A New York State Administrative Law Judge (ALJ) rejected a nearly $20 million sales tax refund claim for sales tax paid on hardware and software purchased by Verizon Wireless to upgrade its Orangeburg, New York data center. Matter of Cellco Partnership d/b/a Verizon Wireless, DTA No. 827179 (N.Y.S. Div. of Tax App., Apr. 12, 2018). The ALJ held that the purchased property did not qualify for the exemption from sales tax for property used to process and transmit telecommunications services because the property was used to upgrade Verizon Wireless’ customer care and data center and not its transmission equipment.

Verizon Wireless maintains a data center located in Orangeburg, New York, which is primarily dedicated to hosting its Virtual Information System Integrated Online Network (VISION). Verizon Wireless uses the VISION system to add new customers to its network, to change an existing customer’s service plan, and for customer billing. While a cellular device would not work on Verizon Wireless’ network until it was added by VISION, if the VISION system were not working for a month, an active customer would still be able to make phone calls. 

In 2009, Verizon Wireless acquired Alltel Corporation, a cellular provider, and as a result, added more than 10 million new customers to its network. Due to the large influx of new users, Verizon Wireless had to make significant upgrades to the hardware and software in Orangeburg that hosted the VISION application. As part of this upgrade, Verizon Wireless made extensive purchases of server, disk, tape, memory, and other mainframe component upgrades from various vendors. It paid sales tax on these purchases. 

Verizon Wireless subsequently filed a refund claim in the amount of $19,184,576 on the grounds that the purchased property was exempt from sales tax under Tax Law § 1115(a) (12-a), which provides an exemption from sales tax for:

Tangible personal property for use or consumption directly and predominantly in the receiving, initiating, amplifying, processing, transmitting, retransmitting, switching or monitoring of switching of telecommunications services for sale or internet access services [including tangible personal property used or consumed to upgrade such processing and transmittal systems.] 

Verizon Wireless took the position that the purchased property was essential to its business operations, and should be exempt despite the fact that it was not used to process or transmit telecommunications services, citing Matter of Peoples Telephone Company, Inc., DTA No. 816253 (N.Y.S. Tax App. Trib., Jan. 16, 2001). The Department approved $49,553 of Verizon Wireless’ refund claim, but denied the balance of $19,135,023, finding that the vast majority of the purchases were “[n]ot used in transmitting telecom,” as required under the statute.

ALJ Determination. The ALJ found that the question to be resolved was straightforward: whether the purchased tangible personal property, which was used to upgrade Verizon’s VISION system, was used or consumed directly and predominantly in the receiving, initiating, amplifying, processing, transmitting, retransmitting, switching, or monitoring of switching of telecommunications services for sale or internet access services for sale. The ALJ held that it was not. 

While the ALJ acknowledged that the property used to upgrade Verizon’s VISION system was “mission critical” to Verizon’s operations in providing cellular telecommunications services, he held that the exemption did not apply because the hardware and software were “not necessary nor used to receive, initiate, amplify, process, transmit, retransmit, switch or monitor switching of telecommunications services.” The ALJ noted that this was evidenced by the fact that cellular communications could still occur if the VISION system was not operational.


This case is a reminder that exemption statutes are narrowly construed. Accordingly, the ALJ declined to expand the exemption under Tax Law § 1115(a)(12-a) for tangible personal property “directly and predominately used” in initiating, transmitting, and receiving telecommunications services to include tangible personal property that is essential to Verizon’s business operations, but is not necessary or used for the actual transmission of telecommunications services. In so doing, the ALJ distinguished Matter of Peoples Telephone, in which the Tribunal held that payphone pedestals and enclosures were directly and predominately used in the initiating and receiving of telecommunications services, because in that case there would be no meaningful reception or initiation of telephone communications at payphone locations without the pedestals or enclosures.