preferential tax treatment
Many states and cities offer preferential tax treatment to certain types of businesses. This often includes a temporary exemption from collecting sales and use taxes. Recently the District of Columbia successfully opposed an effort by a local television station to qualify for such a tax break.
In 2000, the Council of the District of Columbia, which exercises legislative power for the nation’s capital under a congressional mandate, adopted the “New E-Conomy Transformation Act.” This act authorized preferential tax treatment for businesses classified as “Qualified High Technology Companies” or QHTCs. Among other benefits, a QHTC is temporarily exempt from collecting the District’s 5.75% sales and use tax.
The act defines a QHTC as any individual or entity doing business in the District of Columbia with at least two employees and “deriving at least 51% of its gross revenues earned in the District” from one of five classes of high-technology activity. For example, a company providing “Internet-related services” such as web design would qualify as a QHTC.
Another qualified class includes “Information and communication technologies.” It was this classification which prompted the recent litigation. WRC-TV, the NBC television affiliate in Washington, DC, claimed it was as a QHTC and therefore entitled to a sales and use tax exemption. The District’s Office of Tax and Revenue (OTR) disagreed and assessed a “deficiency” of more than $78,000 against the television station. An administrative law judge upheld this assessment, prompting WRC to seek review in the District of Columbia Court of Appeals.
The court affirmed the OTR’s assessment in an October 22 decision. The core of WRC’s argument was it “generated”
at least 51% of its local revenues from “information and communication technologies.” That is to say, WRC purchased and “used” such technologies to produce its television programming. Like most broadcast television affiliates, WRC actually sells advertising, not tangible products or information technology services.
The Court of Appeals agreed with the OTR the District’s QHTC law “requires a much closer nexus” between “information and communications technologies” and the revenues generated by WRC’s advertising sales. As the court explained, “If WRC’s sale of advertising via technology-enabled television programming counts as a QHTC activity…then so would a similar technology-intensive provision of services for fees (in place of advertising) by, for instance, accounting, brokerage, or even law firms, with the resulting danger of a tax exemption swallowing up the taxation rule.” The court said the DC government clearly intended the QHTC designation apply to companies “engaged in the development and marketing of high technology systems,” rather than businesses, like WRC, which merely purchase such technology in order to produce and sell other services. Accordingly, the court affirmed the OTR’s decision and ordered WRC to pay $78,784.84 in back taxes.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info
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