Did a pass-through telecommunications company owe Virginia's 2008 minimum tax after Virginia Cellular?

Plain-English summary

Virginia denied the single-member LLC's refund and held that it owed the telecommunications minimum tax for 2008. The company relied on Virginia Cellular, where the Virginia Supreme Court found that the earlier statute did not support applying the tax to all pass-through telecommunications entities.

The General Assembly responded in 2009 with House Bill 2378, expressly imposing the tax on pass-through entities and making the change declarative of existing law effective September 1, 2004. Because that retroactive period included 2008, Virginia found the taxpayer subject to the tax.

The ruling also rejected the due-process challenge. It found a legitimate legislative purpose—taxing all telecommunications companies regardless of entity form—and a rational means of carrying it out. The meaningful-backward-looking-relief cases did not require a refund because the legislature had retroactively corrected the statute for the period at issue rather than leaving an invalid discriminatory scheme in place.

What this means for you

• Court decisions and prompt retroactive legislation must be read together for historical refund claims.
• Pass-through form did not remove the 2008 telecommunications minimum tax under the applied 2009 law.
• A timely protective claim can still fail on the merits.
• Retroactive-tax challenges depend on legislative purpose, rationality, timing, and the exact period covered.

Common questions

Q: Didn't Virginia Cellular invalidate the tax on pass-through companies?
A: It found the prior statute insufficient, but the General Assembly then enacted a retroactive correction covering 2008.

Q: Why did Virginia reject the due-process argument?
A: The ruling found a legitimate purpose and rational basis for equal treatment across telecommunications entity forms.

Q: Was meaningful backward-looking relief required?
A: Not under the ruling's analysis because the retroactive statute covered the claim period and did not preserve the discriminatory scheme discussed in the cited retiree cases.

Q: What happened to the refund claim?
A: It was denied.

Citations and references

• Va. Code §§ 58.1-1824, 58.1-1821, 58.1-1822, and 58.1-400.1 A.
• 23 VAC 10-120-89; 2009 Va. Acts ch. 37 (House Bill 2378).
• Virginia Cellular, LLC v. Virginia Department of Taxation, 276 Va. 486, 666 S.E.2d 374 (2008).
• Colonial Pipeline Co. v. Commonwealth, 206 Va. 517, 145 S.E.2d 227 (1965); United States v. Carlton, 512 U.S. 26 (1994); Harper v. Virginia Department of Taxation, 509 U.S. 86 (1993).

Subject

Taxpayer, subject to the telecommunications minimum tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-158

Original ruling text

August 8, 2013

Re: § 58.1-1824 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you submit a protective claim for refund for Virginia telecommunications minimum tax paid by * (the "Taxpayer") for the taxable year ended December 31, 2008. I apologize for the delay in responding to your request.

FACTS

In September 2008, the Virginia Supreme Court's decision in Virginia Cellular v. Virginia Department of Taxation , 276 Va. 486, 666 S.E.2d 374 (2008) overturned the Department's regulation, which reconciled the Va. Code § 58.1-400.1 with the fact that non-corporate telecommunications companies were not liable for the corporate income tax. In 2009, House Bill 2378 (Chapter 37, Acts of Assembly ) was enacted to impose the telecommunications minimum tax on pass-through entities. The provisions of the bill were made declarative of existing law and effective September 1, 2004.

The Taxpayer, a single member LLC providing telephone services in Virginia, filed a 2008 Virginia corporate income tax return reporting a net operating loss and paid telecommunications minimum tax on its gross receipts as certified by the State Corporation Commission (SCC). In October 2012, The Taxpayer timely filed a claim for a refund of telecommunications minimum tax asserting that the Virginia Cellular decision prohibits the Department from imposing the telecommunications tax on pass-through entities. The Taxpayer also argues that the retroactive provision of House Bill 2378 is a violation of its right to due process. In addition, The Taxpayer contends the legislation violates the United States Supreme Court's standard of meaningful backward looking relief.

DETERMINATION

Protective Claim

Pursuant to the authority granted the Tax Commissioner under Va. Code § 58.1­1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1-1821. As permitted by statute, the Taxpayer's request has been treated as an appeal under Va. Code § 58.1-1821.

Telecommunications Minimum Tax

Virginia Code § 58.1-400.1 A provides that a telecommunications company is subject to a minimum tax, in lieu of the income tax, based on its gross receipts for the calendar year that ends during the taxable year if the corporate income tax is less than the minimum tax. The Telecommunications Tax was enacted in 1988 in order to transition telecommunications companies from a gross receipts tax imposed by the SCC to the income tax.

At the time, only a few telecommunications companies operated as pass-through entities. Because of potential issues with the imposition of the tax on pass-through entities, the Department developed and issued Title 23 of Virginia Administrative Code (VAC) 10-120-89 to explain that pass-through entities are to be treated as if they were subject to corporate income tax for purposes of computing the Telecommunications Tax. See Public Document (P.D.) 06-61 (2/6/2006).

In Virginia Cellular , the Virginia Supreme Court found the statute did not support the minimum tax be imposed on all telecommunications companies in spite of a regulation, which had been in effect and enforced for 20 years. In response to the decision, the General Assembly enacted House Bill 2378. Because House Bill 2378 was effective for the 2008 taxable year, the Taxpayer was subject to the telecommunications minimum tax.

Due Process

The Taxpayer asserts it has been deprived of its right to seek a refund of erroneously paid telecommunications minimum tax for the 2008 taxable year when the General Assembly enacted House Bill 2378, thereby violating the Due Process Clause. The Virginia Supreme Court, however, has acknowledged that the General Assembly has the power to make legislation effective retroactively. See Colonial Pipeline v. Commonwealth of Virginia 206 Va. 517, 145 S.E.2d 227(1965). In such cases, the retroactive enactment of a statute will overcome a Due Process challenge if it supports a legitimate legislative purpose and is founded by a rational basis. See also Welch v.Henry , 305 U.S. 134, 59 S.Ct. 12(1938) and United States v. Carlton , 512 U.S. 26, 114 S.Ct. 2018 (1994).

In Virginia Cellular , the Virginia Supreme Court found the statute did not support the General Assembly's intention that the minimum tax be imposed on all telecommunications companies. In response to the decision, the General Assembly acted in the next session to codify the Virginia's policy under Title 23 VAC 10-120-89. In doing so, it declared its intent that telecommunications companies could not escape minimum taxation simply by changing their form and confirmed the application of the telecommunications minimum tax as it had been assessed by the Department and paid by taxpayers, including the Taxpayer. As such, the retroactive provisions of House Bill 2378 supported a legitimate legislative purpose (to impose the telecommunications minimum tax on all telecommunication companies) furthered by rational means (to prevent some telecommunications companies to escape taxation simply because they were not organized as corporations subject to income tax).

Meaningful Backward Looking Relief

The Taxpayer also asserts the General Assembly disregarded clear instructions from the United States Supreme Court regarding matters of illegally collected taxes. It cites Harper v. Virginia Dept. of Taxation , 509 U.S. 86, 113 S.Ct. 2510 (1993), in which the United States Supreme Court required Virginia to provide relief to federal retirees for income taxes paid on retirement income.

In Davis v. Michigan Dept. of Treasury , 489 U.S. 803, 109 S.Ct. 1500 (1989), the United States Supreme Court had invalidated Michigan's statute of taxing retirement benefits paid by the Federal Government while exempting retirement benefits paid by the state or its political subdivisions. While the Virginia Supreme Court acquiesced to the Davis decision, it held that the ruling did not apply retroactively and Virginia was not required to issue refunds to federal retirees. See Harper v. Virginia Dept. of Taxation , 241 Va. 232, 401 S.E.2d 868 (1991).

In 1989, the General Assembly enacted legislation to repeal the subtraction for Virginia state and local government retirement benefits, including benefits paid by the Virginia Supplemental Retirement System. See Chapter 3, Acts of Assembly - Special Session No. 2. This legislation was not made retroactive by the General Assembly. As such, when the United States Supreme Court ordered the Commonwealth to provide meaningful relief, it was acting on and invalidated the statute prior to the change enacted by the General Assembly.

In Davis , the United States Supreme Court struck down Michigan's tax scheme because it favored retired state and local government employees over retired federal employees. Virginia showed no such favoritism in imposing the telecommunications minimum tax. It was imposed on both corporations and pass-through entities.

After Virginia Cellular decision, the General Assembly immediately acted to correct the statutory error retroactively. As indicated above, the General Assembly has authority to enact retroactive tax legislation if certain conditions are met. Because the retroactive enactment clause of HB 2378 covers the period for which the Taxpayer has filed its protective claim, the meaningful backward looking relief rules do not apply.

CONCLUSION

Based on the facts in this case and applicable law, the Taxpayer, a telecommunications company, was subject to the telecommunications minimum tax for the 2008 taxable year. Accordingly, the Taxpayer's protective claim for refund is denied pursuant to Va. Code § 58.1-1822.

The Code of Virginia sections and regulation 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 regarding this ruling, you may contact * in

the Office of Tax Policy, Appeals and Rulings, at *.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5221308750.o