Did equipment used by an Internet-service parent and subsidiary qualify for Virginia's ISP sales-tax exemption?

Subject

Affiliated Internet providers qualified for the ISP equipment exemption

Plain-English summary

Virginia abated two use-tax assessments because the affiliated companies qualified for the Internet-service-provider equipment exemption. The parent held equipment and processed Internet access and email for wholly owned subsidiaries that billed end customers in multiple countries; the subsidiary also made untaxed Internet-service purchases.

The exemption required more than Internet connectivity. The provider had to sell end users a package including access to proprietary and other content, email, and the Internet. Virginia treated privately developed, exclusively owned visual or audible web content as proprietary content. It did not treat underlying email, anti-spam, or antivirus code by itself as that content.

The taxpayers documented owned content presented through web pages and screens for email and hosting, instant messaging, directories, games, chat rooms, news, and portals. That satisfied the proprietary-content element for the audit period.

The parent also satisfied the end-user requirement even though subsidiaries billed the customers. The wholly owned group had a closely integrated commercial purpose and provided Internet access in a retail manner through those affiliates. Both contested assessments were abated in full.

What this means for you

• The historical ISP exemption required a package of Internet access, email, and qualifying content.
• Proprietary content meant customer-facing material developed, owned, and controlled by the provider, not merely software code.
• Affiliated entities could collectively serve end users when the group functioned as an integrated retail provider.
• Screenshots, archived pages, ownership records, and service descriptions helped prove qualification.

Common questions

Did anti-spam or email software code count as proprietary content?

Not by itself. Virginia focused on owned content displayed or delivered to subscribers.

Did serving customers through subsidiaries defeat the exemption?

No. The integrated wholly owned group provided access to end users in a retail manner.

What happened to the assessments?

Both contested assessments were abated in full.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-609.6(2).
• 47 U.S.C. § 573, as cited in the ruling.
• Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-12

Original ruling text

February 9, 2010

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 assessments issued to * (the "Parent") and *** ("Subsidiary") (collectively the "Taxpayers"), as a result of an audit for the periods November 2000 through September 2004 and September 2001 through September 2004. I apologize for the delay in responding to your letter.

FACTS

The Parent was established to hold investments in various companies that provide Internet services in various countries. The Department audited the Parent and found untaxed assets used in the provision of Internet services. An audit of the Subsidiary found untaxed expense purchases used in the provision of Internet services.

The Taxpayers contest the consumer use tax assessed on all items for use in the provision of Internet services. The Taxpayers maintain that these items qualify for the Internet service provider ('ISP') exemption granted by Va. Code § 58.1-609.6(2). The Taxpayers maintain that their Internet access service offerings include e-mail and proprietary and other content that satisfy the minimum criteria set out by the exemption. According to the Taxpayers, they also provide web hosting content services, electronic instant messaging using internally developed and proprietary software, e-mail with proprietary features (anti-spam and anti-virus), and other serviced as part of a monthly package. In addition, the customers served by the Virginia facility were provided with access to content from a worldwide network.

The Taxpayers believe they have met the requirements for proprietary content via their proprietary interactive services (such as game, chat-room, and web portal) and proprietary information (via directory services, news aggregation and presentation services, and other proprietary interactive content sites). For example, the Subsidiary developed a public interest web site that preserves expressions from many individuals involving a historical event. The Taxpayers have provided snap shots of their web pages over the last ten or more years from a website that archives web pages.

During the period of audit, all domestic and foreign subsidiaries of the Parent were wholly owned. The Parent held equipment in the Subsidiary and provided Internet processing (access to the Internet and e-mail services) to subsidiaries in other countries that billed the end customer. The auditor determined the Parent to be a wholesale ISP.

The two non-contested audit assessments have been paid. The two contested assessments remain outstanding.

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, ... 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.

Virginia Code § 58.1-602 was amended effective July 1, 1999 to define many words and phrases applicable to the above exemption, as follows:

"Video programmer" is defined to mean "a person or entity that provides video programming to end-user subscribers;"

"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;"

"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...;"

"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;" and

"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."

The Virginia courts have consistently required strict interpretation of sales and use tax exemptions. That is, where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Community Motor Bus , 214 Va. 155, 198 S.E.2d 619 (1973).

Under the doctrine of strict construction, I find that this exemption is limited to certain tangible personal property used or to be used by ISPs that provide Internet access to end-user subscribers. The exemption is further limited to those ISPs that, in addition to Internet access, provide access to a package of specific services including proprietary information and electronic mail sold to end-users.

Proprietary Content

In the absence of a statutory or regulatory definition of proprietary content, I would generally view proprietary content as content privately developed and exclusively owned and controlled by an ISP and available to the subscriber via web pages or screen shots that display programmed content in the form of graphics, video, images, sound, data, symbols, text, and similar web content. This proprietary content could be seen or heard in on-line games, videos and pictures, musical and other sound recordings and news articles and other writings available only to end user subscribers. When such content is not exclusively owned and controlled by the ISP, such content would constitute 'other' content if made available only to end user subscribers.

Accordingly, I would not view the underlying programming code of e-mail programs or the coding for anti-spam and anti-virus features thereof, as proprietary content as envisioned by the ISP exemption. By contrast, I would view any web pages, screen shots, or portions thereof containing graphics, video, images, sound, data, symbols, or text developed and owned by the Taxpayers for e-mail and web hosting content services, electronic instant messaging, directory services, gaming, chat-rooms, news, or web portals as proprietary content. When such content is not developed and owned by the Taxpayers, the content is deemed other content and not proprietary content of the Taxpayers.

Based on the information and documentation presented, it appears that the Taxpayers developed and owned proprietary content and provided its subscribers with access to such content during the audit period.

End-User Subscribers

The facts presented indicate the Parent provided Internet access and electronic mail to end-user subscribers during the audit period via its wholly owned subsidiaries. Because of the closely integrated commercial purpose of the Parent's group of affiliated corporations, this business structure provided Internet access in a retail manner. For this reason, the Taxpayers satisfy the end-user subscriber criteria of the exemption for the audit period.

CONCLUSION

Based on the foregoing, I find that the Taxpayers' Internet purchases are entitled to the ISP exemption provided in Va. Code § 58.1-609.6(2). As such, the two contested assessments (Bill numbers * and ***) will be abated in full.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library 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,

Janie E. Bowen

Tax Commissioner

AR/1-672093437.R