A New York State Administrative Law Judge has held that sales tax was properly assessed on interstate wireless voice services bundled with intrastate services, but that Internet access services and interstate overage charges were not subject to sales tax.  Matter of Helio, LLC, DTA No. 825010 (N.Y.S. Div. of Tax App., June 12, 2014).

Facts. Helio LLC was a mobile virtual network operator that sold wireless mobile telecommunication services to customers throughout the United States, including in New York during 2006 through 2009, the audit period. Helio offered customers two fixed monthly charge plans. “A La Carte” plans allowed interstate and intrastate voice calls and ancillary services, such as call waiting and call forwarding, for a specified number of minutes per month. “All-In” plans were similar, but also included data-based services such as Internet access, text messaging, and email, and had higher monthly rates. For either plan, customers were charged per-minute overage charges if they exceeded their allotted minutes each month, which were separately stated on customer invoices. All-In plan customers were charged per-kilobyte data usage overage charges for data usage exceeding the amount included in the plan, which were also separately stated on invoices. Helio also invoiced its customers for its costs of contributing to the Federal Universal Service Fund (“FUSF”), relying on safe harbor percentages established by the Federal Communications Commission to calculate the amount of FUSF contribution cost fee to charge to its customers.

Helio collected and remitted New York sales tax only on the portion of the fixed monthly charges for the two plans that it determined was attributable to voice services for intrastate calls and took the position that the portion it deemed attributable to interstate calls was not subject to sales tax. It also collected and remitted sales tax only on the overage charges that were attributable to intrastate voice service, and not on the portion attributable to interstate calls or Internet access. It did not collect sales tax on the FUSF contribution fees that it recovered from its customers.

Issues.  The Department of Taxation and Finance relied on estimates for a portion of the audit period, despite Helio’s offer to produce complete records.  It assessed sales tax on the full amount of the fixed monthly charges for the A La Carte and All-In plans, taking the position that bundled charges were taxable in their entirety; tax on all of the overage charges for interstate wireless voice service and Internet access, although conceding that charges for interstate voice service and Internet access service, if separately stated, are not subject to tax; and tax on the FUSF contribution recoveries.  Only minimum interest was imposed, and the Department stated in the audit report that reasonable cause existed for Helio’s filing position.

Decision of the ALJ.  First, the ALJ found that the Department’s reliance on an estimate for the portion of the audit period was improper, since Helio’s books and records were adequate and Helio had not agreed to a test period, so the assessment for that part of the audit period was canceled.

The ALJ then went on to analyze the taxes imposed by Tax Law § 1105(b).  Helio was relying on the language in § 1105(b)(1), which imposes tax on telephony and telephone services “except interstate and international ... telephone ... service and except any telecommunications service the receipts  from the sale of which are subject to tax under paragraph two  of this subdivision …” to argue that the charges for interstate calls were specifically exempted.  The ALJ focused on § 1105(b) (2), which imposes tax on “the receipts from every sale of mobile telecommunications service … or any other services that are taxable under subparagraph (B) of paragraph one… sold for a fixed periodic charge (not separately stated) …”(emphasis added), and found that the full amount of fixed monthly charges for mobile voice services is subject to tax and not covered by the exemption in § 1105(b)(1) for interstate telephony, and that “use of the disjunctive ‘or’ [in § 1105(b) (2)] indicates that subdivision (b)(2) applies to voice services and nonvoice services … sold for a fixed periodic charge.” The ALJ also relied on the decision in People v. Sprint Nextel Corp., 41 Misc. 3d 511 (N.Y. Sup. Ct., N.Y. Cnty. 2013), aff’d., 114 A.D.3d 622, leave to app. granted, No. 103917/11 (N.Y. App. Div. 1st Dep’t June 12, 2014), in which the  courts did not accept, for purposes of a motion to dismiss, Sprint Nextel’s arguments that interstate voice services were excluded from New York sales tax under § 1105(b)(1).

The ALJ also rejected the argument – again, as did the courts in Sprint Nextel – that the federal Mobile Telecommunications Sourcing Act (“MTSA”) preempts the Tax Law, finding no conflict between the Tax Law and the MTSA, since the MTSA applies only to tax on mobile telecommunications charges aggregated with other charges if the taxing jurisdiction does not otherwise subject the mobile telecommunications charges to tax, and here the ALJ found that New York does otherwise subject the charges to tax.  The ALJ also found that the FUSF fee was properly subject to tax because it was an integral part of the service that Helio chose to pass on to its customers and was not related to actual interstate usage.

However, with regard to the interstate overage charges, the ALJ agreed with Helio that these were not subject to tax, since they were not part of the bundled plans, and found that Helio had met its burden of demonstrating that the charges were related to interstate services and subject to the exclusion.  After April 2007, Helio identified and separately stated the interstate charges, as recognized by the audit report, and  could support the charges with its books and records.  For charges until April 2007, although Helio’s billing data did not distinguish between interstate and intrastate voice charges, Helio was able to identify from its books and records the interstate charges by call detail, and thus those charges were similarly found exempt. Helio’s charges for Internet services were also found to be exempt, although included in the bundle, since Helio was able to identify charges attributable to the Internet access service. This was generally done by demonstrating the difference in price between plans sold with and without Internet service with the same number of calling minutes, since the price differential was based on the cost for Internet access services. Finally, Helio’s separate data overage charges, also separately stated, were found to be exempt.

Additional Insights

Although the ALJ found that the Tax Law imposed tax on the interstate charges when bundled with intrastate charges, there is an exemption provided in Tax Law § 1105(b)(1) for interstate charges, and the ALJ’s determination involved a technical interpretation of a complicated law and the use of the term “or” in a subsection following the exemption to preclude application of the exemption to bundled charges.  To the extent the ALJ’s opinion relied on the Appellate Division’s affirmance of the trial court decision in the Sprint Nextel case, that reliance may turn out to be misplaced:  on the same day the Helio decision was issued, the Appellate Division granted Sprint Nextel’s request to have its appeal heard by the Court of Appeals.  State of New York v. Sprint Nextel Corp., et al., No. 103917/11 (N.Y. App. Div. 1st Dep’t June 12, 2014).   Further proceedings in that action have been stayed pending appeal.

It is also interesting to note that on audit in Helio, the Department imposed only minimum interest and sought no penalties, acknowledging that Helio had reasonable cause for its interpretation of the statute, while in Sprint Nextel the Attorney General has pursued the issue under the False Claims Act and sought substantial penalties for what appears to be the same interpretation of the statute relied upon by Helio.