In a recently issued decision, Virginia Cellular LLC v. Virginia Department of Taxation, the Virginia Supreme Court determined that a regulation extending Virginia’s tax on telecommunications to partnerships and other pass-through entities was invalid. The Virginia Cellular decision creates a refund opportunity for any partnership or pass-through entity that has paid the Virginia telecommunications tax. The Virginia Cellular decision also highlights the fact that challenges to tax regulations are not always a losing cause. When a tax regulation is in conflict with the plain meaning of the statute, a taxpayer can mount a successful legal challenge, notwithstanding the deference that the courts usually grant to such regulations.

The Virginia Cellular case involved Virginia’s minimum tax on telecommunications companies. Under the terms of the telecommunications tax statute, the tax was imposed on the gross receipts of telecommunications companies “instead of the corporate income tax.” The Virginia corporate income tax applies only to corporations, not pass-through entities (e.g., entities treated as partnerships for tax purposes). Nonetheless, the Virginia Department of Taxation promulgated a regulation that provided that, unless a specific exemption applied, every telecommunications company was subject to the minimum tax, even if the company would not otherwise be subject to the Virginia corporate income tax.

Virginia Cellular, which was organized as a limited liability company, filed Virginia telecommunications tax returns for the tax years 2001 through 2004. However, Virginia Cellular did not report any telecommunications tax liability on its returns. Instead, Virginia Cellular claimed that it was exempt from the tax, because it was a pass-through entity, not a corporation. On audit, the Virginia Department of Taxation determined that Virginia Cellular was not exempt, and assessed tax, penalties and interest against Virginia Cellular. This determination was upheld by the Virginia Department of Taxation in an administrative appeal. Virginia Cellular then filed an appeal in the Circuit Court for the City of Richmond, which upheld the validity of the Department’s regulation in a summary judgment motion.

The Virginia Supreme Court reversed the Circuit Court’s decision in the summary judgment motion, noting that the courts must follow the plain language of a statute, unless the terms are ambiguous or unless applying the plain meaning would lead to an absurdity. The Court then noted that the telecommunications tax statute provided that the tax applied “instead of” the Virginia corporate income tax. The Court then held that the use of “instead of” implied that the telecommunications tax was not intended to apply to entities, like Virginia Cellular, which were not otherwise subject to Virginia corporate income tax. Therefore, based on the clear and unambiguous language of the statute, the Court reversed the Circuit Court and held the Department’s regulation invalid.