98-059
Response
February 9, 1999
REQUEST
LETTER
July 29, 1998
Re: Company
X
Dear Mr. Jones:
Below COMPANY
has been retained by Company X to determine the tax consequences of the
following fact pattern. Company X will
provide a unique service that may be considered a telecommunication service, an
Internet service or some other taxable service in your state. Because of the unique nature of the services
Company X will provide, the statues, regulations and case law do not adequately
address the tax consequences of these services. Therefore, we respectfully request you review the following fact
pattern and notify us in writing your opinion as to the tax obligations of
Company X in your state. It is Company X's
intent to fully comply with your opinion prior to initiating operations in your
state.
Facts
Company X is in the process of beginning operations
in the next few months. Company X will
be based in Texas.
The majority of the services will be
provided using resources located
in
Texas.
Company X's principal business will be to provide low-cost, high-speed
wireless broadband date communications to business travelers. Specifically, Company X will provide
local-are network (LAN) and Internet connectivity to laptop and palmtop
computer users from remote locations at speeds approximating a desktop LAN
connection. In essence, Company X will
allow customers remote user access to exactly the same date, programs and other
network services, at similar speeds provided by a local terminal in the
customer's office.
Company X will market its services to its clients in
a manner similar to cellular phone services.
Most customers will purchase bundled services. Company X will initially market its services to hotels,
convention centers, conference facilities and office complexes (public access
sites). These service are described in
more detail below. However, Company X
will only provide access to transmit and receive data. Company X does not anticipate providing voice
communications at this time. All date
transmission will occur using radio frequencies and high-speed telephones lines
that coverage to the customer's LANs or other destinations selected by the
user.
There are four separate charges that will be
invoices to Company's customers. These
include:
1) Company X's customers will purchase a transmitter
card and insert it into a laptop computer's PCMICIA slot;
2) A monthly subscriber fee;
3) An access fee for every time a connection is
made; and
4) A charge for every megabyte above a predetermined
monthly level.
It is assumed that Company X will have sufficient
physical presence for sales/use and income/franchise tax nexus. Company X anticipates that it will provide
information of some of the systems at various customer locations. In addition, Company X may own a small
amount of physical property in your state via radio transmitters. Company X intends to charge sales tax on
sales of item 1 above and use tax for transmitter given for free as part of a
bundled service agreement incorporating items 2-4.
ISSUES
Company X specifically request guidance on items 204
above. Issues that concern Company X
are the following:
1) IN general, how should items 204 be taxed? Are these items considered a
telecommunications service, an Internet service or some other taxable service?
2) Company X anticipates that most bills will be
sent to a customer's headquarters.
However, by definition, the customer will have employees use Company X's
service when they are away form the corporate office. How should these services be sourced? In Goldberg v. Sweet, the U.S. Supreme Court outlined how long
distance telephone service should be sourced, In essence, the Court stated that
long distance charges are sourced by looking at where the call originated,
where the call originated, where the call terminated and where the billing
address is located. The long distance
service is then sourced to the location where two of the three activities
occurred. Should the principals
discussed in that case be applicable here?
3) What if three different states are involved in a
transaction in item 2 above? (Service
originates in one state, terminates in another state and is billed in a third
state.)
4) Company X is providing only data services. Therefore, even if the state holds that
Company X should be taxed as a telecommunication service, Company X believes
that only the standard rate of telecommunication tax should apply. Company X should not be obligated to collect
911 and other miscellaneous telecommunications excise taxes and charges since
Company X nor its customers would be included in the class intended by the legislature
to collect and remit such taxes. In
addition, Company X and its customers do not stand to benefit from these
services and ti impose such fees would violated Due Process.
5. Due to
the mobility of the origination and termination of service, should all services
be sourced to the billing address for administrative ease to both the State and
Company X?
6. Would
your state impose different tax rates for the various services offered above?
I appreciate your attention to this matter. As you can see, Company X will provide a
unique service that does not clearly fit the current state statutes,
regulations and case law. I look
forward to your response. If you have
any questions, please contact me at (214) 969-7007.
Yours very truly,
NAME
COMPANY
February
9, 1999
NAME
COMPANY
RE: Advisory
Opinion - Sales Tax on Communication Services
Dear NAME,
We
have received your request for an advisory opinion concerning the services
provided by your client, Company X. As
indicated in your letter, Company X will install equipment at various sites in Utah. Company X’s subscriber clients will connect laptop and palmtop
computers to Company X’s equipment at these sites and, through Company X’s
radio frequencies and telephone lines, be able to connect to the clients’ own
various local-area networks (“LANs”) and Internet providers. Clients will be charged various fees to
transmit and receive data using Company X’s equipment, radio frequencies, and
phone lines. You specifically ask six
questions concerning Company X’s charges to provide this service. Let us address these questions separately.
QUESTION
1. Utah Code Ann. §59-12-103
imposes a sales tax on charges for intrastate telephone service, which is
defined in Utah Admin. Code R865-19S-90 (copy enclosed). Section 5 of that rule defines “telephone
service” as the transmission for hire of data by wire, cable, radio waves,
fiber optics or any other method.
Company X does not provide its clients a LAN or access to an Internet
server. What is does provide is the means
for its clients to connect to their own offices through Company X’s equipment,
telephone lines, and radio waves. Once
clients connect to their own offices, they have access to their own LANs and
Internet providers. Company X acts not
as a provider of LANs and Internet services, but instead as a telephone
corporation providing equipment and telephone lines for its clients’ use. Accordingly, Company X provides telephone
services for purposes of Utah’s Sales and Use Tax Act, and charges associated
with these services are subject to sales and use tax.
Among
the charges subject to sales tax are subscriber fees and charges for intrastate
telephone service. However, interstate
long distance charges are not subject to sales tax. Thus, all three of the charges you ask about would be subject to
sales tax except when the charge is for an interstate transmission. Let us discuss the three charges
individually.
a) Monthly Subscriber Fees. These charges are not for a specific transmission,
so there is no need to differentiate between intrastate and interstate
service. Thus, any subscriber fee
billed to access an entity located in Utah is subject to sales tax whether or
not that entity’s billing address is in Utah.
b) Access Fee for Each Connection. If this charge is associated with an
intrastate transmission, which is defined in Rule R865-19S-90 as a transmission
that both originates and terminates in Utah, sales tax is applicable. If this charge is associated with an
interstate transmission, which is any transmission other than an intrastate
one, then sales tax is not applicable.
c) Charge for Megabyte Usage. Each data transmission can be measured in
terms of megabytes. Certain charges
will be imposed based on the number of megabytes transmitted through Company
X’s system. As in b) above, each of
these charges will be subject to sales tax if the associated transmission is an
intrastate one. Should the charge
instead be for an interstate transmission, then the charge is not subject to
sales tax.
QUESTION
2. As explained above, Rule
R865-19S-90 only imposes sales tax on a transmission that is intrastate (both
originating and terminating in Utah).
As the billing address never determines whether a transmission charge is
taxable, Utah’s approach to determining taxability is less inclusive than the Goldberg
v. Sweet standard you refer to in your question.
QUESTION
3. Again, billing address is not a
factor in determining whether a specific transmission charge is taxable or not. It is irrelevant in differentiating
between an interstate and an intrastate
transmission.
QUESTION
4. This is your only question that
does not concern the application of sales tax on charges for your telephone
services. Instead, it concerns other fees
that are often added to telephone service charges, and the Tax Commission does
not have jurisdiction over these fees.
They are administered by the Public Service Commission. We suggest you contact them to ascertain
what collections duties actually exist for you. The telephone number is (801)530-6716, and the address is 160
East 300 South, Salt Lake City, Utah 84111.
QUESTION
5. No. The client’s billing address may be located somewhere other than
the client’s office. The client’s
office is that location at which the client’s own LAN and Internet provider are
located and to which he or she connects using Company X’s services. Subject to these distinctions, charges for
subscriber fees and separate transmissions should be sourced for purposes of
sales tax situs as follows:
a) Subscriber Fees. If the billing address and the client’s office are both located
in Utah, then taxes on this fee should be sourced to the client’s office;
however, the billing address may be used if it fairly represents the location
of the client’s office. If only one of
these locations is in Utah, then the fee is sourced to the one location that is
in Utah.
b) Transmission Fees. For this fee to be taxable, there must exist an intrastate
transmission. The transmission must
either originate or terminate at the client’s office, where the LAN or Internet
provider is located. In either case,
taxes on this fee should always be sourced to the client’s office, unless the
billing address fairly represents the location of the client’s office.
QUESTION
6. The sales and use tax varies in
Utah depending upon location. The
appropriate sales tax to apply for a specific charge is dependent upon the tax
situs, as explained in Question 5 above.
For
the Commission,
Joe B. Pacheco, CPA
Commissioner
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