Did Virginia order a city to refund BPOL tax on internet-access receipts under the federal Internet Tax Freedom Act?

Plain-English summary

Virginia upheld a city's denial of BPOL-tax refunds for gross receipts attributed to internet-access services, but not because it found the federal Internet Tax Freedom Act irrelevant. The Department repeated its view that the federal act applied to BPOL and that BPOL, a tax on gross receipts without deductions, was not a protected tax on net income.

The unresolved question was whether the city's BPOL tax qualified for the federal act's grandfather protection. Following its existing approach, the Department declined to order a correction based on a dispute over whether a locality had proved grandfather status. The refund denial therefore stood.

Common questions

Did the Department say BPOL was outside the Internet Tax Freedom Act? No.

Did it treat BPOL as a net-income tax? No. It described BPOL as a broad gross-receipts tax.

Why were the refunds still denied? The Department declined to resolve the city's claimed grandfather protection and upheld the local determination.

Citations and references

• Va. Code §§ 58.1-3703.1 and 58.1-3700.1
• Va. Code § 58.1-400 et seq.
• 47 U.S.C. § 151 note, Internet Tax Freedom Act
• Dulles Duty Free, LLC v. County of Loudoun, 294 Va. 9 (2017)
• P.D. 17-94 (June 9, 2017) and P.D. 18-24 (Mar. 14, 2018)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-150

Original ruling text

August 3, 2018

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business, Professional and Occupational License Tax

Dear *:

This final state determination is issued upon the application for correction filed by you on behalf of * (the “Taxpayer”) with the Department of Taxation. You appeal the denial of refunds of Business, Professional and Occupational License (BPOL) tax paid by the Taxpayer to the *** (the “City”) for the 2013 through 2015 tax years.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e. , the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.

FACTS

The Taxpayer claimed refunds of BPOL tax paid to the City for the 2013, 2014 and 2015 tax years on the basis that gross receipts attributable to internet access services were not subject to BPOL tax under the federal Internet Tax Freedom Act (the “Act”) codified at Title 47 U.S.C. § 151 note. The City issued a final determination denying the refund claim. The Taxpayer filed an appeal with the Department, repeating its contention that the Act preempts imposition of the City’s BPOL tax on gross receipts attributable to internet access services.

The City contends that the Act was only intended to apply to transactional taxes on internet access services, not taxes of general application such as the BPOL tax. Alternatively, the City argues that the BPOL tax should be considered an income tax for purposes of the exemption from the Act for net income, capital stock, net worth or property value. In addition, even if the Act applies to the BPOL tax generally, the City argues that its BPOL tax was grandfathered. The Taxpayer refutes each of these contentions and asserts that the Act precludes imposition of the BPOL tax on gross receipts attributable to internet access services.

DETERMINATION

After extensive analysis in Public Document (P.D.) 17-94 (6/9/2017), the Department concluded that the Act applied to the BPOL tax. That determination addresses the City’s arguments that the Act was only intended to apply to transactional taxes directly imposed on internet access services or alternatively, that the BPOL tax should be considered an income tax for purposes of the exemption from the Act for taxes on net income, capital stock, net worth or property value under 47 U.S.C. § 151 note § 1105(10)(B) .

In addition, since the publication of P.D. 17-94, the Supreme Court of Virginia ruled in Dulles Duty Free, LLC vs. County of Loudoun , 294 Va. 9 (2017), that the Import-Export Clause of the United States Constitution prevented the county from imposing BPOL tax on the taxpayer’s export goods in transit. The Court rejected the county’s argument, at least in the context of the Import-Export Clause, that the BPOL tax was a tax on the privilege of doing business and was not the same as a tax on goods. See id . at 21-22. The Court observed that the characterization of a tax for state law purposes does not control whether a tax violates the Import-Export Clause and concluded that the BPOL tax was “in its ‘operation and effect’ a direct tax on export goods in transit.” See id . at 22. Although the Department analyzed other reasons in P.D. 17-94 why the ITFA should not apply merely to transactional taxes on the service itself, Dulles Duty Free suggests that courts may look more to the operation and effect of a tax rather than its state law characterization in determining whether it is preempted by a federal law.

Further, even if the BPOL tax has been considered to be an income tax in certain contexts, in the Department’s opinion the BPOL tax, as a tax generally on “the whole, entire, total receipts, without deduction” is not a tax on “net income.” See Virginia Code § 58.1-3700.1 . As a broad-based gross receipts tax, the BPOL tax is unlike Virginia’s net corporate income tax generally applicable to businesses under Virginia Code § 58.1-400 et seq .

Finally, the Department has declined to issue any orders for correction on the basis that a Virginia locality failed to prove it qualified for grandfather protection under the Act. See P.D. 18-24 (3/14/2018).

DETERMINATION

Because the remaining issue involves a dispute between the Taxpayer and the City regarding whether the City was grandfathered under the Act, the Department declines to issue an order for correction in this case pursuant to P.D. 18-24. Therefore, the City’s denial of the refunds is upheld.

If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1699.M