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Virginia Supreme Court Includes Internet-Related Revenue in Tax Base (Sort of)

The Virginia Supreme Court recently issued an interesting decision related to the minimum tax on telecommunications companies. The court held that the State Corporation Commission (“SCC”) did not have authority to exclude the taxpayer’s Internet-relat

August 30, 2011

The Virginia Supreme Court recently issued an interesting decision related to the minimum tax on telecommunications companies. The court held that the State Corporation Commission (“SCC”) did not have authority to exclude the taxpayer’s Internet-related revenues from the gross receipts it certifies to the Department of Taxation (“Department”). Level 3 Comm’ns, LLC v. State Corp. Comm’n, 710 S.E.2d 474 (Va. June 9, 2011).

Level 3, a telecommunications company, provides wholesale Internet services to Internet service providers. It maintains an extensive network in Virginia and is thus subject to Virginia’s minimum tax on telecommunications companies (telecommunications companies are subject to either a corporate income tax or a minimum tax on gross receipts). The minimum tax computation is a two-step process:

  1. The Virginia SCC is required to certify telecommunications companies’ gross receipts to the Department, 
  2. The Department calculates the minimum tax.

In certifying Level 3’s information, the SCC included Internet-related revenues. Level 3 argued that the Department was prohibited from taxing Internet-related revenues pursuant to the federal Internet Tax Freedom Act (ITFA). However, the court explained that the SCC’s function with respect to the state tax is to certify a telecommunications company’s gross receipts to the Department. The court noted that because the minimum tax statute does not provide an exemption for Internet receipts, the SCC cannot authorize an additional exemption so it is not authorized to deduct Internet-related revenues from gross receipts.

The court did not have to address the underlying issue of whether the taxpayer could deduct Internet-related revenues from its gross receipts. The court noted that the “the ITFA limits state and local taxation, and taxation is outside the scope of the SCC’s duty….” Thus, the question of whether the Department is improperly imposing tax on Internet related revenues in violation of ITFA remains unaddressed.

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