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Taxing ASPs as Telecommunications?

author photo of Carolynn Iafrate Kranz

The Virginia Department of Taxation has recently issued Ruling of the Commissioner No. 13-182 (10/18/2013) holding that an out-of-state application service provider (“ASP”) providing cloud based and hosted phone and other services that support voice processing and routing, video processing, storage and transmission, voice message, presence applications for instant messaging and audio conferencing, web conferencing and wireless/mobile communications does not need to collect and remit sales taxes on sales to Virginia customers because no tangible personal property is transferred to the customer.  The bad news?  These same services may be subject to the communications sales and use tax if the taxpayer has nexus with Virginia.

The ASP’s customers are charged a monthly fee that covers charges for accessing the ASP’s hardware, software and services and for the provision of storage, rack space, power and cooling, monitoring and management and most modifications and upgrades needed to provide the ASP’s services.  The customer does not download or otherwise possess the software that is hosted by the ASP.  Nor does the ASP provide telecommunication, Internet or network connections necessary for the customer to utilize its services.

Since 2007, Virginia has imposed a communications sales and use tax on communications services, which are defined under Va. Code Ann. §58.1-647 as follows:

“Communications services” means 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.

In this case, it is unclear from the facts stated, the extent to which the ASP provides “the electronic transmission, conveyance, or routing of voice, data, audio, video or any other information or signals.”  As noted in the ruling the ASP does not provide “telecommunication, Internet or network connections that are necessary for its customer to utilize its services.”  Nevertheless, the Department stated that “it appears that the Taxpayer provides taxable communications services to customers in Virginia when it electronically routes voice, data, or audio signals and provides voicemail services.”

This is the first instance in Virginia where we have seen the Department rule that an ASP may be subject to communications sales and use tax.  Note, however, that the ASP services described in this ruling appear to be VOIP type services, a service model expressly intended to be captured by Virginia’s communications sales and use tax - emphasizing the fact that one should not look to the label of the agreement when making taxability decisions, but should look closely to the underlying services being performed.   While we commonly see the term ASP used to refer to remotely accessed software, this term can be broadly used by vendors to cover a variety of internet based services.

However, Virginia’s opinion that its communications sales and use tax applies to this ASP is noteworthy.   This ruling further underlines the continued efforts of states to somehow tax cloud based services under their existing statutory schemes.  We have more commonly seen states attempting to tax the services of an ASP as either the sale of prewritten computer software (e.g., Indiana, Massachusetts, New York, Utah, etc.); or (2) as a as data processing services (e.g., Texas).  However, South Carolina has long taken the position that ASPs are taxable as a telecommunications service – regardless of whether the services are VOIP related.

Virginia’s move to tax the services provided by this Taxpayer as a communications service could undoubtedly cause other states with similar provisions to examine whether ASPs are potentially taxable in their own states as a telecommunications or communications service – an inherently important issue given the significant rate differential in some states for communications services.

As always – your questions and comments are not only welcomed – but greatly appreciated.

Carolynn is the founder and Managing Member of Industry Sales Tax Solutions, LLC (“ISTS”), which offers a subscription database containing the sales and use taxability of software related transactions, digital content and cloud services; she is also the Managing Member of Kranz & Associates, PLLC, a boutique law firm specializing in state and local tax consulting. See Carolynn's AUTHOR page in order to send a message and/or consultation request.

Other recent “Cloud, Software & Digital Tax” posts by Carolynn Iafrate Kranz:

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Comments

5 Responses to Taxing ASPs as Telecommunications?

  • Posted by SaaS on April 3, 2015 5:36am:

    […] etc., was subject to sales and use tax as a taxable “communications service.”  See “Taxing ASP’s as Telecommunications” […]

  • Posted by Bob on November 23, 2013 11:50pm:

    Carolyn,
    Whenever technology makes advances within an industry, the states find themselves attempting to "catch-up" with those advances in order to address sales taxation on same. We need only look to electronically delivered software (ESD) and we find that a number of states have definitions of tangible personal property (TPP) that assert that if personal property can be "sensed", it too will be considered tangible personal property.
    From our elementary school science classes, we learned that there are 3 elements needed to have a fire: fuel, oxygen, and a spark. I will use this analogy to show how Virginia has, in my view, correctly caught up with ASP's that offer cloud computing that provides voice over Internet protocol (VOIP).
    Consider the following components for purposes of this discussion:
    1. Computers as the terminal starting and ending points of VOIP similar to cell phones and landlines.
    2. The Internet infrastructure thru which the VOIP travels.
    Without ASP VOIP software, merely having above-noted components 1 & 2 DOES NOT mean that a user has VOIP available to them! Indeed, just as fire requires a "spark" + oxygen + fuel, VOIP software is the "spark/catalyst", or 3rd component of the triumvirate needed along with computers + Internet in order to produce VOIP!
    Not all ASP's involve themselves with VOIP software, which your post's title implies. Instead, it is only those ASP's that offer VOIP "catalyst" software that need be concerned with how states classify VOIP software for sales tax/telecommunications tax purposes.
    You state in you post that "it is unclear from the facts stated, the extent to which the ASP provides “the electronic transmission, conveyance, or routing of voice, data, audio, video or any other information or signals.” " I'm sorry, but I respectfully disagree with you. From your VA extracts, I believe that it is very clear that VOIP software is taxable under VA definitions precisely because it is the "catalyst" that makes VOIP possible.
    Specifically, I find your initial citing as fully applicable to VOIP catalyst software.
    "The term includes, but is not limited to, (i) the connection, movement, change, or termination of communications services;"
    Bob Parker- How can VOIP software not be considered as responsible for the "movement, change, or termination of communications services"? After all, VOIP software is in fact the catalyst, the very spark that makes such VOIP movement, change or termination possible within the Internet!! Although this may not be a direct/clear cut "match" I believe that there is more than sufficient wording within VA's definitions that you cited to qualify VOIP software as indeed subject to VA's telecommunications taxes!
    Virginia's attempt at classifying VOIP software as subject to telecommunications taxes is no surprise to me given the fact that so many states have already gone out of their way to tax ESD software! For a state like VA to be aggressive in their approach, such states only need to tweak/revise their taxation definitions accordingly, & VOILA, they have caught up with the latest industry technologies accordingly.
    On the other hand, ASP's who choose to enter these areas of substantial technology advancement cannot enter such markets naively, lest they do so at their own peril. These VOIP software vendors darn well BETTER be aware of both the immediate and eventual/long-term potential state tax exposures that they subject themselves to as a direct result of their decisions to be a player/provider in an industry such as VOIP!

    • Posted by Author photo of Carolynn Iafrate KranzCarolynn Iafrate Kranz on December 1, 2013 11:30am:

      Thank you for your comments, Bob. You are correct in that it was my intent to point out that this ruling is focused on ASPs that offer software that support VOIP services. Thank you for clarifying. My point as to whether or not the services provided by the ASP fall squarely within the definition of “communications services,” was meant to question whether the ASP in fact provides “the electronic transmission, conveyance, or routing of voice, data, audio, video or any other information or signals.” Indeed, even the Department noted some uncertainty as to whether the ASP provided taxable communication services as it stated “it appears that the Taxpayer provides taxable communications services to customers in Virginia when it electronically routes voice, data, or audio signals and provides voicemail services.” My point was only to note that there was some uncertainty with regard to the facts that were disclosed. Nevertheless, I agree with you that ASPs that choose to enter this area need to be aware of the potential sales tax exposure that they may encounter in providing services to the VOIP industry. And, as noted in my post, I do concur that the communications services tax was enacted with an intent to capture VOIP services.

  • Posted by Diane on November 22, 2013 10:17pm:

    Great analysis Carolynn as always. Would VA take the position that the ASP provider is acting as agent for the out of state customer such that all ASP customer's would have nexus? Or do you think they will hold to more traditional nexus creation activities?

    • Posted by Author photo of Carolynn Iafrate KranzCarolynn Iafrate Kranz on December 1, 2013 11:27am:

      Thank you for your comments, Diane. There is no indication from the ruling that the Department intends to take a more aggressive stance on nexus – the traditional nexus creating activities are still the standard in Virginia based on what I have seen published.

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