Did Virginia order a county to refund BPOL tax on internet-access receipts under federal preemption?

Plain-English summary

Virginia declined to order a county to refund BPOL tax on internet-access receipts. The Department had previously concluded that the Internet Tax Freedom Act applied to BPOL tax, and it noted that the Virginia Supreme Court's Dulles Duty Free decision supported looking at a tax's operation and effect rather than only its state-law label.

The remaining dispute, however, was whether the county's BPOL tax qualified for federal grandfather protection. Following P.D. 18-24, the Department declined to resolve that dispute through an order for correction. The county's refund denial therefore stood.

Common questions

Did the ruling hold that all BPOL tax on internet access is lawful? No. It left the grandfather-status issue unresolved.

Why discuss Dulles Duty Free? The decision undermined the county's argument that calling BPOL a privilege tax necessarily prevented federal preemption analysis.

Citations and references

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

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-97

Original ruling text

May 21, 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 to the *** (the “County”) 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 requested a refund of BPOL taxes paid for the 2013, 2014 and 2015 tax years, contending that the federal Internet Tax Freedom Act (the “Act”), codified at Title 47 U.S.C. § 151 note, preempted imposition of the County's BPOL tax on gross receipts attributable to internet access services. The County issued a final determination denying the Taxpayer's refund request. The Taxpayer filed an appeal with the Department, repeating its contention that the Act preempts imposition of the County's BPOL tax on gross receipts attributable to internet access services.

ANALYSIS

The County contends that the Act does not apply to the BPOL tax. In addition, even if the Act applies to the BPOL tax generally, the County argues that its BPOL tax was grandfathered. The Taxpayer presents arguments to refute these contentions and asserts that the Act precludes imposition of the BPOL tax on gross receipts attributable to internet access services.

In Public Document (P.D.) 17-94 (6/9/2017), the Department concluded that the Act applied to the BPOL tax. The County argues that the BPOL tax is a fee for the privilege of doing business within a locality and thus is not a tax on internet access, as defined by the Act. The County's final determination relied heavily on the circuit court's opinion in Dulles Duty Free, LLC v. County of Loudoun , Case No. 90613 (April 26, 2016), in part that the BPOL tax is not identified to any particular good or service.

Since the publication of P.D. 17-94, the Supreme Court of Virginia reversed the circuit court and 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 Act applied to the BPOL tax, 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.

In addition, 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 County regarding whether the County 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 County's assessment stands.

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/1507.M