Will the Department order a BPOL refund for internet-access receipts under the Internet Tax Freedom Act when the locality claims it was grandfathered?

Plain-English summary

A taxpayer sought refunds of BPOL tax paid to a city for 2013-2015 on gross receipts from internet access services, arguing the federal Internet Tax Freedom Act (the "Act," 47 U.S.C. § 151 note) preempts the tax. The city denied the refund, saying the appeal violated a prior settlement agreement and that its BPOL tax was grandfathered from the Act. The taxpayer appealed to the Department.

The Department upheld the city's denial.

• The Act does apply to BPOL -- generally. In P.D. 17-94, the Department concluded after extensive analysis that the Internet Tax Freedom Act applies to the BPOL tax.
• But grandfather status is the locality's fight. The city argued its BPOL tax was grandfathered from the Act. The Department has declined to order corrections on the basis that a Virginia locality failed to prove it qualifies for grandfather protection (P.D. 18-24).
• So no order for correction. Because the remaining issue was a dispute between the taxpayer and the city over grandfather status, the Department declined to issue an order for correction, and the refund denial stands. The Department also declined to opine on the effect of any prior settlement agreement.
• Burden matters. On a BPOL appeal, the assessment is prima facie correct (Va. Code § 58.1-3703.1), so it stands unless the taxpayer proves it wrong.

What this means for you

"ITFA applies to BPOL" is not the end of the analysis. Even though the Act reaches the BPOL tax, a locality may still claim its tax was grandfathered -- and the Department won't resolve that grandfather dispute for you.

Grandfather fights go elsewhere. Where the real question is whether a specific locality qualified for grandfather protection, expect the Department to decline an order for correction, leaving the dispute between you and the locality (and potentially the courts).

Watch settlement agreements. The Department declined to address how a prior settlement affected the city's ability to tax these receipts -- such agreements can independently constrain a refund claim.

Common questions

Q: Didn't Virginia say the Internet Tax Freedom Act applies to BPOL?

A: Yes, in P.D. 17-94. But that general conclusion doesn't override a locality's separate claim that its tax was grandfathered from the Act.

Q: Why wouldn't the Department just order the refund?

A: Because the unresolved issue was whether the city was grandfathered -- a dispute the Department declines to decide (P.D. 18-24) -- so it would not issue an order for correction.

Q: What about the settlement agreement between the taxpayer and city?

A: The Department expressly declined to express any opinion on the effect of a prior settlement agreement.

Citations and references

• Va. Code § 58.1-3703.1 -- Department authority over BPOL appeals; a BPOL assessment is prima facie correct
• Title 47 U.S.C. § 151 note -- the federal Internet Tax Freedom Act
• P.D. 17-94 (6/9/2017) -- the Department concluded the Act applies to the BPOL tax
• P.D. 18-24 (3/14/2018) -- the Department declines to order corrections based on a locality's unproven grandfather protection

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-206

Original ruling text

December 10, 2018

Re: Appeal of Final Local Determination

Taxpayer: *

Locality Assessing Tax: *

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 local determination denying the refund claim. The City concluded that the Taxpayer’s appeal violated the terms of a prior settlement agreement between the City and the Taxpayer and that the City’s BPOL tax was grandfathered from the Act’s application. 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.

ANALYSIS

After extensive analysis in Public Document (P.D.) 17-94 (6/9/2017), the Department concluded that the Act applied to the BPOL tax. The City contends that even if the Act applies to the BPOL tax generally, its BPOL tax was grandfathered from the Act’s application. 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. Therefore, the City’s denial of the refunds is upheld. The Department declines to express an opinion concerning what effect, if any, any prior settlement agreement had on the City’s ability to tax the Taxpayer’s gross receipts from internet access services.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1865.M