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