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Virginia Communications Tax Obeys ITFA (Technically, Maybe..)

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It is axiomatic that federal law trumps state law on the same subject. The United States presently labors under a pervasive law, the Internet Tax Freedom Act (“ITFA”), that some consider wrong-headed, or worse – but it is the law, and it effectively forbids taxation of Internet access services. Until that law is changed or expires, it is incumbent upon The Powers That Be in this country to enforce it – which should include fostering the spirit, values, and intentions ITFA was enacted to advance. For any state to carve a path that adheres to the letter of federal law but ignores – indeed, countervails – its underlying sense, motivation, and purpose does a disservice to the entire system and process, and at some level even undermines respect for the law. [NOTE: I personally am opposed to ITFA and have always considered it a terrible idea, but I defend it here because it IS (presently, at any rate) the law of the land. - MPK]

Last year, the Virginia Department of Taxation issued two “Rulings of the Tax Commissioner” (P.D. (“Public Document”) 14-130 and P.D. 14-131) to three unidentified telecom-provider “Taxpayers” who challenged audit findings insisting that the state’s Communications Sales Tax be imposed on Taxpayers’ customer charges to activate and reactivate Internet service, despite the seeming prohibitions against such levy by both ITFA and the parallel Commonwealth statute implemented to conform with it (Va. Code Ann. § 58.1-648).

Taxpayers had (understandably) reasoned that the federal and state bans against taxing “Internet access service … or similar services that are incidental to Internet access” (emphasis added to ITFA’s actual wording) also exempted service activation and reactivation charges – that is, if the words “incidental to” were to carry their accepted, plain-sense meaning. But this proved not to be the case.

The Commissioner first explained to Taxpayers that the taxability bar had NOT been effected by excluding “Internet service” from Virginia’s definition of taxable “communications” or “telecommunications services.” That was not how it was done. The Commonwealth had, indeed, crafted the definitions of “telecommunications service” and “Internet service” to be mutually exclusive (as other states have), but ITFA’s specific prohibitions were implemented here by having Section 58.1-648.C read, “Communications services on which the tax is hereby levied shall not include … Internet access service.”

Doing it in this manner enabled Virginia to pull the manoeuver we ponder here: Because “communications services” is defined so that “[t]he term includes, but is not limited to, (i) the connection, movement, change, or termination of communications services” (Commissioner’s emphasis), and since Internet access is, remember, an (untaxable) communications service, all that is missing to complete this tax trap is a linkage supplied by the Tax Commission itself:

In “Guidelines and Rules for the Virginia Communications Taxes” (P.D. 06-138) – a 2006 aid for taxpayers and local governments in understanding the then-lately-revised telecom taxation regime – the Commissioner had ruled (perhaps somewhat summarily) that “Taxable communications services also include, but are not limited to, charges for: ∙ Connection, reconnection, termination, movement, or change of communications services, including Internet services” (emphasis added). As a direct consequence, the Commissioner now concludes this case by observing (in frequently self-referential and self-justifying fashion):

In accordance with Va. Code § 58.1-648.C, Internet access service is a communications service upon which the Virginia communications sales tax is not levied. Internet access service has not been excluded from the definition of communications service; rather, the statute merely states how the tax should be applied with respect to these services. Further, the aforementioned authorities [that is, the P.D. 06-138 “Guidelines”] define the connection, movement, change, or termination of communications services as communications services that are subject to the tax. The Department has previously dealt with the application of tax on activation and reactivation charges in P.D. 12-148 (9/17/12) [concerning similar issues and written by this same Commissioner]. In that public document, it was determined that the tax assessed on such charges was proper. Accordingly, the communications sales tax assessed in this instance is correct. The Taxpayers contend that the Department is prohibited from taxing reactivation fees under the Internet Tax Freedom Act. The Taxpayers maintain that the reactivation fee is a charge that follows or accompanies the obtaining of Internet access. As such, the Taxpayers assert that the reactivation services are incidental to Internet access and are not subject to the communications sales tax.

* * * * *

While the Act bars the application of state tax on Internet access service, the Act does not prohibit the Commonwealth from deeming the connectivity charges subject to the communications sales tax. In accordance with § 1101(b) of the Act, the Commonwealth is authorized to apply the communications sales tax to communications services, as long as such application does not violate the provisions of the Act. As such, the Commonwealth operated well within the confines of the Act by enacting a law that applies the communications sales tax to the sale of communications services related to the provision of Internet access services, as well as other communications services. Additionally, the connectivity services provided by the Taxpayers and held taxable in the audit are not of the kind of incidental services that are considered in the Act. [Emphasis added.]

That last – wanly defensive, then summarily dismissive – has about it the whiff of someone attempting to sell a bill of goods. Does Virginia really want to take a stand on splitting the difference between services “incidental to” (untaxable) and “related to” (taxable)? Is that to be the legacy here? (And could anyone explain it?) Playing its hand from a stacked deck, the Tax Commission has, on its side of the argument, the letter of the law (as it chooses to read it), state precedent (as established by its own earlier rulings), and a thin and dubious logic (of its own fabrication). It has everything going for it, that is to say, except common sense, the accepted use of the English language, and a determination to uphold the spirit and purpose of the law.

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About the Author: Marc Palmer Kram is a Senior Tax Analyst at Wolters Kluwer Tax & Accounting US, where he performs quality control and troubleshooting on the vast taxability database supporting its best-in-class CCH tax-compliance software, and then sometimes writes about what he finds. Learn more about him by visiting his author bio page. Learn more about Wolters Kluwer at and

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