How did the 1994 ruling tax a city's fiber bandwidth and network services?

Subject

Fiber Optic Telecommunications Services

Plain-English summary

Under the 1994 ruling, the city had to collect 7% sales tax and account for gross receipts tax on receipts from both bandwidth and network telecommunications service. The Department treated bandwidth alone and bandwidth combined with switching as telecommunications service.

The city was exempt from sales and use tax on its own tangible-property purchases and from tax based on the cost of operating the network for its own use. The ruling also said the city's internal network use did not require gross receipts tax based on operating cost.

The official PDF expressly directs readers to Revised TAA 94M-010R or TAA 00A-050 dated October 3, 2000. The rates and conclusions summarized here are therefore historical.

What this means for you

Do not use the stated 7% sales-tax rate or 2.5% gross-receipts-tax rate as current guidance. The useful historical distinction is that the Department rejected the city's position that leasing bandwidth without switching fell outside telecommunications service.

Common questions

Were the city's network purchases taxable? No. The ruling applied the governmental-entity exemption to purchases for the city's own use.

Did the city have to collect sales tax from customers? Yes. The ruling required collection on both bandwidth and network-service receipts.

Did gross receipts tax apply only when switching was included? No. The Department applied it to receipts from both bandwidth and networking.

Is this current guidance? The PDF itself points readers to later revised guidance, so this page presents the 1994 result only.

Citations and references

• Fla. Stat. §§ 203.01, 203.012, 203.013, 212.02(13), 212.05(1)(e), (h), 212.06, 212.08(6), and 213.22
• Fla. Admin. Code r. 12A-1.091(4)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94M-010

Original ruling text

Title:

Fiber Optic Telecommunications Services

See Revised TAA 94M-010R or 00A-050 dated Oct. 3, 2000

Sep 29, 1994

Re: Technical Assistance Advisement No. 94(M)-010 Gross Receipts Tax and Sales Tax XXX (hereinafter City)

Dear :

The City has requested a technical assistance advisement pursuant to Section 213.22, Florida Statutes.

Issue

Whether revenues received from fiber optic network provided by the City and the by-pass of the local telephone company's switched service are subject to gross receipts tax under Chapter 203, F.S., and sales tax under Chapter 212, F.S.

FACTS

The City is constructing a fiber optic network to facilitate various municipal and governmental communication services. At least a portion of the network will result in a by-pass (substitute) of the local telephone company's switched services. In addition, the City will allow others to use its fiber optic network. In some cases the City will lease bandwidth only (i.e., dark fiber capacity). In other cases, the City will lease network service, which includes both bandwidth and periphery switching equipment. The City also owns and operates an electric utility. The electric utility department will use the fiber optic network to send information to devices that remotely operate generation, transmission, and distribution switching equipment, and devices that collect data from equipment that monitors the generation, transmission, and

distribution systems. Identifiable sections of the network (i.e., lateral pulloffs from the network backbone to the electric utility facility) are dedicated to providing communication services for the generation, transmission or distribution system. Further, it is my understanding that the City has been approved by the Florida Public Service Commission as an alternate access vendor.

Your questions concern the taxability of the sale and use of the fiber optic network as follows:

Question 1. Are City's purchases of tangible personal property for the fiber optic network exempt from sales tax by s. 212.08(6), F.S.?

Question 2. Does section 212.05(1)(h), F.S., require the City to remit sales tax on its cost of operating the fiber optic network?

Question 3. Does section 212.05(1)(h), F.S., require the City to collect sales taxes on revenues derived from leases of bandwidth or network services?

Question 4. Does section 212.05(1)(e), F.S., require the City to collect and remit sales taxes on leases of bandwidth?

Question 5. Does section 212.05(1)(e), F.S., require the City to collect and remit sales taxes on the leases of the network services?

Question 6. Are the City's revenues from leasing bandwidth to others subject to the gross receipts tax?

Question 7. Are the City's revenues from leasing network services to others subject to the gross receipts tax?

Question 8. For the purposes of section 203.01(1)(c), F.S., what is included in the cost of operating the City's fiber optic network?

City believes that Question 1 must be answered in the affirmative. Section 212.08(6), F.S., exempts from tax sales to municipalities other than "machines and equipment and parts and accessories therefor used in the generation, transmission or distribution of electrical energy." Although the City utilizes a portion of the fiber optic network to send communications to its transmission and distribution equipment, the fiber optic network only transmits light and information and it cannot transmit, distribute, or generate electric energy.

City believes that Question 2 must be answered in the negative. Section 212.08(6), F.S., and rule 12A-1.091(4), F.A.C., generally exempt the City from payment of sales and use taxes imposed by Chapter 212, F.S. Therefore, the City should be exempt from the tax imposed by section 212.05(1)(h), F.S., which appears to be a use tax.

City believes that Question 3 must be answered in the negative. Section 212.05(1)(h), F.S., imposes a tax on the user of the telephone service, and not the provider. See TAA 85(B)6-001. Although the user may be required to remit the tax, the City is not required to collect or remit the tax.

City also believes that Question 4 and Question 6 must be answered in the negative. Sections 212.05(1)(h), and 203.01(1)(c), F.S., require the user to remit sales and gross receipts taxes to the Department based on the amount paid to the City, but a lease of the bandwidth (i.e., specific channels or fibers) without switching capability does not appear to constitute a lease of a `telecommunications service.' See subsections 203.012(4) and (5), F.S.

City believes that Question 5 and Question 7 must be answered in the affirmative. The lease of network service includes bandwidth and switching, which appears to constitute a lease of a `telecommunications service.' See sub-sections 203.012(4) and (5), F.S.

City believes that the answer to Question 8 must be one of the following:

a) The cost of operating the entire system prorated by the percentage of the system's capacity that is utilized by the City; or

b) The cost of operating the entire system less any revenues derived from leases of bandwidth or network services. However, it is not clear whether the City must include any depreciation costs. Section 203.01(1)(c), F.S., provides that "the depreciation expense to be included in actual cost shall be the depreciation claimed for federal income tax purposes." As the City does not pay federal income tax, a city is not required to remit gross receipts tax on its depreciation expenses.

DISCUSSION AND ANALYSIS OF LAW

Discussion and Law

"212.05 Sales, Storage, use tax.--It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who engages in the business of selling tangible personal property at retail in this state, including the business of making mail order sales, or who rents or furnishes any of the things or services taxable under this chapter,...

"(1) For the exercise of such privilege, a tax is levied on each taxable transaction or incident, which tax is due and payable as follows:...

"(e)1. At the rate of [7] percent on charges for... [a]ll telegraph messages and long distance telephone calls beginning and terminating in this state, telecommunication service as defined in s. 203.012 and those services described in s. 203.012(2)(a)....

"212.08...
"(6) EXEMPTIONS; POLITICAL SUBDIVISIONS. "There are also exempt from the tax imposed by this chapter sales made to the United States Government, a state, or any

county, municipality, or political subdivision of a state when payment is made directly to the dealer by the governmental entity.... This exemption does not include sales, rental, use, consumption, or storage for use in any political subdivision or municipality in this state of machines and equipment and parts and accessories therefor used in the generation, transmission, or distribution of electrical energy by systems owned and operated by a political subdivision in this state except sales, rental, use, consumption, or storage for which bonds or revenue certificates are validated on or before January 1, 1973, for transmission or distribution expansion."

"212.02 Definitions."(13) `Person' includes any individual, firm, copartnership, joint adventure, association, corporation, estate, trust, business trust, receiver, syndicate, or other group or combination acting as a unit and also includes any political subdivision, municipality, state agency, bureau, or department and includes the plural as well as the singular number.

Section 203.01(1)(a) and (b), Florida Statutes, provides that every person that receives payment for any utility service shall report to the Department the total amount of gross receipts derived from business done within this state, or between points within this state.

Section 203.012(9), F.S., defines utility service as electricity or natural or manufactured gas for light, heat, or power; or telecommunication services. In addition, Section 203.012(5), F.S., defines telecommunication service as local or toll telephone service, telegram or telegraph service, teletypewriter or computer exchange service, or private communication service. Further, Section 203.013, F.S., imposes the tax on the charge for telecommunication services that originate or terminate in this state and are billed or charged to a Florida telephone number or device, or Florida customer, except private line service. Private line service is taxed based on the charge for each channel termination point in Florida, the charge for the total channel milage between each

termination point within Florida, and fifty percent of the charge imposed for the total channel mileage between the first channel termination point in Florida and the nearest channel termination point outside of Florida.

As to the Florida Sales Tax, Section 212.05(1)(e) 1., F.S. imposes the sales tax on telecommunication services as defined in Chapter 203, F.S., on sales that occur in Florida in the same manner as the gross receipts tax, except for interstate or international private communication serve. Private communication service is taxable on a prorated basis for the interstate interoffice mileage charge.

Chapter 203, F.S., provides the gross receipts tax of 2.5 percent will apply to all telecommunications services including local telephone service, toll telephone service including intrastate, interstate and international telephone service, pay telephone service, pagers and beepers, voice mail, cellular, computer exchange service and private line service. Chapter 212, F.S., provides all telecommunication services defined or described in Chapter 203, F.S., are subject to the 7 percent sales tax, unless specifically exempt.

In addition, both Chapter 203, F.S., and Chapter 212, F.S., provide that the above mentioned telecommunication services may be purchased without paying the taxes to the provider, if they are being resold and a separate resale certificate is given to the provider for the gross receipts tax and sales tax. The appropriate taxes are due and must be remitted on their resale.

Department's Position

Therefore, the answers to the questions presented are as follows:

Question 1. The City is exempt from sales and use tax on its purchases of tangible personal property under s. 212.08(6), F.S., which exempts a governmental entity on purchases of tangible personal property for its own use.

Question 2. Section 212.05(1)(h), F.S., requires any person

who operates a telecommunications system for its own use to remit sales tax based on the cost of operating that system. However, since s. 212.08(6), F.S., exempts cities from sales and use tax, the City is exempt from remitting the sales and use tax on the cost of operating its telecommunications system. In addition, the City is exempt under s. 212.05(1)(h), F.S., which provides that the sales and use tax provisions do not apply to the use of the system by a telecommunications provider in the conduct of providing a telecommunications service for hire.

Question 3. Section 212.05(1)(e), F.S., provides that all services as defined in s. 203.012, F.S., are taxable and s. 212.06, F.S., provides that a governmental entity is a dealer and shall collect the sales tax on taxable transactions. Therefore, the City is required to collect the 7% sales tax on the amount derived from providing the bandwidth or network telecommunications service.

Question 4. Section 212.05(1)(e), F.S., provides that all telecommunications service defined in section 203.012, F.S., is taxable, and the providing of the bandwidth and network is a telecommunication service under Chapter 203, F.S. Therefore, you are required to collect and remit the 7% sales tax on these services.

Question 5. See Question 4.

Question 6. Chapter 203, F.S., imposes the gross receipts tax on all telecommunications service of whatever nature and the providing of both bandwidth and networking are a telecommunications service. Therefore, the gross receipts tax will apply to all receipts received for both the bandwidth and networking.

Question 7. See Question 6.

Question 8. Since both the bandwidth and networking are taxable telecommunication services and there is an exemption for a telecommunications provider using a system for its own use in the conduct of providing a

telecommunication service, the internal use of the system would not require the City to remit the gross receipts tax based on the cost of operating the system.

As to the sales tax, s. 212.08, F.S., provides an exemption for holders of a consumer's certificate of exemption and provides that utility services to residential households are exempt.

This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice as specified in s. 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules upon which this advice is based may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect the confidentiality of such information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or the response.

Sincerely,

James E. Silvey
Tax Law Specialist
Technical Assistance

JES/jes