94-011
Response September
2, 1994
XXXXX
Utah State Tax
Commission
Administrative
Division
Heber M. Wells
Building, 5th Floor
160 East 300 South
Salt Lake City, Utah
84134
Re: Request for an Advisory Opinion
Dear XXXXX:
INTRODUCTION
XXXXX is a corporation
organized and existing under and by virtue of the laws of the State of XXXXX,
with its principal offices located in XXXXX
XXXXX is a wholly-owned operating subsidiary of XXXXX. XXXXX is the XXXXX telecommunications services
provider in the United States.
XXXXX respectfully
requests that the Department of Revenue issue an Advisory Opinion regarding the
application of Section 5912-103 of Title 59, Chapter 12 of the Utah Code Annotated
to certain charges made by XXXXX in connection with services provided by XXXXX
to its customers, as described below.
FACTS
A. PARTICULAR SERVICES BEING OFFERED
XXXXX communication
system is used to provide two basic and different categories of service. The first category is comprised of simple
data communications. With respect to
simple data communications, customers, mainly residential, may use XXXXX system
in conjunction with their personal computers and modems for transmitting data
to, or receiving data from, others. The
first category of service is provided as a separate and distinct category from
the second category of service which is enhanced data communications. Since XXXXX operates a long distance system
and does not currently provide local service, users of either the first or
second category of XXXXX service must access XXXXX system via local exchange
carriers for originating transmissions and similarly must exit XXXXX system via
local exchange carriers for terminating transmissions.
The second category of
service consists of an enhanced data communications network that enables the
transmission of its customers' data using “telephone lines” interconnected to
XXXXX equipment to ensure the security, integrity, and reliability of the
transferred data in a timely and efficient manner. There are basically two types of customers of XXXXX enhanced data
services: (1) database providers with external customers and, (2) other
customers having enhanced service requirements.
a.
Database Providers with External Customers. An information database provider might use XXXXX to reach a
diverse population of users desiring to access the provider's database
services. In this is situation, XXXXX customer is the database provider
itself. The database provider contracts
with its own subscribers and authorizes them to use the enhanced network
services provided by XXXXX to reach their database. These enhanced network services have been purchased by the database
provider. It is XXXXX customer (the
database provider) who consequently provides the various database services
themselves to their customers.
b.
Other Customers with Enhanced Service Requirements. Customers,
such as corporations, universities, and governments contract with XXXXX so that
they can utilize their own internally owned and controlled applications
generally from remote sites (i.e., order entry systems, inventory tracking,
airline or hotel reservation systems, and accounting information
consolidation).
XXXXX may apply
protocols in providing services to its customers. Protocols consist of applying controls which facilitate the
transmission of data, including the method of packaging the data (packets) in
quanta, the rules controlling the flow of the data, the formatting of the headers
and trailers, the control messages, and the conversion of subscriber-originated
protocols. For example: headers and
trailers are inserted before and after the data of each client; address
information added to each client's data allows the data to be identified as to
owner and sequence; packets are counted to assure that the count of packets and
data bits sent agrees with that which is received; all packets not received are
resent; packets are disassembled and reassembled; error checking routines are employed
to assure that data is received correctly; if the protocol placed back in the
packets at the terminal node differs from the subscriber's originating
protocol, XXXXX creates new protocol conversion, etc.
Customers'
confidential and proprietary data cannot be compromised. An enhanced data communications network such
as XXXXX may provide security through both validation processes and
technological features. Validation may
be provided at several levels: who may get onto the network, where they may enter,
and where they are allowed to go. For
XXXXX, security is also provided through the use of “packetizing” or placing
the data into a series of separate electronic envelopes, and within each
envelope interspersing the data of more than one customer.
Not only does a
customer want its data transfers to be secure, but it wishes to maintain the
integrity of the data being transferred.
With data conveyance, if one bit of data is dropped, the entire file
will be worthless and must, and will, be resent. With XXXXX enhanced data network, error-checking occurs at each
piece of equipment. The receiving
equipment verifies that the data received is the same as that which was sent by
the prior equipment. If there is any
variation, this segment is resent.
Finally, customers
value reliability and speed. They want
to count on their transfers being accurate and secure each and every time. Receipt of data is often time-critical. The
typical data packet transmits over the XXXXX network in less than 1/5th of a
second.
In addition to
managing general data transfers, XXXXX offers applications on the enhanced data
network which handle transfers of data in a specialized manner or which serve a
specialized customer group. Although there
are some special features of these services, they share the common features
provided to all of XXXXX enhanced data network customers: security, integrity
and reliability of data transfers. Such
services include electronic data interchange and electronic transaction data
transfer services (including electronic draft capture).
Electronic data
interchange is a method of exchanging business forms in a paperless environment
electronically. Each group which wishes
to send and receive files by using this type of service prepares and/or reads their
files by using software packages of their choice on their own computers. This ensures that all such files will have
the same format. The data is then
exchanged over XXXXX system.
Electronic transaction
services can also be furnished by XXXXX customers over its network. Electronic transaction services provide a
method of facilitating credit card verification by utilizing XXXXX enhanced
data network. XXXXX contracts with banks (and on occasion with large merchants)
to carry data from the card swipe machines to the authorization database
designated by the XXXXX customers (banks or large merchants). The XXXXX customer contracts with the
authorization database and XXXXX arranges for a gateway to this host. XXXXX may provide other services for the
customer, including collecting some of the transaction data until the end of
the day and providing the file to the customer. This feature is called
electronic draft capture. It would be
similar to keeping a carbon copy of each credit card slip from which data had
been sent that day, putting them into an envelope in some order, and giving
them to the XXXXX customer at the end of the day. The purchase of this feature is not required for providing the
electronic transaction service.
In summary, the basic purpose
when entering into a transaction with XXXXX is to use XXXXX enhanced
telecommunications network for the handling of data traffic. Such enhanced services assure the integrity,
reliability, and security of the transferred data, as well as the ability to
allow transfer between dissimilar devices.
The customer desires to obtain prompt delivery of its data, without any
change to the information content of the data, and without the risk of improper
interception of the data by unauthorized parties. XXXXX manages secure and reliable data transfers using its own
sophisticated proprietary equipment and technology. XXXXX role is merely to assist its customers in providing their
services to their customers, internal and/or external.
OPINIONS REQUESTED
XXXXX requests the
following opinions: (1) whether its providing the first category of services
(simple data communications) constitutes “telephone service” within the meaning
of Section 59-12-103(1)(b)(ii) of the Tax Law and (2) that the tax, if
applicable to such services, would be imposed only on sales attributable to
communications that both originate and terminate in Utah.
With respect to XXXXX
providing the second category of services (enhanced data communications), XXXXX
requests opinions whether (3) the enhanced data communications provided by
XXXXX constitute “telephone service” within the meaning of Section
59-12-103(1)(b)(ii) of the Tax Law and (4) that the tax, if applicable to such
services, would be imposed only on sales attributable to communications that
both originate and terminate in Utah.
APPLICABLE LAW
Telephone
Service classification. Section 59-12-103(1)(b) of the Tax Law
imposes a sales tax for the “amount paid to common carriers or to telephone or
telegraph corporations ... for (ii) intrastate telephone service.” Section 59-12-103(2)(b) sets this rate at
5%.
Rule R865-19-90S A
defines “telephone service” to include “the transmission for hire of signs,
signals, writings, images, sounds, messages, data, or other information of any
nature by wire, radio, light waves, or other electromagnetic means.”
If the first or second
category of XXXXX services consists of “telephone service” within the meaning
of Section 59-12103(1)(b)(ii), the tax would be imposed only on sales for
services which begin and end in Utah.
Under Section 59-12-103(1)(b)(ii), the tax would not be applicable to
receipts from interstate or international communications.
If you have any
questions, or need additional information with respect to any of the matters
herein, please call either XXXXX or the undersigned.
Very truly yours,
XXXXX
Tax Representative
Re:
Advisory Opinion - - Sales or Use Tax Application to Telecommunications
Services
Dear XXXXX:
Your request for an advisory opinion as to
whether your charges for certain telecommunication services constitute taxable
charges for telephone service was referred to the Auditing Division for their
analysis.
The division's staff recommendations are
as follows:
1.
Utah Code Annotated Section 59-12-103 imposes the sales tax on charges
for “intrastate telephone service.”
2.
Administrative Rule R865-19-90S (copy attached) defines “telephone
service” as the “transmission for hire of signs, signals, writings, images,
sounds, messages, data, or other information of any nature by wire, radio,
light waves, or other electromagnetic means.”
3.
Both of the categories of telecommunication services as described in
your letter do, therefore, constitute telephone service; and charges for such
services are subject to the tax if attributable to communications that both
originate and terminate in Utah.
Based upon the facts presented in your
letter, we are in agreement with the Auditing Division's recommendations.
Obviously, if there are deviations from these facts, this opinion may be
negated.
If you do not agree with this
determination, you may appeal to the Tax Commission for a formal hearing. The results of that hearing would constitute
a declaratory judgment and be appealable to the Utah State Supreme Court. A Notice of Appeal Rights and a copy of the
Utah Taxpayer Bill of Rights are attached.
For The Commission,
Alice Shearer
Commissioner