Were cellular-phone activation fees taxable communications services, and could the provider add a separate audit issue after the appeal deadline?

Subject

Phone equipment fee relieved; later audit issue time-barred

Plain-English summary

Virginia removed communications sales tax from the provider's separately stated phone-linked fees. The fees were charged only when a customer bought a phone from the provider or another retailer, were refunded when the phone was returned, and were not charged when a customer brought a device. Those facts showed the fees were equipment charges rather than charges to connect or activate communications service.

The provider also later challenged average-sales calculations for January-August 2007. That issue was raised nine days after the 90-day appeal period expired, so Virginia could not consider it.

What this means for you

• A fee's label is less important than when it is charged and what the customer receives.
• Document links to equipment purchases, return refunds, and bring-your-own-device treatment.
• Raise every audit issue within the 90-day appeal period.

Citations and references

• Va. Code §§ 58.1-647, 58.1-648 A, and 58.1-1821.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-64

Original ruling text

May 14, 2014

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") in which you seek correction of the communications sales and use tax assessment issued for the period January 2007 through January 2009.

FACTS

The Taxpayer is a cellular telephone service provider. The Taxpayer was assessed tax in the audit on "activation" fees charged by the Taxpayer to its customers. The Taxpayer maintains that the separate activation fee charged to its customers is an equipment charge and is not a fee associated with activating an account. The Taxpayer maintains that the fee is used by the Taxpayer to recoup some of the loss associated with the sale of the phones.

The Taxpayer states that if a customer purchases a phone directly from the Taxpayer, the customer would be charged for the cost of the phone as well as a separate activation fee. The Taxpayer provides that if the customer were to return the phone that was previously purchased from the Taxpayer, the charge for the cost of the phone and the activation fee would be refunded to the customer. The Taxpayer provides that its customers may also purchase phones from a separate retail store. The Taxpayer states that customers who purchase phones from the separate retail store would be charged for the cost of the phone and the activation fee. The Taxpayer states the phone would not be activated at the time of purchase, and the customer would need to contact the Taxpayer to activate service. When a customer uses its own phone to receive cellular phone service from the Taxpayer, the customer is not charged any activation or startup costs. Based on these factors, the Taxpayer requests that the tax assessed on the activation fees be removed from the audit.

DETERMINATION

Activation Fees

In accordance with Va. Code § 58.1-648 A, "there is levied and imposed, in addition to all other taxes and fees of every kind imposed by law, a sales or use tax on the customers of communications services in the amount of 5% of the sales price of each communications service that is sourced to the Commonwealth in accordance with § 58.1-649."

Virginia Code § 58.1-647 defines Communications services 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. The term includes, but is not limited to, (i) the connection, movement, change, or termination of communications services; (ii) detailed billing of communications services; (iii) sale of directory listings in connection with a communications service; (iv) central office and custom calling features; (v) voice mail and other messaging services; and (vi) directory assistance. [Emphasis added.]

Based upon the information provided, the activation fees at issue are not for the activation of communications services as considered in Va. Code § 58.1-647. As such, the fees are not for communications services and are not subject to the communications sales tax. The fees are only charged when a phone is purchased by a customer from the Taxpayer or from a separate retail store. Additionally, the fees are refunded when a customer returns the phone to the Taxpayer in an acceptable condition. Furthermore, a customer is not charged the fee when the customer uses its own phone to obtain cellular phone services from the Taxpayer.

Based on the foregoing, the tax associated with these fees will be removed from the audit. The audit will be returned to the appropriate field audit staff for the revision. A revised bill, with interest accrued to date, will be mailed to the Taxpayer once the revisions are complete. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill. Please remit payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203.

Average Sales Calculations

In correspondence sent by the Taxpayer after its initial appeal was filed with the Department, the Taxpayer indicated that it would like to appeal the calculations of average sales for January 2007 through August 2007.

Virginia Code § 58.1-1821 states, in pertinent part that "Any person assessed with any tax administered by the Department of Taxation may, within ninety days from the date of such assessment, apply for relief to the Tax Commissioner." [Emphasis added.]

The date of assessment for the audit at issue is October 21, 2013. The statute of limitations to appeal issues associated with the assessment expired on January 20, 2014 (the 90 th day after the date of the assessment fell on Sunday, January 19, 2014). The Taxpayer's letter regarding the average sales calculations was postmarked January 30, 2014, nine days after the 90-day period for filing an appeal expired. Accordingly, the Taxpayer is barred by the statute of limitations from appealing this issue.

The Code of Virginia sections 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/1-5601611774.P