On December 29, 2016, a New York City administrative law judge (ALJ) determined that Sprint’s long distance telecommunications service fees were exempt from the City’s Utility Tax. The ALJ concluded that the Utility Tax enabling statute—which limits the scope of the Utility Tax to transactions occurring within City limits—applies to “transactions” and not “services.” Based on that reasoning, the ALJ explained that the charges for long distance telecommunications transactions, which are exempt from the Utility Tax, include not only the charge for the long distance telephone call itself but also charges related to the long distance transaction, regardless of the billing method. The ALJ further determined that charges for Internet access are exempt from the Utility Tax pursuant to the Internet Tax Freedom Act. In the Matter of the Petitions of U.S. Sprint Communications Co., LP, TAT (H) 14-12 (UT) et al. (NYC Tax App. Trib. ALJ Div. Dec. 29, 2016). Sutherland represented Sprint in the matter.
The Taxpayer provided long distance telecommunications services to New York City customers.1 In order to provide its long distance telecommunications services, the Taxpayer paid local telephone providers to transmit the “last mile” of the telecommunications service because the Taxpayer did not own local telephone equipment. Specifically, the Taxpayer paid these local telephone companies (local exchange carriers or LECs) various charges to transmit the telecommunications traffic from the Taxpayer’s point of presence to the customer’s New York City location, and vice versa.
The New York City Department of Finance (Department) assessed Utility Tax on various fees that the Taxpayer charged its customers for the provision of its long distance telecommunications services. The charges on which the Department assessed Utility Tax were as follows:
- Access Charges (Usage and Flat-Fee). Charges that the Taxpayer paid to LECs to complete the last mile of the long distance telecommunications service. The Taxpayer both paid and passed these Access Charges on to long distance customers based on two billing methods: usage (i.e., based on calls made) and flat-fee.
- Taxes and Fees. Taxes and fees that the Taxpayer must pay to various governmental agencies to provide its long distance telecommunications service (e.g., Federal Universal Service Fund contributions). The Taxpayer recovered these amounts from its long distance customers.
- Long Distance Telephone Service Related Charges. Charges that the Taxpayer imposed on long distance customers for certain long distance related services (e.g., higher speed telecommunications transmissions that likewise use LECs).
- Internet Access Charges. Charges that the Taxpayer imposed on customers for access to the Internet.
- Installation and Equipment Charges. Charges that the Taxpayer imposed on customers for the sale and installation of long distance telephone equipment at the customer’s location.
What Is an Exempt “Transaction”?
In reaching its determination, the ALJ first determined the scope of taxable transactions pursuant to the Utility Tax enabling statute. The enabling statute limits the City’s authority to impose the Utility Tax by prohibiting its imposition on “any transaction originating or consummated outside of the territorial limits of [the City], notwithstanding that some act be necessarily performed with respect to such transaction within [the City’s] limits.”
The ALJ determined that the enabling statute applies to exempt long distance “transactions.” The ALJ explained that once an exempt long distance transaction has been identified, the exemption would extend to all related charges, regardless of the billing method (i.e., incorporating the charge into the rate for long distance telephone calls or separately stating the charge). That is, an exempt long distance transaction is not strictly limited to the long distance call itself. Rather, the exemption extends to other revenue associated with the exempt long distance transaction.
Exempt Long Distance Transaction or Local and Taxable?
The ALJ determined that the majority of the Taxpayer’s receipts at issue were exempt from the Utility Tax because such receipts were associated with exempt long distance transactions. Specifically, applying the “transaction” analysis, the ALJ determined that the Access Charges (both Usage and Flat-Fee), Taxes and Fees, and Long Distance Telephone Service Related Charges were all exempt from the Utility Tax. In so doing, the ALJ rejected the Department’s assertions that (i) only the long distance call itself is exempt from the Utility Tax and that the tax would apply to related pass-through charges; and (2) by excluding the receipts from its Utility Tax base, the taxpayer improperly deducted its receipts, which is forbidden by the tax law.
With regard to Access Charges, which comprised a majority of the Taxpayer’s receipts, the ALJ determined that such charges were exempt long distance transactions because the Taxpayer necessarily incurred them to provide its long distance telecommunications services. The ALJ explained that the enabling statute’s exemption applies “notwithstanding that some act be necessarily performed with respect to such transaction” within the City—i.e., notwithstanding the LECs’ “last mile” activities within the City. The ALJ further rejected the Department’s assertion that Access Charges imposed on a flat-fee basis are unrelated to long distance transactions because customers incur such charges regardless of whether they actually make a long distance telephone call. The ALJ noted that the billing model, which was consistent with competitors’ billing models, does not change the fact that the charges related solely to long distance telephone calls.
The ALJ further determined that the Taxes and Fees were exempt long distance transactions because the Taxpayer incurred such charges solely because it provided long distance telecommunications services. Likewise, the ALJ determined that the Long Distance Telephone Service Related Charges were exempt charges because they were associated with long distance services and solely billed to long distance customers.
Nevertheless, the ALJ determined that certain installation, equipment, and billing fees were subject to the Utility Tax. The ALJ explained that such charges may be necessary to provide a long distance telecommunications service, but such charges are not long distance “transactions.”
Internet Tax Freedom Act
Finally, the ALJ determined that the Taxpayer’s charges for access to the Internet were exempt under the Internet Tax Freedom Act (ITFA). The ALJ explained that ITFA imposed a moratorium on new taxes on Internet access but permits taxes on Internet access that were “generally imposed and actually enforced prior to October 1, 1998.” The Department issued a Finance Memorandum explaining that its policy was that Internet access services were not “telecommunications services” for Utility Tax purposes. As such, because the Department did not historically impose and enforce imposition of the Utility Tax on Internet Access, the ALJ determined that the Internet access charges at issue were exempt from the Utility Tax.
The ALJ’s determination provides sound and needed guidance regarding the scope of taxable transactions for Utility Tax purposes. The ALJ’s interpretation of “transactions” under the enabling statute will likely extend beyond the telecommunications context and may apply to other services on which the City imposes the Utility Tax.