental to the provision of Internet access as considered in the Act. The incidental services addressed in the Act are those that are provided to the customers as part of the Internet access account and are specifically excluded from the tax in the Act. Additionally, I find that the Service is not a type of e-mail or messaging as considered in the Act. Accordingly, I find that the application of the communications sales tax to the Service does not violate the Act.
Virginia Communications Sales and Use Tax
The Taxpayer asserts that the Service is exempted by Virginia law because the Service is “incidental to Internet access” as considered in P.D. 06-138. The Guidelines and Rules for the Virginia communications taxes are set forth in P.D. 06-138 and specifically state that the communications sales tax does not apply to charges for “Internet access service, electronic mail service, electronic bulletin board service, or similar services that are incidental to Internet access, such as voice-capable e-mail or instant messaging (however, charges for connection, reconnection, termination, movement, or change of such services are subject to the tax).” The Taxpayer states that the Service is only offered to customers that have Internet access through the Taxpayer's network. The Taxpayer further contends that the Service is a form of e-mail or instant messaging with video-capability offered to its Internet customers.
The Service charges were held taxable by the auditor in accordance with P.D. 06-138, which states that the communications sales tax applies to charges for “voice mail, text messaging, picture messaging, and other messaging services.” [Emphasis added]. The auditor determined that the charges at issue are for picture messaging and not for Internet access.
The Guidelines relied upon by the Taxpayer and the auditor interpret the Virginia statutes regarding the communications sales tax. Virginia Code § 58.1-647 defines Internet access services as:
A service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users. “Internet access service” does not include telecommunications services, except to the extent telecommunications services are purchased, used, or sold by a provider of Internet access to provide Internet access.
Virginia Code § 58.1-647 broadly defines communications services 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. The term includes, but is not limited to, (i) the connection, movement, change, or termination of communications services; (ii) detailed billing of communications services; (iii) sale of directory listings in connection with a communications service; (iv) central office and custom calling features; (v) voice mail and other messaging services; and (vi) directory assistance. [Emphasis added.]
Virginia Code § 58.1-648 imposes the communications sales and use tax and provides in section C that “Communications services on which the tax is hereby levied shall not include... (vii) Internet access service, electronic mail service, electronic bulletin board service, or similar services that are incidental to Internet access, such as voice-capable e-mail or instant messaging.”
In its letter dated August 21, 2014, the Taxpayer describes its Service as picture messaging, the taking and sending of pictures while on the Taxpayer's network. In a subsequent letter filed on the Taxpayer's behalf and dated January 15, 2015, the letter states that the Taxpayer's Service is essentially a form of e-mail or instant messaging.
Picture messaging (sometimes called photo messaging) is the practice of taking a picture with a built-in camera on a mobile phone or other device and sending it to another mobile device or an e-mail recipient.[7] E-mail (electronic mail) is the exchange of computer-stored messages by telecommunication.[8] Instant messaging, often shortened to simply “IM” or “IMing,” is the exchange of text messages through a software application in real-time.[9]
The manner in which the Taxpayer describes the Service is in line with the aforementioned definition of picture messaging, and is not the same or a similar service as e-mail or instant messaging as stated above. In accordance with the aforementioned authorities, I find that the Service at issue is for picture messaging, a communications service that is subject to the communications sales tax. As such, the communications tax was correctly assessed on the related charges in the audit. I further find that the Taxpayer's assertion that “voice mail, text messaging, picture messaging and other messaging services” are not taxable when incidental to Internet access is incorrect. The Guidelines and the statute also do not include these services in the types of services that are deemed incidental to Internet access. Further, there is no requirement in the Guidelines or statute that changes the application of the tax on “voice mail, text messaging, picture messaging, and other messaging services” as suggested by the Taxpayer.
Based upon this determination, the assessment is correct. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit your payment to: Virginia Department of Taxation, 600 E. Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
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 determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5818199261.P
[1] Pub.L. No. 105-277, 112 Stat. 2681-719 § 1105(5)(A).
[2] Id at § 1105(5)(C).
[3] Id at § 1105(5)(E).
[4] Id at § 1101(d)(3)(D).
[5] Id at § 1101(b).
[6] See, U.S. Congress, House of Representatives. Committee on the Judiciary. Internet Tax Nondiscrimination Act. 108th Cong., 1st sess., H. Report 108-234 (July 24, 2003).