Last year, in Virginia Cellular LLC v. Virginia Department of Taxation, the Virginia Supreme Court held that a regulation extending Virginia's minimum tax on telecommunications companies to partnerships and other pass-through entities was invalid.1 Under emergency retroactive legislation enacted in late February, the Virginia General Assembly has effectively reversed the court's decision in Virginia Cellular, retroactive to 2004.2 The General Assembly's attempt to retroactively reverse Virginia Cellular and, thus, impose the minimum tax on partnerships and other pass-through entities for prior periods, may violate the Due Process clause of the U.S. Constitution.

In light of the new legislation, telecommunications companies organized as partnerships or other pass-through entities that have not paid the minimum tax for prior periods should consider paying the tax and filing refund claims to avoid potential penalties. However, any pass-through entities with pending refund claims based on Virginia Cellular can expect these claims to be denied by the Virginia Department of Taxation (the "Department"). Nonetheless, pass-through entities should consider appealing any denial of their refund claims by filing a petition with a Virginia Circuit Court, raising the due process issue.


The Virginia telecommunications tax statute imposes tax on the gross receipts of telecommunications companies, "instead of the corporate income tax." The Virginia corporate income tax applies only to corporations, not to pass-through entities (e.g., entities treated as partnerships for tax purposes).

In 1988, the Department promulgated a regulation that purported to extend the application of the minimum tax to all telecommunications companies, including those not otherwise subject to the Virginia corporate income tax. The Virginia Supreme Court's decision in Virginia Cellular invalidated this regulation, as applied to partnerships and other pass-through entities, and created refund opportunities for any partnership or pass-through entity that had paid the minimum tax on telecommunications companies based on the regulation.

However, after the passage of the emergency legislation, the Department issued a Bulletin announcing that it would deny any refund claims based on the holding in Virginia Cellular for tax years beginning on or after Jan. 1, 2004.3

Potential Due Process Issue

As with all retroactive legislation, Virginia's emergency legislation "presents problems of unfairness that are more serious than those posed by prospective legislation, because it can deprive citizens of legitimate expectations and upset settled transactions."4 The United States Supreme Court has held that the "due process clause" of the U.S. Constitution provides a safeguard against retrospective legislation.5 Specifically, the takings clause provides that "no person shall be deprived, without due process of law...nor shall private property be taken for public use, without just compensation."

The due process standard applied to tax statutes with retroactive effect is the same as that generally applicable to retroactive economic legislation. As a consequence, only if the retroactive application of a statute is "supported by a legitimate legislative purpose furthered by rational means," will the retroactive application be held to be constitutional. Thus, in United States v. Carlton, the United States Supreme Court has held that retroactive legislation must be enacted for a legitimate purpose and must establish "only a modest period of retroactivity."6 Although the majority decision in Carlton did not define what constitutes a "modest period," in a concurring opinion, Justice O'Connor stated that a period of retroactivity of more than one year would raise constitutional questions.7 Since Carlton, several courts have held tax statutes with excessive periods of retroactive application to be in violation the Due Process clause.8

Although the Virginia General Assembly may have had a legitimate purpose for the retroactive application of the emergency legislation (avoiding a potential loss of state revenue resulting from refund claims based on Virginia Cellular), applying the legislation to periods as far back as 2004 would appear to establish much more than a "modest period of retroactivity." Arguably this constitutes an unconstitutional deprivation of property without due process. Thus, although the Department may be planning to reject refund claims based on the holding in Virginia Cellular, pass-through entities may ultimately be able to obtain their refunds by raising the due process issue in a petition filed with a Virginia Circuit Court.