March 17, 2017
Re: Ruling Request: Communications Sales and Use Tax
Dear *****:
This is in response to your request for a ruling regarding the payment of franchise fees to localities from the Communications Sales and Use Tax Trust Fund distributions.
FACTS
The Taxpayer is a “cable operator” and provides cable television service, as well as other services, to Virginia customers. The Taxpayer collects and remits the applicable communications taxes on such services. The Taxpayer has entered into franchise agreements with Virginia localities in which the Taxpayer provides cable television service. You request a ruling regarding three aspects of the payment of the franchise fee: 1) whether a taxpayer is subject to franchise fees under new or renegotiated franchise agreements entered into on or after January 1, 2007; 2) whether a taxpayer is liable for any additional franchise fees that may be owed to a locality under a pre-2007 franchise agreement; and 3) what remedy a locality has regarding disputes concerning the amount of franchise fees paid after January 1, 2007.
DETERMINATION
Background
Effective January 1, 2007, House Bill 568 (Acts of Assembly 2006, Chapter 780) replaced many of the state and local communications taxes and fees with a centrally administered state Communications Sales and Use Tax, a Landline E-911 Tax, and a Cable Rights-of-Way Use Fee (“Communications Taxes”). Revenues from the Communications Taxes are collected and remitted monthly by communications services providers to the Department of Taxation (“Department”) and deposited into the Communications Sales and Use Tax Trust Fund (“the Fund”). Moneys in the Fund are distributed to localities on a monthly basis after payment (1) to the Department for the direct costs of administering the communications taxes; (2) to the Virginia Department for the Deaf and Hard-of-Hearing (“VDDHH”) for the costs of the Virginia Relay Center for the hearing impaired; and (3) to localities for any cable television franchise fees due. Any errors made in any distribution, or adjustments that are otherwise necessary, are made in the distribution for the next month or for subsequent months.
House Bill 568 provided that the percentage share of the net revenue that each locality receives is determined by the Auditor of Public Accounts (“APA”.) Each locality's percentage share is based on the percentage of telecommunications and television cable funds the locality received in Fiscal Year 2006 based on local tax rates adopted on or before January 1, 2006. The formula included local funds from any consumer utility tax on landline and wireless telephone service; E-911 tax on landline telephone service; portion of the local BPOL tax on public service companies exceeding .5% currently billed to customers in some grandfathered localities; cable television franchise fees; local consumer utility tax on cable television; and video programming excise tax on cable television services (“Telecommunications and Television Cable Funds”). Localities were required to report these revenues to the APA by October 1, 2006.
Legislation enacted in the 2010 Session of the General Assembly amended Va. Code § 58.1-662 to change the procedures for a locality to request an adjustment of its percentage share of distribution from the Fund. Beginning July 1, 2010, a locality may request a ruling from the Department adjusting its distribution from the Fund so long as the aggregate redistribution from all other localities does not exceed $100,000. A locality is required to present evidence to the Department that it collected Telecommunications and Television Cable Funds in Fiscal Year 2006 from local tax rates adopted on or before January 1, 2006 before obtaining a ruling from the Department.
Cable Franchise Fees
Pursuant to Va. Code § 15.2-2108.1:1(C), no new or renewed cable franchise entered into on or after January 1, 2007, may include a franchise fee as long as cable services are subject to the Virginia Communications Sales and Use Tax. Cable franchises in effect as of January 1, 2007, remain in full force and effect. However, any requirement in such an existing franchise agreement for payment of a monetary franchise fee based on the gross revenues of the franchisee is fulfilled by the cable operator including a report listing by locality the franchise fees that accrued that month with their monthly Communications Taxes return. Although each franchise fee is reported on an accrual basis, in all other respects the amount of the franchise fee is determined in accordance with the franchise agreement. Localities retain the right to audit cable franchisees and to otherwise enforce franchise agreements.
The Department first pays the accrued franchise fees to localities from the Fund on a monthly basis after deducting its administrative costs and the costs of the Virginia Relay Center, but prior to making other calculations and distributions from the Fund. An amount equal to the cable franchise fee paid to each locality with a cable franchise existing on January 1, 2007, at the rate in existence on January 1, 2007, is subtracted from the amount owed to such locality prior to the distribution of the remaining moneys from the Fund.
Franchise Agreements Entered into On or After January 1, 2007
Virginia Code § 15.2-2108.1:1(C) provides that “no new or renewed cable franchise entered into on or after January 1, 2007, shall include a franchise fee as long as cable services are subject to the Virginia Communications Sales and Use Tax.” Accordingly, as cable services are subject to the Communications Sales and Use Tax, no cable operator may be subject to franchise fees under new or renewed franchise agreements entered into on or after January 1, 2007.
Pre-2007 Franchise Agreements
Virginia Code § 15.2-2108.1:1(C)(1) provides that any requirement in an existing franchise that was in effect as of January 1, 2007, for payment of a monetary franchise fee based on the gross revenues of the franchisee must be fulfilled in the manner specified in Va. Code § 15.2-2108.1:1(C)(2). Virginia Code § 15.2-2108.1:1(C)(2) states:
Each cable operator owing monetary payments for franchise fees, until the expiration of one or more such existing franchises, shall include with its monthly remittance of the Communications Sales and Use Tax a report, by locality, of the amounts due for franchise fees accruing during that month. The Department of Taxation shall, on behalf of the cable operator in the relevant locality, then distribute to each county, city, or town the amount reported by each locality's franchisee(s). Such payments shall reduce the cable operator's franchise fee liability.
Virginia Code § 15.2-2108.1:1(C)(3) specifically states that a “locality's acceptance of any payment under subdivision 2 shall not prejudice any rights of the locality under the applicable cable franchises (i) to audit or demand adjustment of the amounts reported by its franchisee, or (ii) to enforce the provisions of the franchise by any lawful administrative or judicial means.” [Emphasis added.]
Virginia follows the Dillon Rule of strict construction, which provides that “municipal corporations have only those powers expressly granted, those necessarily or fairly implied therefrom, and those that are essential and indispensable.” See Board of Sup'rs of Fairfax County v. Home, 216 Va. 113, 117, 215 S.E.2d 453, 455 (1975). Additionally, the powers of local governments “are fixed by statute and are limited to those conferred expressly or by necessary implication.” See Sup'rs of Nottoway County v. Powell, 95 Va. 635, 635, 29 S.E. 682, 683, (1898).
While Va. Code § 15.2-2108.1:1(C)(3) allows for localities to demand adjustment in the amounts reported by a taxpayer to the Department of Taxation, there is no specific authorization for a locality to demand payment of such amount from a taxpayer. Accordingly, a taxpayer's obligation to pay a monetary franchise fee based on gross revenues is fulfilled with the filing of the Form CT-75B, Virginia Cable Franchise Fee Schedule, with the Form CT-75, Virginia Communications Taxes Return.
Locality Remedy for Disputed Franchise Fees
Revenues in the Fund are distributed pursuant to Va. Code § 58.1-662. Virginia Code § 58.1-662(E) provides: “If errors are made in any distribution, or adjustments are otherwise necessary, the errors shall be corrected and adjustments made in the distribution for the next month or for subsequent months.” As Va. Code § 15.2-2108.1:1 (C)(3) authorizes localities to demand adjustment of the amounts reported by its franchisee, if a locality or taxpayer believes that an adjustment of the amount of the franchisee fee should be made, they should notify the Department and provide the necessary documentation.
If the Department determines that an error has been made or an adjustment to the Fund distribution is necessary, the Department will correct the error and make any adjustments in the distribution for the next month or for subsequent months.
CONCLUSION
I trust this responds to your inquiry. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result. The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Policy Development Division, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
PD/1-5195162331