Rulings of the Tax Commissioner

September 22, 2017

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

Dear *****:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the “Taxpayer”) as a result of an audit for the period October 2006 through September 2012.  This also acknowledges the supplemental information provided.  I note that the assessment is paid in full.  I apologize for the delay in responding to your request.

FACTS

The Taxpayer is a telecommunications company primarily providing Voice over Internet Protocol (“VoIP”).  For a monthly subscription service fee, the Taxpayer provides VoIP services that allow subscribers to make calls both domestically and internationally.  To render these VoIP services, the Taxpayer provides, without charge, an IP Box (“Adaptor”) to the subscriber.  An audit resulted in the assessment of consumer use tax on various purchases of tangible personal property, including Adaptors, used or consumed in the Taxpayer's provision of its services.

The Taxpayer takes exception to the consumer use tax assessed on untaxed purchases of Adaptors and maintains that the Adaptors qualify for exemption under Va. Code § 58.1-609.6 2.  Accordingly, the Taxpayer requests a refund of the tax and interest paid on the Adaptors.

The Adaptors at issue are designed to be connected to the subscriber's modem and telephone and are used to convert analog signals to digital signals and vice versa. The Adaptors are mobile devices and provide worldwide access to the Taxpayer's VoIP services at any location that has access to the Internet.  The Taxpayer indicates that the Adaptors are used in the assignment of IP addresses and to provide a DNS-A record that enables subscribers to connect to Internet websites via the Taxpayer's servers.  An Adaptor is provided to each subscriber of VoIP services.  When the VoIP services are terminated, the subscriber must return the Adaptor to the Taxpayer.  The majority of the Adaptors at issue were shipped to the Taxpayer at a Virginia office without sales tax being charged. Because the Taxpayer did not pay sales tax to the vendor and did not remit the consumer use tax, the auditor held the Adaptors taxable on the basis of first use in Virginia.  The auditor concluded that no exemption was applicable.

DETERMINATION

Virginia Code § 58.1-609.6 2 provides an exemption from the retail sales and use tax for:

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 (“FCC”) 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.  [Insert added.]

Criteria Needed to Qualify for the Exemption

In Winchester TV Cable Company v. State Tax Commissioner, 216 Va. 286, 217 S.E.2d 885 (1975), the Supreme Court of Virginia affirmed four criteria that must be met before a taxpayer qualifies for the exemption.  Under the initial intent of the exemption, a taxpayer was required to satisfy the following criteria:

• It must be a commercial radio or television company or concern;
• It must be under the regulation and supervision of the FCC;
• It must be engaged in broadcasting; and
• The property must be broadcasting equipment, parts and accessories thereto, or towers used directly in broadcasting.

Since 1975 when the opinion of Winchester TV Cable was issued, the exemption provided in Va. Code § 58.1-609.6 2 has been amended on three separate occasions that ultimately resulted in extending an exemption for certain equipment used by cable television systems, video programmers and certain concerns that use open video systems.  Under the amended statute, a taxpayer must satisfy the following criteria:

• It must be a commercial radio or television company, a cable television system, a common carrier or video programmer that uses an open video system provided by a telephone common carrier, or a similar concern;
• It must be under the regulation and supervision of the FCC;
• It must be engaged in broadcasting or cable television operations or in operating an open video system; and
• The property must be broadcasting equipment, parts and accessories thereto, or towers used directly in broadcasting.  If the property is not used in broadcasting, a cable television operation must use the property directly in the amplification, transmission or distribution of cable television services, and an open video system must use the property directly in the amplification, production, transmission or distribution of Internet services.

The Taxpayer believes the Adapters qualify as broadcasting equipment, parts, and accessories thereto and towers used by a concern that is under the regulation and supervision of the Federal Communications Commission.  The Taxpayer also maintains that the Adaptors are amplification, transmission and distribution equipment used or to be used by open video systems that are exempt under Va. Code § 58.1-609.6 2 because they amplify, transmit and distribute a digital signal from the subscriber's phone line through the Taxpayer's servers via the Internet to the end-recipient and vice versa.  The Taxpayer also provides its subscribers with call forwarding, 3-way calling, call blocking, call waiting, voicemail, voicemail to email, and facsimile services as part of the subscription service fee.  The Taxpayer further maintains that the Adaptors allow subscribers to access the subscriber's email and the Internet when the subscriber's equipment is connected to it.  Accordingly, the Taxpayer contends that it provides access to proprietary and other content, information electronic mail, and the Internet as part of a package of services sold to subscribers.  For these reasons, the Taxpayer poses a number of arguments to support the application of the cited exemption as follows.

“Concerns” Under the Regulation and Supervision of the FCC

The Taxpayer contends that it is a concern under the regulation and supervision of the FCC and is subject to numerous reporting requirements imposed by the FCC.  The Taxpayer complies with FCC requirements on the payment of various regulatory fees including the universal service fund, telecommunications relay service, and interstate telecommunications service providers.  The Taxpayer indicates that it follows all of the FCC regulations on the porting of local telephone numbers, emergency 911 services and the customer proprietary network information rules regarding the protection of customer data.  The Taxpayer further indicates that the FCC requires it to comply with other laws such as the Communications Assistance for Law Enforcement Act.

As currently enacted, the exemption is applicable to certain tangible personal property for use by specified entities.  As originally enacted, however, the exemption was applicable only to commercial radio and television companies or concerns which were under the regulation and supervision of the FCC.  In interpreting the original enactment of the exemption, § 1-88 of the 1969 Virginia Retail Sales and Use Tax Rules and Regulations read as follows:

The tax does not apply to broadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies or concerns which are under the regulation and supervision of the Federal Communications Commission.  The foregoing applies to tangible  personal property used directly in broadcasting by such companies or concerns. [Emphasis added.]

In other words, the term “concerns” was interpreted by the Department as pertaining to commercial concerns that broadcast radio or television signals to the general public.  This interpretation has been subjected to court scrutiny and upheld by the Supreme Court of Virginia on two occasions.  See Winchester TV Cable at 216 Va. 286 and WTAR Radio-TV Corporation v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977).  In Winchester TV Cable, 216 Va. at 290 (Footnote 2), the Court specifically rejected “the taxpayers argument that the language of the exemption should be divided into independent parts, thereby qualifying the taxpayer for the exemption merely because it is a ‘concern’ which is under FCC regulation and supervision.”  The Court went on to state that “[t]he sentence is composed of interdependent parts . .”

Furthermore, under the legal doctrine “noscitur a sociis” that translates to “it is known from its associates,” the meaning of a word “takes color and expression from the purport of the entire phrase of which it is a part, and it must be read in harmony with its context.”  Turner v. Commonwealth, 226 Va. 456, 460, 309 S.E.2d. 337, 339 (1983). Another fundamental rule of construction is “ejusdem generis,” which means that “where general words follow an enumeration of persons or things by words of a particular and specific meaning, the general words are not be construed in their widest extent, but are to be held as applying only to persons or things of the same general kind or class as those specifically mentioned.  In other words, general words in such a situation are to be restricted to a sense analogous to the less general.”  East Coast Freight Lines v. City of Richmond, 194 Va. 517, 525, 74 S.E.2d 283, 288 (1953) (citing Rockingham Co-operative Farm Bureau, Inc. v. Harrisonburg, 171 Va. 339, 344, 198 S.E. 908, 910 (1938).  “A specific enumeration of words or objects, as a rule, controls general words which follow and limits them in their operation to others of like kind.”  Rockingham paraphrasing Gates & Sons Co. v. Richmond, 103 Va. 702, 49 S.E. 965 (1905).  In Gates & Sons, 103 Va. at 705, the Supreme Court of Virginia stated that “[t]he rationale of the principle of ejusdem generis, seems to be, that if the legislature had intended the general words to apply, uninfluenced by the preceding particular words and without restriction, it would in the first instance have employed a compendious word to express its purpose.”  Commonwealth v. Progressive Community Club, Inc., 215 Va. 732, 737, 738, 213 S.E.2d 763 (1975).

For these reasons, the term “concerns” must be read in harmony with the rest of the phrase, which currently refers to commercial radio and television companies, wired or land based wireless cable television systems, and common carriers or video programmers using an open video system or other video platform provided by telephone common carriers.  While the Taxpayer is under the regulation and supervision of the FCC, it has not established that it is any of the specific persons or things enumerated in Va. Code § 58.1­-609.6 2.

Open Video System

The Taxpayer contends that it uses an open video system and therefore qualifies for the exemption.  The phrase “open video system” is defined by Va. Code § 58.1-602 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 regardless of whether the provider of such service is also a telephone common carrier.”  [Emphasis added.]  Title 47 U.S.C. § 573 (a) (1) provides, in part, the following:

A local exchange carrier may provide cable service to its cable service subscribers in its telephone service area through an open video system that complies with this section.  To the extent permitted by such regulations as the  Commission may prescribe consistent with the public interest, convenience, and necessity, an operator of a cable system or any other person may provide video programming through an open video system that complies with this section.  An operator of an open video system shall qualify for reduced regulatory burdens under subsection (c) of this section if the operator of such system certifies to the Commission that such carrier complies with the Commission's regulations under subsection (b) of this section and the Commission approves such certification. The Commission shall publish notice of the receipt of any such certification and shall act to approve or disapprove any such certification within 10 days after receipt of such certification. [Emphasis added.]

Section 76.1500 (a) of the Code of Federal Regulations (“CFR”) defines “open video system” as follows:

A facility consisting of a set of transmission paths and associated signal generation, reception, and control equipment that is designed to provide cable service which includes video programming and which is provided to multiple subscribers within a community, provided that the Commission has certified that such system complies with this part. [Emphasis added.]

It is my understanding that the Taxpayer does not operate a cable television system and thus provides no cable service.  Furthermore, the Taxpayer has presented no evidence that it operates an open video system as authorized pursuant to 47 U.S.C. § 573 for the periods covered by the audit and for which the FCC has certified as a system that complies with CFR § 76.1500 (a).  Moreover, the Department found no evidence of such federal authorization after a thorough search of online FCC records. Based on these facts, I find no basis for concluding that the Taxpayer operates an open video system or otherwise operates as a video programmer (or a concern similar to a video programmer) using an open video system furnished by a telephone common carrier.

Plain Language Argument

If the language of a statute is plain and unambiguous, we are bound by the plain meaning of that language.  Cisco Systems, Inc. et al v. Thorson, Tax Commissioner, 68 Va. Cir. 385, 393 (2005) (citing Cummings v. Fulghum, 261 Va. at 73, 77, 540 S.E.2d at 494, 496 (2001)). To fully understand the plain meaning of a statutorily-defined term, it is helpful to examine the ordinary meaning of key words used in that term.  The statutory term “Internet service” has different meanings associated with it depending upon the authority defining it. For Virginia retail sales and use tax purposes, Virginia Code § 58.1-602 specifically defines “Internet service” 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.”  [Emphasis added to key words.]

The ordinary meaning of “enables” and “access” are described as follows: The verb “enable” means “[t]o give power to do something; to make able.”  Black's Law Dictionary, Eighth Edition, p. 567.  The verb “enable” also means “[t]o supply with the means, knowledge, or chance to be or do something” and “[t]o make possible.” Webster's II New College Dictionary, 1995, p. 370.  The noun “access” means “[a]n opportunity or ability to enter, approach, pass to and from, or communicate with.” Webster's II at p. 14.  The noun “access” is also defined as “[a] means of approaching: passage,” “[t]he act of approaching,” “[t]he right to enter or use <has access to official documents>,” and “[t]he quality or state of being easy to approach or enter.”  The verb “access” means “[t]o gain access to (e.g., computer information).”  Page 6 of Webster's II.  These definitions of “enable” and “access” focus on gaining or providing the means or right to enter or use something.  They do not describe or imply an intermediary step to accomplish something.

Thus, the terms “enables” and “access” clarify that an end-user subscriber must be provided with the means or the right to access the Internet, information electronic mail, and proprietary and other content.  In other words, the Internet access provided to the end-user subscriber must be a direct connection to the Internet.

Furthermore, another element of the definition of “Internet service” must not be overlooked.  The Internet access must be part of a package of services sold to the end-user subscriber.  As indicated on the Taxpayer's website, a customer must already have Internet service in order to use the VoIP services. As such, the Taxpayer does not sell Internet access to end-user subscribers.[1]  In essence, an Adaptor furnishes a VoIP service connection only if the end-user subscriber has already established an independent Internet connection. As such, the Adaptors are a step removed from providing direct access or entry to the Internet.

IP addresses and DNS-A record

With respect to the assignment of IP addresses and the provision of a DNS-A record by the Adaptors, such features allow the Taxpayer's VoIP services to be utilized when an Internet connection has been established by the subscriber via a third-party carrier or a third-party location that has Internet access.  Such features are useless without a third-party Internet connection.

P. D. 05-146 (8/17/05)

The Taxpayer cites the decision of the Nineteenth Judicial Circuit Court of Virginia in Cisco.  The Taxpayer notes that this circuit court determined that the Internet service exemption set out in Va. Code § 58.1-609.6 2 applies to wholesale Internet access providers and that the “statutes must be interpreted according to the language of the statute.”  Such court is located in Fairfax County, Virginia and the Department does not acquiesce in or follow this court's determination on a statewide basis because the Supreme Court of Virginia has not determined the extent of the exemption.

Article X, § 6 f of the revised Virginia Constitution, adopted in 1971, provides that “[e]xemptions of property from taxation as established or authorized hereby shall be strictly construed . . .” Thus, the Virginia Constitution mandates the application of the rule of strict construction for exemptions from the retail sales and use tax.  See Progressive Community Club, Inc., 215 Va. at 737, 213 S.E.2d at 762.  In addition, the Supreme Court of Virginia has long followed the rule of strict construction in determining whether taxpayers are entitled to exemptions from the Virginia retail sales and use tax.  When there is doubt as to whether an exemption applies, the Virginia Supreme Court has ruled that the doubt is resolved against the one claiming the exemption.  See Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973). Based on these authorities, the Department must follow the rule of strict construction in determining whether a taxpayer is entitled to an exemption from the retail sales and use tax.

In the Cisco decision, the circuit court cited the longstanding rule of construction that taxing statutes must be construed strongly in a taxpayer's favor.  However, the statute in question is not a taxing statute.  Rather, Va. Code § 58.1-609.6 2 is an exemption statute.  As such, the Virginia Constitution and the Supreme Court of Virginia mandate the application of a strict construction rule for any exemption from the retail sales and use tax.  Thus, despite the Cisco circuit court's broad interpretation of Va. Code § 58.1-609.6 2, the Department must follow the rule of strict construction and resolve any doubts against the exemption.

P.D. 13-136, P.D. 13-137, P.D. 13-138 and P.D. 13-139 (all issued 7/18/13)

The Taxpayer cites these determinations as support for claiming the exemption under Va. Code § 58.1-609.6 2.  The Taxpayer contends that the Adaptors function similarly to the Digital Video Recording (DVR) equipment and Video on Demand (VOD) equipment addressed in the public documents.  The DVR equipment at issue in those documents functioned as a signal receiver, transmitter and recorder of television programming.  Such equipment was determined to qualify for the exemption. However, while the VOD equipment functioned in some exempt activities, that equipment was potentially used in taxable activities for which the tax would have to be prorated.

Unlike the Taxpayer, the taxpayers in the public documents were cable television operators that also provided high-speed Internet services and VoIP services.  While the Taxpayer provides VolP services, it has not established that it provides Internet services as defined in Va. Code § 58.1-602.  As such, I find that the public documents have no application to the Taxpayer's operations.

P.D. 01-29 (3/29/01)

During a telephone conference with the Taxpayer's representative and a member of the Department's Appeals and Rulings staff, the Taxpayer's representative cited P.D. 01-29 as on point to the issue raised in this case.  The representative indicated that P.D. 01-29 exempts servers, routers and other equipment used by an Internet service provider[2] and therefore, provides a basis for exemption of the contested items in the instant case.

In the instant case, the Taxpayer has not established that it provides Internet services as defined in Va. Code § 58.1-602.  As such, I find that P.D. 01-29 has no application to the Taxpayer's operations.

Claim: Adaptors Function as Broadcasting Equipment

The Taxpayer contends that the Adaptors function as broadcasting equipment. In Winchester TV Cable, the Supreme Court of Virginia relied upon the dictionary definition[3] of the verb “broadcasting,” which means “to make widely known: to disseminate or distribute widely or at random . . . to send out from a transmitting station (a radio or television program) for an unlimited number of receivers...”  The Court further relied upon the adjective “broadcast,” which means “made public by means of radio or television.”  The Court went on to determine that cable television systems “do not in fact broadcast or rebroadcast.”  Winchester TV Cable Company, 261 Va. at 291, 217 S.E.2d at 890.

Based on the definition of broadcasting as set out in Winchester TV Cable, the Taxpayer is not engaged in broadcasting its VoIP services within the meaning of the statutory exemption.

Claim: Adaptors are Amplification, Transmission and Distribution Equipment

Virginia Code § 58.1-609.6 2 exempts “amplification, transmission and distribution equipment used or to be used by . . . open video systems or other video systems provided by telephone common carriers.”  The Taxpayer contends that the Adaptors are such equipment. In Va. Code § 58.1-602, the term “amplification, transmission and distribution equipment” is defined as “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.”  [Emphasis added.]

As stated previously, the Taxpayer does not provide Internet access services that connect the end-user subscriber directly to the Internet.  The subscriber obtains such services from a third-party Internet access provider.  Furthermore, the Taxpayer does not operate an open video system as required by Va. Code § 58.1-602.  Although the Adaptors may amplify, transmit or distribute a digital signal from the subscriber's phone through the company's servers, the Adaptors do not qualify as amplification, transmission and distribution equipment as intended by the statutory language.

CONCLUSION

While the Taxpayer is under the regulation and the supervision of the FCC to some extent, the Taxpayer does not operate as a radio or television broadcaster, cable television company, video programmer or open video system.  Based on the facts presented and the cited authorities, I must conclude that the Taxpayer does not satisfy all of criteria necessary to qualify for the exemption Va. Code § 58.1-609.6 2. In addition, the Taxpayer does not satisfy all of the criteria of the term “Internet service” as defined in Va. Code § 58.1-602. For these reasons, I find that the exemption at Va. Code § 58.1-609.6 2 is not applicable to the Adaptors at issue. The assessment is correct as issued, and the Taxpayer's request for a refund of the tax and interest assessed on the contested Adaptors cannot be granted.

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 matter, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/612.J