THE MYTH:	Data and Internet Access services are “the same,” and neither is regulated nor subject to transaction taxes (sales, use, excise, utility, etc.).
THE REALITY:	The common misconception that “Data” and “Internet Access” services are exempt from regulation and taxation overlooks the nuanced legal reality. The regulation and taxation of these services vary depending on factors such as their nature, type, and geographic jurisdiction, making it a complex area of law.

 

 

There is a widely held belief among businesses is that all non-voice data and Internet Access services are not subject to either regulation or taxation.  The origin of this misperception likely derives from decades of siloed regulatory and tax frameworks that provided clear delineations for older, pre-Internet forms of communications technology. However, technological convergence brought about by the commercial Internet caused such regulatory and tax regimes to lag behind the rapid developments in telecommunications technology, thus revealing inconsistencies in how particular services are taxed and regulated in some jurisdictions.

The purpose of this Educational Advisory is to dispel the Myth & Misperception that all non-voice data and all IP-enabled services are exempt from regulation and taxation, as well as to demonstrate the complexity and fluidity of the laws, regulations and policies governing these issues.

Regulation of Data and Internet Access Services

On the federal level, a service is subject to regulation by the Federal Communications Commission (“FCC,” or the “Commission”) depending on its service classification:

• Information Service – “the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications . . . .”[1]
• Telecommunications Service – “the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used.”[2]
• Telecommunications – “the transmission, between or among points specified by the user, of information of the user’s choosing, without change in the form or content of the information as sent or received.”[3]

While information services are typically exempt from most forms of direct FCC regulation, offerings classified as either telecommunications or telecommunications services are subject to direct regulation, as well as certain state regulations.

Private carriers are subject to lighter regulatory oversight and are exempt from certain contribution obligations, while common carriers face a more extensive set of regulations and requirements, as they provide services to the general public or a larger customer base. Providers of telecommunications are considered “private carriers,” and must comply with CALEA, make federal USF contributions/ FCC regulatory fee payments, but are exempt from TRS, NANP, and LNP contributions.

On the other hand, telecommunications services providers are considered “common carriers,” and are subject to the full range of Title II regulation, including:  disability access (“CVAA”); TRS requirements; consumer privacy (“CPNI”) requirements; E911 mandates; CALEA requirements; LNP/ NANP administration support; annual FCC regulatory fees, and a variety of market entry, exit, asset/control transfer, and discontinuance requirements, among others. 

However, determining a service’s classification is not as cut and dry as it may initially seem.  For example, many forms of private line services (e.g., VPN, MPLS, and SD-WAN) have not been formally classified by the Commission and may be either telecommunications or telecommunications services, depending on how the service provider offers the services to consumers.

The FCC considers mass-market broadband internet access service (“BIAS”) as an information service, and as a result, dedicated mass market Internet access services are currently exempt from FCC regulation and USF fees. Accordingly, providers of these services may exclude revenues from Internet access services from their USF contribution base.[4] Only services that exclusively provide Internet access can be excluded from USF contribution. If a carrier provides a connection that acts as a conduit for both voice and data transmission, it would be classified as a “telecommunications” offering subject to USF fees.[5]

Further, BIAS providers are not totally exempt from regulatory oversight.  Namely, they are required to comply with transparency requirements. [6]  They must disclose information about their network practices, performance characteristics, and commercial terms to consumers. [7]  These transparency requirements apply to all BIAS providers, “regardless of whether they lease or own the facilities used to provide the service.”[8]

Raw data transmission services, whether point-to-point (established between two specific endpoints) or point-to-multipoint (from the source to multiple destinations), have consistently been subject to FCC regulation as a form of telecommunications, even if the services do not involve transmitting voice communication.

Sometimes, when telecommunications and information processing are extensively integrated, the telecommunications aspect may become part of the overall information service. Consequently, the finished, retail information service offering might not be directly regulated by the FCC. The Commission determines whether or not a telecommunications service provided in conjunction with information processing will qualify as an information service on a case-by-case basis by scrutinizing the degree to which the basic telecommunications transmission component is “sufficiently integrated” with the enhanced services – often with ad hoc results (e.g., audio bridging services qualify as telecommunications or telecommunication services, even when offered with enhanced services[9]).  In contrast, it appears that certain collaboration services may be considered “sufficiently integrated” information services in certain instances.[10]  Thus, unless and until the FCC provides broader guidance with regard to collaborations services, there is at least an argument that any telecommunications component is sufficiently integrated to be considered to be information services. 

Thus, the FCC’s regulatory treatment of non-voice, raw data transmission services is not as black and white as it initially seems.  Instead, there are many exceptions to the general classification of such services as telecommunications, which in turn has a great impact on state regulation and taxation of such services.

Taxation of Data and IP-Enabled Services

Similar to the federal regulatory treatment of non-voice data transmission services, state and local taxation (“SALT”) of such services varies by jurisdiction and is influenced by an ad hoc combination of federal and state law, state tax administrative rulings, and judicial decisions.  Also, despite the popular belief that the federal Permanent Internet Tax Freedom Act’s (“PITFA”)[11] moratorium exempts all IP-enabled services from transaction taxes, the reality is quite different.  Indeed, the PITFA moratorium is subject to narrow interpretation, such that the specific facts of each purported “Internet Access” or IP-enabled service requires evaluation in light of the statutory language, lest the particular service succumb to SALT. 

1. State Taxation of Telecommunications/ Telecommunications Services

Data transmission services lacking a voice component may be taxable in one state but exempt from taxation in another. 

For example, in 2009 the New York State Department of Taxation and Finance found that communication network services (e.g., value-added network (“VAN”) applications, electronic data interchange, electronic mail and messaging services) were telecommunications services subject to both sales and telecommunications excise taxes.[12]  In contrast, the Illinois Telecommunications Excise Tax expressly excludes “value added services in which computer processing applications are used to act on the form, content, code and protocol of the information for purposes other than transmission.”[13] Furthermore, some states, such as Pennsylvania, tend to align their definition of telecommunications services for the purposes of taxation how the state legislation defines such services.[14] Thus, whether a non-voice data transmission service is taxable as a telecommunications or telecommunications service may vary across state lines based on an intricate web of administrative decisions, state laws, and judicial decisions.

However, an increasing number of states have adopted the uniform definition of “telecommunications service” provided by the Streamlined Sales and Use Tax Agreement (“SSUTA”), which specifically excludes data processing, information services, and Internet Access service from the definition of telecommunications services.  However, the SSUTA is specifically limited to sales and use taxes, thus taxability of data transmission services in SSUTA member states may remain for other taxes (e.g., telecommunications excise taxes). 

Therefore, the notion that data transmission services lacking a voice component are not subject to state taxation is a myth.  In reality, the fact is that such services may be taxable in one state for certain forms of taxes but be entirely exempt from all taxation under other state laws, administrative decisions, and judicial rulings.

2. State Taxation of Internet Access Services

While the ITFA generally exempts Internet Access services from state and local taxation, it is important to understand the limits of the exemption provided under federal law. The is true even in light of the PITFA’s impact of forcing previously “grandfathered” states to cease taxation of Internet access services by June 30, 2020.   

Additionally, many providers erroneously believe that the federal ITFA provides a blanket moratorium on taxation of IP-enabled services, when, in fact, the tax moratorium set forth in the ITFA is more limited. For the purposes of the moratorium, the ITFA defines Internet Access services as: “A service that enables users to access content, information, electronic mail, or other services offered over the internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users.”[15]  Telecommunications services are specifically excluded from this definition – except to the extent that telecommunications services are used by the Internet Access provider to provide Internet access, then such services are not taxable.  In addition, pursuant to the “Accounting Rule,” Internet Access services may be taxable in cases where they are aggregated with telecommunications service charges or other taxable charges on a customer’s bill unless the service provider can reasonably disaggregate the Internet Access charges.[16]

The ITFA protects services that enable users to connect to the Internet to access content, information, or other services, as well as Internet services such as e-mail, instant messaging, voice- and video-capable e-mail and messaging, video clips, and storage.  Despite confusion over the role of the ITFA, the law does not offer a blanket exemption for connected devices and all IP-enabled services.  For example, I-VoIP services are excluded from coverage.  Similarly, in our experience, most states and localities will consider certain services that fall within a regulatory grey area (IP Transit, VPN, MPLS, and SD WAN) to be taxable telecommunications services.

Thus, the idea that the ITFA completely exempts all IP-enabled services from state and local taxation is a myth.  In reality, the various flavors of IP-enabled services may be subject to taxation depending on the state in which such services are offered, and whether these services are aggregated with other taxable communications services. 

Summation

As this Educational Advisory illustrates, the notion that non-voice data transmission and Internet Access services are not subject to either regulation or taxation is a Myth & Misperception held by many industry participants.  In reality, technological convergence over the past few decades has led to the complex regulatory and tax landscape seen today:  where the legal status of a service is dictated by an intricate maze of statutes, administrative rulings, and judicial decisions existing across numerous federal, state, and local regulatory and tax jurisdictions.

Overall, the idea that all IP-enabled services are exempt from taxation is a myth, and the actual taxability varies depending on the specific service and state jurisdiction. Thus, service providers of data and Internet Access services should always consult with experienced legal counsel regarding the taxability and regulation of their specific service offerings, packages, and bundles of services to determine the appropriate treatment in each unique and discrete jurisdiction. 

Contact Us for Assistance

Analyzing the tax and regulatory ramifications of your company’s data and Internet Access services is a complex endeavor. But the long-term risks of neglecting this important step can be disruptive and economically catastrophic.

Attorneys in The CommLaw Group’s Communications Taxes & Fees Practice Group can help you unpack and understand the myriad issues, and how they may impact your business.  Moreover, our Attorneys can assist in the development of practical and pragmatic strategies that will enable, and not inhibit, your company’s ability to take full advantage of marketplace opportunities while mitigating exposure to regulatory and/or tax enforcement agencies.

 

Allison D. Rule, Partner	Tel:  703-714-1312 E-mail: adr@CommLawGroup.com
Jonathan S. Marashlian, Managing Partner	Tel:  703-714-1313 E-mail: jsm@CommLawGroup.com

 

DISCLAIMERS:  This Educational Advisory has been prepared for informational purposes only.  It is not for the purpose of providing legal advice; and does not create an attorney-client relationship between Marashlian & Donahue, PLLC, and you.  You should not act upon the information set forth herein without seeking experienced counsel.  This Advisory may be considered Attorney Advertising in certain jurisdictions.  The determination of the need for legal services and the choice of lawyer are extremely important decisions, and should not be based solely upon advertisements or self-proclaimed expertise.

 

[1] 47 U.S.C. § 153(20).

[2] 47 U.S.C. § 153(46).

[3] 47 U.S.C. § 153(43).

[4] Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, et. al., WC Docket Nos. 04-242, 05-271, Report and Order and Notice of Proposed Rulemaking, 20 FCC Rcd. 14853, 14863-65, ¶¶ 14-17, 14909-12, ¶¶ 103-06 (2005) (“Wireline Broadband Classification Order”); Appropriate Regulatory Treatment for Broadband Access to the Internet Over Wireless Networks, WT Docket No. 07-53, Declaratory Ruling, 22 FCC Rcd. 5901, 5901-02, ¶ 1 (2007) (“Wireless Broadband Classification Order”). As noted above, the FCC reclassified BIAS as a Title II telecommunications service subject to regulation (despite exercising its forbearance regulatory authority to broadband providers from many of the Title II regulations that would otherwise apply to their service offerings by virtue of the reclassification and declined to immediately apply FUSF contribution obligations). 2015 Open Internet Order at ¶¶ 331, 382, 490. Although the FCC reversed this decision in 2017, uncertainty with regard to non-BIAS broadband services and enterprise BIAS services and the risk of future FCC re-classification of BIAS or other broadband services not currently classified persists.

[5] See Wireline Broadband Classification Order at ¶ 9 (treating Gigabit Ethernet services as “telecommunications” based upon the fact that carriers and end-users have traditionally used these services for “basic transmission”).

[6] Report and Order on Remand, Declaratory Ruling, and Order, GN Docket No. 14-28, 30 FCC Rcd, 5601, at ¶¶ 164-167, 169 (2015); 2010 Open Internet Order ¶ 56.  There is a temporary exemption from the enhanced transparency rule for providers with 100,000 or few subscribers.  2017 Open Internet Order ¶ 24. 

[7] Report and Order on Remand, Declaratory Ruling, and Order, GN Docket No. 14-28, 30 FCC Rcd, 5601, at ¶¶ 164-167, 169 (2015); 2010 Open Internet Order ¶ 56.  There is a temporary exemption from the enhanced transparency rule for providers with 100,000 or few subscribers.  2017 Open Internet Order ¶ 24. 

[8] 2017 Open Internet Order at ¶ 188.

[9] See InterCall, Inc., Order, 23 FCC Rcd. 10731 (2008).  However, the Commission found previously that when the telecommunications component is merely “integral” to the data-processing capabilities of a service, then the entire service is deemed to be an Information service.  See Regulation of Prepaid Calling Card Services, Declaratory Ruling and Report and Order, 21 FCC Rcd. 7290 (2006).

[10] See Universal Service Contribution Methodology; Request for Review of a Decision of the Universal Service Administrator by Cisco WebEx LLC, DA 16-1401, WC Docket No. 06-122 (rel. Dec. 16, 2016) finding that WebEx’s desktop and document sharing application and audio teleconferencing service are classified a single information service).

[11] Permanent Internet Tax Freedom Act, Pub. L. No. 105-277, 112 Stat. 2681 (1998), as amended by Pub. L. No. 107-75, 115 Stat. 703 (2001), Pub. L. No. 108-435, 118 Stat. 2615 (2004), Pub. L. No. 110-108, 121 Stat. 1024 (2007).  The ITFA became permanent in Pub. L. No. 114-125, 130 Stat.122 (2015) – Trade Facilitation and Trade Enforcement Act of 2015.

[12] N.Y. Dept. of Taxn. and Fin., TSB-A-09(17)C (Dec. 15, 2009). 

[13] 35 ILCS 630/2(c).

[14] Level 3 Commun., LLC v. Cmmw., 151 A.3d 710 (Pa. Cmmw. 2016), aff’d, 172 A.3d 1118 (Pa. 2017) (basing its analysis on the definition of internet access as an enhanced telecommunications service, which is excluded from the definition of taxable telecommunications services under the Pennsylvania Tax Reform Code).

[15] ITFA at § 1104(5). 

[16] Id. at § 1106.