Were Internet-delivered television and movie subscriptions subject to Virginia communications tax?

Plain-English summary

Virginia ruled that an Internet service allowing customers to search for, select, and view television and movie content did not sell taxable communications services. The content was treated as electronically delivered digital products expressly excluded from the communications sales and use tax.

The Department also rejected the part of P.D. 08-64 that distinguished recurring payments from one-time fees for electronically delivered digital content. The ruling's classification did not turn on whether the customer paid a recurring charge or a one-time fee.

For November 2010 through August 2011, the provider had filed returns and paid the communications tax, penalty, and interest from its own funds. Virginia authorized a refund of those amounts plus accrued refund interest without requiring proof that customers had first been reimbursed.

That refund detail mattered. The ruling said proof of customer refunds would have been required if the provider had collected the tax from customers. For September through December 2011, the Department instead abated the assessed tax and interest in full.

What this means for you

• Internet delivery of audiovisual content was not itself a taxable communications service under this ruling.
• Recurring pricing did not remove the electronically delivered digital-product exclusion.
• Track whether a disputed tax was paid from company funds or collected from customers.
• A provider seeking a refund of customer-collected tax must first prove that it refunded the customers.

Common questions

Q: Was the television and movie content taxable?
A: No. Virginia classified it as electronically delivered digital products, not communications services.

Q: Did subscription pricing change the result?
A: No. The ruling overturned the earlier recurring-versus-one-time distinction in P.D. 08-64.

Q: Why was customer-refund proof unnecessary here?
A: The provider had paid the tax from its own funds rather than collecting it from customers.

Q: What happened to the later assessment?
A: The September-December 2011 assessment of tax and interest was abated in full.

Citations and references

• Va. Code §§ 58.1-647, 58.1-648 A and C, and 58.1-1821.
• Virginia Public Document 08-64 (May 19, 2008), partially overturned for recurring-charge treatment.

Subject

Taxpayer provides "digital product, delivered electronically" to its customers that are excluded from the communications tax by statute.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-17

Original ruling text

February 5, 2013

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

Dear *:

This is in response to the letters submitted on behalf of * (the "Taxpayer"), in which you seek correction of the communications sales and use tax assessments issued for the period November 2010 through August 2011 and for the audit period September 2011 through December 2011. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer provides an Internet-based service to its customers, which allows its customers to search for, select and view television and movie content (the "content") through the Taxpayer's website. The Taxpayer contends that the service it provides is not subject to the communications sales and use tax (the "communications tax") because it does not constitute a communications service. The Taxpayer further maintains that it provides "digital product, delivered electronically" to its customers that are expressly excluded from the communications tax by statute. The Taxpayer also maintains that the ruling rendered in Public Document (P.D.) 08-64 (5/19/08) provides no basis to assess tax on the sale of the content to its customers.

DETERMINATION

Application of the Communications Tax

Virginia Code § 58.1-648 A imposes the five percent communications sales and use tax on the customers of communications services providers. Virginia Code § 58.1­647 defines communications services, in pertinent part, as:

The electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including cable services, to a point or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for the transmission or conveyance.

Virginia Code § 58.1-648 C provides, in pertinent part, that the communications services on which the communications tax is levied shall not include "digital products delivered electronically, such as software, downloaded music, ring tones and reading materials."

In P.D. 08-64, the taxpayer requested a ruling regarding the application of the communications sales tax to sales of audio-visual content ("content services") transferred to its customers via cellular telephones. The content services included news, songs, ring tones, sports live video, sports scores, astrology, stock information, recipes, travelogue, short stories, exam results, reality shows and humorous content. The customer would be charged on a per minute basis for listening to or viewing the content services. There would also be an additional fixed fee charge to download the content services for future use and reuse. The content services would be paid for on either a prepaid or post paid basis. It was ruled that digital products delivered electronically do not include any products that require continued payments from the purchaser or products that are without the right of permanent use granted by the seller. It was further ruled that content services downloaded by a consumer for future use and reuse constitute digital property delivered electronically and would not be subject to the communications sales tax.

Based upon the information provided, sales of the content at issue to the Taxpayer's customers are deemed digital products that are downloaded electronically to the Taxpayer's customers. The provision of the content to the Taxpayer's customers does not constitute a sale of communications services. In accordance with the aforementioned authorities, the sales at issue are not subject to the communications sales tax.

For the purpose of applying the communications sales tax, this determination serves to overturn the portion of P.D. 08-64 that makes a distinction between digital products that are downloaded electronically and charged to customers on a monthly recurring basis and those digital products that are downloaded electronically and customers are charged a one-time fee.

Tax Paid / Assessment

For the periods November 2010 through August 2011, the Taxpayer filed communications tax returns and remitted payment of the tax from its own funds to the Department. The Taxpayer was assessed penalty and interest for these periods, and likewise remitted payment to the Department. The Taxpayer requests a refund of the tax, penalty and interest paid to the Department. In accordance with this determination letter, the Taxpayer will receive a refund of the tax, penalty and interest paid, plus refund interest accrued to date. In this instance, the refund is authorized to the Taxpayer, without the Taxpayer having to show proof of refunding its customers because the Taxpayer remitted the tax from its own funds. Had the tax been collected from the Taxpayer's customers, the Taxpayer would have been required to show proof that the tax had been refunded to its customers before a refund from the Department would have been authorized.

For the period September 2011 through December 2011, the Taxpayer was assessed tax and interest by the Department. In accordance with this determination, the assessment for this period is abated in full.

The Code of Virginia sections and public document 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 response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5076395045.P

Related Documents

08-64