The New York State Tax Appeals Tribunal has affirmed the decision of an Administrative Law Judge holding that bundled charges for interstate and intrastate wireless voice services were subject to New York sales tax in full. Matter of Helio, LLC, DTA No. 825010 (N.Y.S. Tax App. Trib., July 2, 2015).

Facts. Helio LLC sold wireless mobile telephone and Internet access services to customers throughout the United States, including in New York, during 2006 through 2009, the audit period. It offered two fixed monthly 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, with charges varying based on the number of minutes purchased. “All-In” plans were similar, but also included data- based services such as Internet access, text messaging, and email, and had higher monthly rates. 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 New York intrastate calls, and argued that the portion attributable to interstate calls was not subject to New York sales tax. It did not collect sales tax on the FUSF contribution fees that it recovered from its customers. Helio also charged per-minute overage charges to customers who exceeded their allotted minutes each month.

The Department of Taxation and Finance assessed sales tax on the full amount of the fixed monthly charges for both plans, taking the position that bundled charges were taxable in their entirety, and tax on the FUSF fees. The Department also assessed tax on all of the overage charges. Minimum interest was imposed, but not penalties, and the Department stated in the audit report that reasonable cause existed for Helio’s filing position.

ALJ Decision. The ALJ rejected Helio’s argument that the language in Tax Law § 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 . . . ” provided an exception from tax for charges for interstate calls, whether separately stated or bundled with charges for intrastate calls. The ALJ focused on § 1105(b)(2), which imposes tax on “[t]he 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 exception in § 1105(b)(1) for interstate telephony. The ALJ also found that the FUSF fees were properly subject to tax because they were an integral part of the service that Helio chose to pass on to its customers.

The ALJ did agree with Helio that overage charges and Internet charges were not subject to tax, and the Department did not appeal those findings to the Tribunal.

Tribunal Decision. The Tribunal agreed with the ALJ’s analysis and found that the exception from tax in Tax Law § 1105(b)(1) for interstate and international service charges did not apply to bundled charges. As did the ALJ, the Tribunal focused on the language in § 1105(b)(2). It found that the statute imposed tax on “‘all voice services’ that are ‘sold for a fixed periodic charge’” and “does not differentiate between intrastate or interstate and international service.” The Tribunal agreed with the ALJ that Helio’s interpretation of relied in part on the decision in People v. Sprint Nextel Corp., 41 Misc. 3d 511 (N.Y. Sup. Ct., NY Cnty. 2013), aff’d., 114 A.D.3d 622, leave to app. granted, No. 103917/11 (1st Dep’t, June 12, 2014), stating that the court in Sprint Nextel found statutory construction arguments similar to those made by Helio to be inconsistent with the statute’s plain language. The Tribunal found further support for its decision in Tax Law § 1111(l)(2), which sets forth provisions for computing receipts from mobile telecommunications services, and found that it expressly “does not allow for the unbundling of mobile telecommunications voice services from a periodic charge,” only for the unbundling of other telecommunications services that are not voice services.

The Tribunal also agreed with the ALJ in rejecting Helio’s argument 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 only applies 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 New York does otherwise subject the charges to tax. The Tribunal also held that the FUSF charge was subject to tax, and rejected Helio’s attempt to rely on an ALJ decision in another case as being “settled law” that such fees are not subject to tax, Matter of XO New York, Inc., DTA No. 820634 (N.Y.S. Div. of Tax App., Dec. 28, 2006), pointing out that since ALJ decisions may not be cited as precedent, they can hardly be relied upon to establish “settled law.” Finally, the Tribunal found no basis in Helio’s equal protection argument, since it concluded that all mobile telecommunications services sold for a fixed charge are subject to tax.

Additional Insights

This is the second publicly reported case to deal with the question of exactly what is subject to tax when charges for interstate mobile telephone services– which, if separately set forth, are clearly not subject to tax—are bundled with charges for taxable intrastate services, and whether mobile service providers may use reasonable methods to estimate and segregate the charges. Although the Tribunal agreed with the Department’s interpretation of the statute, there is an exemption provided in Tax Law § 1105(b)(1) for interstate charges, and the auditors apparently recognized that other interpretations of the statute are not unreasonable in not imposing penalties. The Tribunal also relied in part on the Third Department’s decision in the Sprint Nextel case, without noting that leave to appeal that decision was granted, and that the case is currently pending before the Court of Appeals, where it has not yet been argued. It is interesting to note that in Sprint Nextel, the case was brought by the Attorney General under the False Claims Act, and substantial penalties are being pursued against a taxpayer who took a position apparently similar to that taken by Helio, against whom no penalties were asserted at all by the Department, raising further questions about whether actions brought under the False Claims Act are an appropriate vehicle for resolving complicated statutory interpretation issues.