Tax Type
Retail Sales and Use Tax
Description
Data communications service; Broadcasting exemption does not apply
Topic
Taxability of Persons and Transactions
Date Issued
08-26-1988
August 26, 1988
Re: Request for Ruling: Sales and Use Tax
Dear******************
This will reply to your letter of August 5, 1988, in which you request a ruling on the application of the sales and use tax to equipment used in providing data communication services.
FACTS
*************** (Taxpayer) is engaged in the provision of data communications services. Typically, the taxpayer provides credit authorization services to merchants, either directly or through banks or other providers. This service enables merchants to determine the credit worthiness of credit card customers.
The taxpayer furnishes all equipment necessary for the provision of the service. This equipment is leased to merchants, banks, or others on a monthly basis. The taxpayer contends that this equipment is exempt from the sales and use tax and local business, professional, and occupational license taxes as equipment used in broadcasting.
RULING
The "true object" desired by the taxpayer's customers is the receipt of credit information rather than the rental of equipment used in providing credit authorization services. As such, the taxpayer is deemed to provide a nontaxable service to its customers. This concept originates from the opinion of the Circuit Court of the City of Charlottesville in Charlottesville Newspapers, Inc. v. Commonwealth (1979), in which charges for certain equipment furnished in connection with the provision of news wire services were deemed nontaxable. Also, the taxpayer's activities can be directly analogized to those of radio common carriers (see enclosed ruling of the Tax Commissioner dated May 12, 1986) and persons who transmit background music to subscribers (see enclosed Virginia Regulation 630-10-72.1).
As noted in the above referenced ruling and regulation, equipment rental charges made in connection with and purely incidental to the furnishing of a nontaxable service are not subject to the tax. Rather, the provider of the service is himself subject to the tax on all equipment used in providing the service to his customers. However, the taxpayer contends that the tax is not applicable in this instance as it is engaged in broadcasting.
§58.1-608.12 of the Code of Virginia exempts from the sales and use tax:
Broadcasting equipment and parts and accessories thereto and towers used...by commercial radio and television companies, cable television systems, or concerns which are under the regulation and supervision of the Federal Communications Commission...
Interpreting the above exemption, the Virginia Supreme Court in Winchester TV Cable v. State Tax Commissioner, 216 Va. 286, 217 S.E.2d 619 (1973), defined the term "broadcasting" as "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." Further, the court defined "broadcast" as "made public by means of radio or television." In addition, the court held in WTAR Radio-TV v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977), that the term "broadcasting" for purposes of the Federal Communications Act means "the dissemination of radio communication intended to be received by the public, directly."
The taxpayer does not disseminate signals directly to the public, but only to customers who have contracted to receive its credit authorization service. As such, the broadcasting exemption does not apply. This can be directly analogized to persons who transmit background music to subscribers, who are not deemed to be broadcasters under VR 630-10-72.1.
As the exemption does not apply to the taxpayer, it will be subject to the sales and use tax on all equipment used or consumed in Virginia in the provision of credit authorization services to customers. In addition, the taxpayer will be subject to the tax on any equipment purchased or temporarily stored in Virginia for future use in other states.
This ruling does not address the applicability of local business, professional, and occupational license taxes as these taxes are administered by Virginia's cities, counties, and towns. Any questions as to these taxes should be addressed to the Commissioner of the Revenue or Director of Finance of any locality in which the taxpayer's customers will be located.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner