Tennessee: Telecommunications Services v. Information Services
- Feb 20, 2014 | Gail Cole
For more than a decade the Tennessee Department of Revenue has been working to expand tax to sales of certain information services. Last week, the Tennessee Supreme Court refused to review three cases, effectively shutting the door on the state’s efforts. As explained on its website, “The Tennessee Supreme Court is the state’s court of last resort.”
The three cases are as follows:
- Tennessee Commissioner of Revenue v. Level 3 Communications, LLC;
- Tennessee Commissioner of Revenue v. IBM Corporation; and
- Tennessee Commissioner of Revenue v. AOL, INC.
A quick look at these cases illustrates the complexity of the issue.
Tennessee Commissioner of Revenue v. Level 3 Communications, LLC
Level 3 is a Delaware LLC “with a principal place of business in Colorado.” During the period in question (January 2001 through March 2004), Level 3 provided dial-up and broadband Internet services to Internet Service Providers that in turn provided these services to end-users in Tennessee. Level 3 collected Tennessee sales tax on sales of those services.
In January 2004, the DOR published Sales & Use Tax Notice #04-03, which explained that “Internet access is no longer considered a taxable ‘telecommunications service’ under Tennessee law.” Internet service providers were invited to request a refund for sales tax collected and remitted for these services. When Level 3 did, the state denied its claim.
Level 3 sought a refund of sales tax it had paid to the state, and when the state refused, they went to court.
The state contends that “the true object of [Level 3’s] services was the ‘ability to communicate.’ The Court of Appeals points out that “it is important to consider what the Legislature explicitly excluded from taxation” in the law, and argues that the services provided by Level 3 are specifically excluded from taxation.
The Tennessee Court of Appeals determined that the true object of Level 3’s services was “to provide access to the Internet, not to provide telecommunications services” and ruled that the “wholesale Internet services” provided by Level 3 Communications were not subject to sales tax. Recently, the Tennessee Supreme Court denied the state’s appeal of that decision.
Tennessee Commissioner of Revenue v. AOL, INC
The AOL case is similar to the Level 3 case in that AOL argued the services it provided during a specific period were not taxable communications services as defined by Tennessee law. Rather, they “constituted value added network services” and were not subject to the tax.
However, unlike the Level 3 case, the Court of Appeals upheld the department’s assessment that “sales of port management services by Sprint to AOL were taxable sales of telecommunications services” between 2000 and 2003. When AOL tried to take its case to the state Supreme Court, it refused to hear AOL’s appeal.
Tennessee Commissioner of Revenue v. IBM Corporation
IBM argued that the services it provided during a specific period of time were not taxable communication services “because users were limited to accessing information on geographically remote computers; the WAN (wide area network) did not allow its users to communicate with one another.”
The trial court ruled that the WAN service was a taxable communication service but the Court of Appeals reversed that judgment. According to the Court of Appeals ruling, the “primary purpose of the WAN was to enable a company’s authorized uses to access information related to the company’s business, not to provide communication between users.” In other words, IBM’s sales of wide area network services were not telecommunications services as defined by Tennessee law, and were therefore not taxable.
To date, the courts have upheld the taxation of telecommunications services in Tennessee. Services deemed to be information services, however, are still exempt from tax.
If the Tennessee Department of Revenue has thus far failed in its attempts to expand tax to information services, that doesn’t mean the issue is permanently settled. The taxation of electronically transmitted information services is a vexing issue in many states. To date, one of the most challenging aspects for businesses is keeping track of information services tax laws in states where they do business.
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