Virginia court rules federal act pre-empts internet tax


On July 14, 2022, the Virginia Supreme Court held that the federal Internet Tax Freedom Act (ITFA) pre-empted the collection of Business, Professional and Occupational License (BPOL) Tax by Fairfax County, Virginia on gross receipts from the sale of internet access services.1 Reversing a lower court ruling that allowed collection of the tax, the Court concluded that a BPOL tax on the sale of internet access services is specifically covered by the ITFA, and that the County could not invoke the ITFA’s grandfather clause to impose the tax.






In 1998, Congress enacted the ITFA, placing a moratorium on the state and local taxation of internet access services.2 The ITFA initially contained a grandfather clause, which provided that preexisting state and local taxes on internet access services were exempt from the ITFA if “generally imposed and actually enforced prior to Oct. 1, 1998.”3 This meant that taxing authorities were permitted to grandfather a pre-existing tax on internet services if: (i) the taxpayer had a reasonable opportunity to know that an appropriate state or local administrative agency interpreted and applied the tax to internet access services by virtue of a rule or other public proclamation; or (ii) the state or locality exhibited a practice of generally collecting the tax.4


In Virginia, localities are authorized to impose a BPOL tax generally on the taxpayer’s gross receipts for the privilege of conducting business in the jurisdiction.5 The tax is imposed and administered by local officials at different rates according to a taxpayer’s classification.6 In 1994, Fairfax County adopted a BPOL tax ordinance, which provided in part that “business service occupations” including online computer services would be subject to tax.7 At the time, America Online, Inc. (AOL) was headquartered in the county and paid BPOL tax on internet access service revenue that it classified as “online service revenue.”


Operating as an internet service provider (ISP) in the county since 2000, Coxcomm, LLC (Cox) paid BPOL tax based on gross receipts from internet access service revenue from 2013-2016. In 2016, Cox filed a request for a refund of BPOL tax paid with the County for the 2013-2015 tax years, asserting that the ITFA preempted the County from imposing BPOL tax on internet access service revenue. Cox also argued that Fairfax County did not qualify for the ITFA’s grandfather clause exemption because the County did not give Cox a reasonable opportunity to know that the tax applied prior to October 1998. However, the County determined that the ITFA did not apply to the BPOL tax because it considered the tax to be a general tax on entire gross receipts. The County further concluded that the grandfather clause exemption applied even if the ITFA covered the BPOL tax.


Cox appealed to the Virginia Tax Commissioner, which found that the ITFA generally prohibited the imposition of BPOL tax on internet access services. Concluding that the case turned on whether the grandfather clause exemption applied, the Commissioner declined to rule on that question. Both parties appealed to the circuit court, which agreed with the Commissioner that the BPOL tax was preempted by the ITFA because the law was broadly drafted to prohibit taxes on internet access, including gross receipts taxes. However, the circuit court ruled that the grandfather clause applied to the BPOL tax, finding that the County ordinance constituted a rule or public proclamation under the applicable ITFA provision, thus giving ISPs a reasonable opportunity to know that the tax applied to them. Cox appealed the decision to the Virginia Supreme Court.




Court decision


On appeal, the Court considered whether Fairfax County’s BPOL tax on internet access services was covered by the ITFA; and, if so, whether the tax met the requirements of the ITFA’s grandfather clause.



ITFA applies to county BPOL tax


The Court agreed with the circuit court’s conclusion that the ITFA generally applies to the BPOL tax. The Court noted that the ITFA broadly defines the term “tax on Internet access,” explaining that it applies regardless of whether the tax is imposed on providers or purchasers of internet access and regardless of the terminology used to describe the tax.8 The Court further noted that none of the ITFA’s possible exemptions covered a tax such as the BPOL tax. For these reasons, the Court concluded that the BPOL tax is covered by the ITFA.



ITFA grandfather clause does not apply to County BPOL tax


Concluding that the BPOL tax did not qualify for the ITFA grandfather clause exemption, the Court first determined that the tax did not satisfy the ITFA’s initial requirement of a rule or public proclamation that an administrative agency interpreted and applied the tax to internet access services. The Court disagreed with the County’s argument that it satisfied this requirement by publishing the BPOL ordinance itself, finding that the County and its board of supervisors are not an “administrative agency.” Instead, the Court reasoned, the County Department of Tax Administration is responsible for implementing and interpreting the BPOL tax. Second, the Court noted that publication of the ordinance itself did not satisfy the grandfather clause requirements because “[t]here is a difference between publishing an ordinance and a proclamation clarifying the meaning of an ordinance.”


Next, the Court agreed with the circuit court that the county failed to establish that it “generally imposed and actually enforced” the BPOL tax. Although several ISPs provided internet access services throughout the county before October 1998, the County presented evidence that only AOL paid tax on internet access service revenue at the time. The Court referred to testimony from the County’s auditor, which revealed that ISPs including Prodigy and Roadrunner did not pay BPOL tax because it was apparently imposed only on ISPs with a situs in the County. Based on this testimony, it was unclear in the Court’s view whether other companies provided internet access services in the County during the tax years in question. Given a lack of evidence to the contrary, the Court concluded that the County failed to meet its burden of providing that it generally collected BPOL tax prior to October 1, 1998.


Finding that the County failed to meet either of the requirements to invoke the ITFA’s grandfather clause, the Court reversed the judgment of the circuit court and remanded the case to determine the amount of refund due to Cox.







The Coxcomm case highlights an important preemption principle concerning the federal limitations of state and local taxing authority. The Court’s decision clarifies that internet access services provided by ISPs are exempt from Virginia local BPOL taxes based on the broad definition of internet access services as provided in the ITFA. Moreover, Fairfax County could not impose tax on such services under the ITFA’s grandfather clause despite the fact that its BPOL ordinance was enacted prior to the ITFA’s October 1, 1998 enactment date. Although the County argued that Cox had a reasonable opportunity to know that BPOL tax applied through the publication of its BPOL tax ordinance, the Court disagreed, concluding that an ordinance was not the same thing as a rule or proclamation issued by the agency responsible for administering the tax. Further, the County could not establish that it generally collected BPOL tax on internet access services prior to the ITFA enactment date, as ISPs other than AOL did not pay the tax.


While the Court’s holding applies to other local jurisdictions in Virginia that impose BPOL taxes, the decision may also have important implications for other state and local gross receipts taxes with broad tax bases that may encompass receipts from internet access services. ISPs that pay similar gross receipts taxes may point to the Coxcomm decision as persuasive authority supporting an argument for exemption from internet access service revenue on the basis that they are preempted by the ITFA.


On a broader scale, the decision highlights the continuing relevance of the ITFA and its frequent interplay with both historic and new state and local taxes. For example, Maryland recently enacted the nation’s first tax on digital advertising services, which became effective on January 1, 2022.9 However, the state currently faces two separate lawsuits in both federal and state court alleging that the tax is illegal under the ITFA because the tax does not apply to other types of advertising.10 Although the federal lawsuit was largely dismissed, the scope of the ITFA and its application to Maryland’s digital advertising tax are among the primary issues currently being considered by the state court.


1 Coxcomm, LLC v. Fairfax County et al., No. 210568, Virginia Supreme Court, July 14, 2022.
2 Internet Tax Freedom Act, Pub. L. No. 105-277, §§ 1100 et seq., 47 U.S.C. § 151.
3 ITFA § 1104(a)(1). The grandfather clause expired on June 30, 2020.
4 Id.
5 VA. CODE ANN. § 58.1-3703.A.
6 VA. CODE ANN. § 58.1-3706.A.
7 Fairfax County Code § 4-7.2-22.
8 Citing ITFA § 1105(10)(A).
9 MD. CODE ANN., TAX-GEN. §§ 7.5-102–7.5-301. For further discussion, see GT SALT Alert: Maryland to implement digital ad services tax.
10 U.S. Chamber of Commerce v. Franchot, No. 1:21-cv-00410, U.S. District Court for the District of Maryland, North Division, filed Feb. 18, 2021; Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC v. Maryland Comptroller of the Treasury, No. C-02-CV-21-000509, Circuit Court for Anne Arundel County, Md., filed Apr. 15, 2021.






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