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