Were charges for value-added computer network management services subject to Florida sales or gross receipts tax as telecommunications?

Subject

"Value added" Computer Network Services

Plain-English summary

The cooperative's customer charges for value-added computer network management were not subject to Florida sales tax or telecommunications gross receipts tax. The Department found that its data manipulation, transmission security, encryption, information processing, electronic messaging, protocol conversion, bandwidth allocation and management, frame relay, network management, and customer support did not fall within the statutory definition of telecommunications.

The cooperative used packet-switching equipment and carrier-provided T1 and wide-band leased lines to connect members' computers and other devices. Its services included managed data networks, messaging, electronic data interchange, and Internet or intranet network management. Members paid monthly fees based on usage and connections, with usage measured by characters transmitted rather than transmission distance or duration.

Although the cooperative did not sell telecommunications to its members, it bought telecommunications to operate the network. Florida treated it as the ultimate consumer of those inputs, so it had to pay sales and gross receipts taxes to its providers on Florida telecommunications purchases, including the leased lines.

What this means for you

Using carrier lines to deliver a managed data service did not, by itself, make the customer-facing service taxable telecommunications under the statutes applied in 1998. The Department focused on what the cooperative sold: managed information-processing and network functions, not local or toll telephone service, private communication channels, or the other listed telecommunications.

The input side came out differently. A provider that consumes taxable telecommunications while selling a nontaxable managed service remains responsible for the tax charged on those purchased telecommunications.

Common questions

Q: Did frame relay, bandwidth management, and protocol conversion make the service taxable telecommunications? No. The Department expressly included those functions among the value-added computer network management services it did not consider telecommunications.

Q: Were all charges to the cooperative's members exempt from the taxes discussed? The ruling said charges for the described services were not subject to sales tax under section 212.05(1)(e)1.a. or gross receipts tax under section 203.01, and did not include other taxable property or services on the stated facts.

Q: Could the cooperative buy its carrier services tax-free for resale? No. Because it was not reselling telecommunications, it was the ultimate consumer and had to pay sales and gross receipts taxes on telecommunications purchased in Florida.

Citations and references

• Fla. Stat. §§ 203.01, 203.012(4)-(5), (9) — gross receipts tax, utility service, telecommunications, and private communication service
• Fla. Stat. § 212.05(1)(e)1.a. — sales tax on telecommunications
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-051

Original ruling text

SUMMARY

A "value added" computer network management service,
including data manipulation, leaning and securing data
transmissions, data encryption, information processing,
electronic messaging, computer related protocol conversion
and bandwidth allocation, bandwidth management, frame
relay, network management, or customer support, is not a
"telecommunication service", as defined in Chapter 203.
F.S. Therefore charges to customers for such service are
not subject to sales tax under Section 212.05(1)(e)1.a. or
gross receipts tax under Section 203.01 F.S. Provider of
computer network management service must pay sales tax and
gross receipts tax to the telecommunication service
provider for any telecommunication services that it
purchases in Florida, including the charges for T1 and
wide-band leased lines.

Jul 06, 1998

Re: Technical Assistance Advisement 98A-051
Sales Tax and Gross Receipts Tax
"Value added" Computer Network Services
Chapter 212, F.S., and Chapter 203, F.S.
XXX ("Entity")

Dear :

Your letter of February 12, 1998, requested a Technical
Assistance Advisement concerning the above referenced matter.
This response constitutes a Technical Assistance Advisement
(TAA) under Chapter 12-11, Florida Administrative Code, and is
issued to you under the authority of s. 213.22, Florida
Statutes.

STATED FACTS

Your letter imparted the following facts:

[Entity] is a not-for-profit cooperative organized for the
purpose of providing a data-only network over which its
members transmit messages. [Entity] provides information
processing services over a value added network, providing
customers with high speed virtual circuits which are used
to connect a wide variety of computers and other peripheral
devices. Transportation of information is performed by
meshed, high-performance packet switching nodes and
multiplexers interconnected through high-speed digital
highways.

[Entity's] network is composed of more than 1,500 circuits
which represent a consolidated transmission capacity of
around 500 Megabits per second. The backbone of the
network consists of large capacity communications circuits,
such as intercontinental T1 and wide-band, leased lines
from common carriers. These common carriers collect
applicable taxes related to the leased lines from [Entity].
These lines are connected to [Entity's] high speed cell
relay switches. These switches utilize special
communications protocols that provide dynamic allocation of
bandwidth, error control, protocol conversion, and
alternative routing in case of line or equipment failure.

Data moves within the network under the control of
proprietary routing algorithms which take into account
traffic volumes, line error rates, and line failures, as
well as data priority, to select the most economical route.
Services cover fixed and mobile communications and a broad
range of information processing applications. Services
include managed data network services using frame relay,
X.25, IBM SNA protocols; messaging; electronic data
interchange (EDI); and Internet/Intranet managed network
services.

[Entity's] Managed Data Network Services (MDNS) provides a
portfolio of cost-effective network services designed to
meet the communications needs of the air transport
industry. MDNS can be accessed five different ways:
through direct access-using a leased line connection, dial

access- using a private or public dial connection, LAN
access- providing access from a managed router on the
customer site, indirect access- access via a Public Data
Network provided in exceptional cases only, and VSAT
access- access via a satellite link to the [Entity]
Network. Each of these access types supports a range of
different access services. Each access service is
associated with a specific communication protocol.

With the increased use of local area networks of personal
computers and servers, and the need to interconnect them
across long distances, [Entity] has introduced support for
the frame relay protocol. The Frame Relay Access service
provides a high-performance data networking service for the
interconnection of geographically dispersed Local Area
Networks (LANs) and IBM environments. Frame relay is
totally transparent to the protocols used. The Frame Relay
Access service provides sophisticated bandwidth management
capabilities, allowing the service to be tailored to the
requirements of individual sites. Options such as
Committed Information Rates and burst traffic support offer
users the benefits of allocated capacity, end-to-end,
combined with bandwidth-on-demand capabilities. This
service allows one LAN to connect to other LANs at very
high speeds. Since the intelligence in the network
determines where frames of information are to be sent, only
one network access line is required per LAN, as opposed to
multiple lines connecting each LAN to the other. The
combination of frame relay's streamlined implementation and
the sophisticated flow-control and error handling systems
provide a highly effective solution for IBM host-to-host
communications. Additionally, the speed of the line can be
varied to meet the user's needs as they change from moment
to moment. Frame relay also provides automatic redirection
around access line failures, node failures and customer
premises equipment (CPE) failures [and] ensures highavailability frame relay service.

Although the economy, protocol conversion, reliability, and
various value added services provided by [Entity] are all
considered benefits by its customers, a primary benefit of

the service is network management. Proactive round-theclock supervision of the network is ensured by over 20
regional control centers. [Entity] has more than 170 help
desks which provide a high level of support to customers at
any time, whenever needed. [Entity] takes complete
responsibility for tracking, reporting, and resolving
network problems, and provides expertise, as well as
diagnostic and test equipment that most customers do not
have.

[Entity] does not provide equipment to its members with
which to access the network. Rather, the members utilize
their own equipment, typically, a personal computer. Also,
[Entity] does not own property in any states other than
where it has switching centers or network access points.
Operating expenses are recovered by requiring members to
pay monthly fees based on usage and number of connections.
The usage fees are based on the number of characters
transmitted, but are not based on distance or duration of
transmission....

REQUESTED ADVISEMENT

"Entity" requests a determination whether the above described
service of "providing a network which cleans and secures data
transmissions over local telephone lines," is subject to sales
tax or gross receipts tax on utility services.

APPLICABLE LAW

A review of pertinent statutory and administrative authority
would be helpful in the discussion of the taxability of the
services provided by "Entity." Chapter 203, Florida Statutes
(F.S.), imposes the Florida Gross Receipts Tax, and Chapter 212,
F.S., imposes the Florida Sales and Use Tax.

Gross Receipts Tax

Section 203.01(1), F.S., provides, in part:

203.01 Tax on gross receipts for utility services.--

(1)(a) Every person that receives payment for any utility
service shall report by the last day of each month to the
Department of Revenue, under oath of the secretary or some
other officer of such person, the total amount of gross
receipts derived from business done within this state, or
between points within this state, for the preceding month
and, at the same time, shall pay into the State Treasury an
amount equal to a percentage of such gross receipts at the
rate set forth in paragraph (b). Such collections shall be
certified by the Comptroller upon the request of the State
Board of Education.
(b) Beginning July 1, 1992, and thereafter, the rate shall
be 2.5 percent.

"Utility service" is defined in Section 203.012(9), F.S., to
include telecommunication services.

Section 203.012(5), F.S., provides:

(5) The term "telecommunication service" means:
(a) Local telephone service, toll telephone service,
telegram or telegraph service, teletypewriter service, or
private communication service; or
(b) Cellular mobile telephone or telecommunication
service; or specialized mobile radio, and pagers and
paging, service, including but not limited to "beepers" and
any other form of mobile and portable one-way or two-way
communication; but does not include services or equipment
incidental to telecommunication services enumerated in this
paragraph such as maintenance of customer premises
equipment, whether owned by the customer or not, or
equipment sales or rental for which charges are separately
stated, itemized, or described on the bill, invoice, or
other tangible evidence of the provision of such service.

The term "telecommunication service" does not include any
Internet access service, electronic mail service,
electronic bulletin board service, or similar on-line
computer service.

Section 203.012(4), F.S., provides:

(4) The term "private communication service" means:
(a) A communication service furnished to a subscriber or
user that entitles the subscriber or user to exclusive or
priority use of a communication channel or groups of
channels, or to the use of an intercommunication system for
the subscriber's stations, regardless of whether such
channel, groups of channels, or intercommunication system
may be connected through switching with a service described
in subsection (3), subsection (6), or subsection (7);
(b) Switching capacity, extension lines, and stations, or
other associated services which are provided in connection
with, and which are necessary or unique to the use of,
channels or systems described in paragraph (a); or
(c) The channel mileage which connects a telephone station
located outside a local telephone system area with a
central office in such local telephone system.

Sales and Use Tax

Section 212.05(1)(e), F.S., provides, in part:

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, or who stores for use or consumption in
this state any item or article of tangible personal
property as defined herein and who leases or rents such
property within the state.
(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 6 percent on charges for:
a. All 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), except that
the tax rate for charges for telecommunication service is 7
percent....

DETERMINATION

None of the services described in your letter falls under any
definition of "telecommunication service" delineated in Section
203.012(5), F.S., such as local telephone service, toll
telephone service, telegram or telegraph service, teletypewriter
service, private communication service, cellular mobile
telephone or telecommunication service, specialized mobile
radio, or pagers and paging service. Furthermore, the facts
presented do not indicate that Entity is engaged in the
operation of a bypass network pursuant to Section 203.01(1)(c),
F.S.

The Department does not consider a "value added" computer
network management service, including data manipulation,
cleaning and securing data transmissions, data encryption,
information processing, electronic messaging, computer related
protocol conversion and bandwidth allocation, bandwidth
management, frame relay, network management, or customer
support, as a "telecommunication service."

Therefore, charges to customers for such services are not
subject to sales tax under Section 212.05(1)(e)1.a., or gross
receipts tax under Section 203.01, F.S. Additionally, these
services do not include the sale of any taxable tangible
personal property or taxable services, and charges for such
services are therefore not subject to sales tax under any other
provision of Chapter 212, F.S.

Since Entity is not reselling "telecommunication service," it is
deemed to be the ultimate consumer of any telecommunication
services that it purchases to provide the network management

services to its customers. Thus, Entity must pay sales tax and
gross receipts tax to the telecommunication service provider for
any telecommunication services that it purchases in Florida,
including the charges for intercontinental T1 and wide-band
leased lines.

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 confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

Ralph G. Pepe
Tax Law Specialist
Tech. Assist. & Dispute Resolution
Control #: 33030