Virginia: BPOL Tax Preempted by Internet Tax Freedom Act

A Virginia circuit court recently held that the Virginia Business, Professional Occupational License (BPOL) tax imposed by Fairfax County was a tax on Internet access that was pre-empted by the Internet Tax Freedom Act. The ITFA bars state and local governments from imposing taxes on charges for internet access. The law defines a “tax” as “any charge imposed by any governmental entity for the purpose of generating revenues for governmental purposes and is not a fee imposed for a specific privilege, service, or benefit conferred.”  Certain taxes that were imposed and enforced prior to October 1, 1998 enjoyed so-called “grandfathered” status and could continue to be imposed despite the ITFA. The taxpayer, a communications service provider, requested a refund of BPOL paid on its service of providing Internet access. The County Commissioner of the Department of Taxation denied the refund on the basis that BPOL was not preempted by ITFA, and even if ITFA applied, the County was grandfathered under the ITFA. On appeal, the issues before the circuit court were (1) whether the BPOL tax was a “tax” as defined by ITFA, (2) whether it was an impermissible tax on Internet access, and (3) whether the County bore the burden of proving it was grandfathered under the Act.

The court first held that because BPOL tax is imposed on every business in the county and revenues from BPOL are used for general purposes, it was “tax” as defined under ITFA.  The next question was whether the BPOL was a tax on Internet access. The County appeared to argue that because the BPOL was a gross receipts tax imposed on almost all activities, it was not a tax on Internet access prohibited under the ITFA.  As support for this argument, the County cited to a federal statute prohibiting states from imposing taxes on the “gross receipts” derived from persons traveling in air commerce. In the County’s view, Congress could have drafted the ITFA more broadly if it wanted to prohibit all gross receipts taxes that included receipts from providing Internet access. The court disagreed, noting that the ITFA allows the imposition of taxes measured by “net income, capital stock, net worth, or property value.” Accordingly, because the BPOL was preempted by the ITFA, the court granted the taxpayer’s summary judgement motion on the first two issues, and ordered that the burden had shifted to the County to prove that the grandfathering clause applied for the tax years at issue.  For more information on Fairfax County v. Caxcom, LLC, please contact Sarika Bakshi at 703-286-8467.