The New York City Tax Appeals Tribunal upheld an Administrative Law Judge determination that income from fixed charges that were imposed by a long-distance telephone service provider each month whether or not a customer made any long-distance calls were not subject to the New York City utility tax because they related to transactions that “originat[ed] or consummated outside the territorial limits” of New York City. Matter of U.S. Sprint Communications Company, LP, TAT(H)14-12(UT) et al. (N.Y.C. Tax App. Trib., Apr. 3, 2018).
Facts. U.S. Sprint Communications Company, LP (“Sprint”) provided an assortment of telecommunication services in New York City, including long-distance telephone service. Sprint’s long-distance telephone service involved calls that either were initiated from the City and received outside of the City, or initiated outside of the City and received within the City.
Sprint owned no local telephone equipment within New York City, but maintained a physical point of presence, described in the opinion as a “long-distance switch,” within the City for purposes of providing its long-distance telephone services. Sprint also paid access charges to use the facilities of a New York City local exchange carrier (“LEC”) to bring long-distance calls between a New York City customer’s location and Sprint’s long-distance switch in the City. Access charges were imposed on a schedule set by the Federal Communications Commission. Some of the access charges were charged as a fixed monthly fee based on the number of Sprint customers located in the LEC’s coverage area. In turn, Sprint imposed fixed monthly charges on each long-distance telephone service customer, even if the customer made no long-distance calls in any given month, to recover the fixed access charges Sprint paid to the LECs (the “monthly charges”). Separately, Sprint also charged a “per-minute” rate for all long-distance calls completed by such customers. Sprint did not include either the monthly charges or the per-minute charges in its utility tax gross operating income base. The New York City Department of Finance assessed Sprint for utility tax on the basis that a variety of its charges to customers, including the monthly charges, were subject to the utility tax. The Department asserted that the monthly charges represented a local charge for access to long-distance service, rather than a charge for an actual long-distance telephone call.
Tax Law. New York City imposes the utility tax under the authority of New York State’s General City Law (“GCL”) § 20-b, which enables cities to impose a utility tax on certain utility services, including telecommunication services. However, GCL § 20-b prohibits cities from imposing a utility tax on “any transaction originating or consummated outside of the territorial limits of any such city, notwithstanding that some act be necessarily performed with respect to such transaction within such limits.” (Emphasis added.) Therefore, the utility tax may not be assessed on a long-distance telephone call even if some part of the call occurs within the City. However, under Administrative Code § 11-1102.c, the income of an entity subject to the utility tax is “presumed” to be “derived from business conducted wholly within” New York City, and an entity carries “the burden of proving” otherwise.
ALJ Decision. As reported in the February 2017 issue of New York Tax Insights, the ALJ concluded that most of the charges that the Department included in Sprint’s gross operating income, including the monthly charges, were not subject to the utility tax under GCL § 20-b. The Department filed an exception only to the ALJ’s conclusion that the monthly charges were not subject to the utility tax.
Tribunal Decision. The Tribunal upheld the ALJ’s conclusion that GCL § 20-b prohibited Sprint’s income from the monthly charges from being subject to utility tax. The Tribunal largely focused on GCL § 20-b’s prohibition of the imposition of tax on any “transaction” originated or consummated outside of New York City, and concluded that a long-distance call, rather than any discrete activities necessary to consummate the call, represents a transaction for purposes of GCL § 20-b.
The Tribunal first established that GCL § 20-b was an “imposition” statute that contained a prohibition on taxing long-distance telephone service, rather than a statute that would generally allow the imposition of a tax on long-distance telephone service while “exempting receipts from the sale of individual long distance calls.” Next, the Tribunal determined that Sprint had rebutted the statutory presumption that the monthly charges related to activities wholly within New York City. According to the Tribunal, “no long distance service could be provided [by Sprint] if local access” was not provided by a New York City LEC and, as such, the monthly charges related to access charges that were a necessary component of transactions “originating or consummating outside the City.”
Ultimately, the Tribunal rejected the Department’s argument that the monthly charges related to local transactions originating and consummating in the City that were separable from the per-minute charges for a long-distance call. Although the Department argued that the monthly charges related only to an LEC providing access to Sprint’s long-distance switch within the City, the Tribunal pointed out that the Department had acknowledged in its own briefs that a long-distance call represented a “transaction” under GCL §20-b. The Tribunal concluded that the services received in exchange for the monthly charges were inseparable parts of activities necessary to complete a single long-distance call. Further, the Tribunal stated that the fact that the monthly charges were itemized and separately charged o
State and City Tax Departments often interpret statutory exemptions or exclusions from a tax very narrowly. In this case, the Department’s attempt to narrowly interpret the exclusionary language of GCL § 20-b was supported by a New York City Administrative Code provision that explicitly placed the burden on the taxpayer to prove that certain items of income were not subject to utility tax.
Nevertheless, before analyzing this statutory burden, the Tribunal’s opinion stated that GCL § 20-b was an imposition statute containing exclusionary language limiting its application, rather than an exemption statute. Under New York case law, a statutory exclusion contained in a tax imposition statute is construed in favor of the taxpayer and against the taxing authority. See, e.g., Grace v. New York State Tax Comm’n, 37 N.Y.2d 193 (1975). While the Tribunal did not cite this case law, the burden placed upon Sprint may have effectively been lowered by the Tribunal’s conclusion that GCL § 20-b was not an exemption statute.