Which Internet-service-provider charges were exempt or taxable in Kansas under the extended Internet Tax Freedom Act moratorium?

Plain-English summary

Notice 08-03 explained Kansas sales and use tax for Internet service providers under the Internet Tax Freedom Act Amendments Act of 2007, which extended the federal moratorium through November 1, 2014 and took effect June 30, 2008.

Exempt Internet-access services

The moratorium covered Internet access and telecommunications an ISP purchased, used, or sold to provide or enable that access, including DSL billed and used for Internet access. It also covered home-page, email, instant-messaging, video-clip, and personal electronic-storage services, including when a third party sold them separately without providing the customer's Internet access.

A telecommunications company documenting an exempt sale to an ISP needed an exemption certificate that identified the ISP, stated that the service was being bought to provide Internet access, identified the particular services and accounts, and carried the ISP's manual or electronic signature.

Charges Kansas still taxed

The federal definition excluded separately charged or bundled audio programming, video programming, voice, and other charged digitized products or services using Internet protocol. Kansas therefore taxed:

• subscriber access to radio or television programming;
• VoIP and similar telecommunications services;
• prewritten or canned computer software, including electronic delivery;
• telecommunications an ISP used for purposes other than Internet access;
• ancillary telecommunications services such as detailed billing, directory assistance, vertical services, voice mail, and conference bridging; and
• Internet access bundled with taxable services unless the ISP could reasonably identify the access charge from books and records kept in the regular course of business.

Other digital products

Purely electronic downloads of movies, music, photographs, newspapers, and similar products other than prewritten software were not taxable because they were not tangible personal property. If the same digital product was delivered electronically and on a physical medium such as a backup CD or DVD, the entire customer charge was taxable. Charges for electronic access to a remote database to answer queries or extract information were also nontaxable.

What this means for you

Internet service providers

Separate exempt Internet-access charges from taxable programming, VoIP, software, and ancillary services in your regular books. For bundled bills, the ability to reasonably identify the access component determined whether the access exemption survived.

Telecommunications vendors selling to ISPs

Obtain the detailed exemption certificate described in the notice before treating telecom service sold to an ISP as exempt Internet-access input.

Common questions

Q: Was DSL sold as Internet access exempt?
A: Yes, when the ISP billed and used it to provide Internet access.

Q: Were VoIP and streaming radio or television charges exempt Internet access?
A: No. The notice treated VoIP and subscriber programming charges as taxable.

Q: Were electronic movie or music downloads taxable?
A: Not when delivered only electronically and not as prewritten software. If also delivered on a physical medium, the full charge was taxable.

Q: What happened when taxable services were bundled with Internet access?
A: The access component remained exempt only if the ISP could reasonably identify it from its regular books and records.

Citations and references

• Public Law 110-108 — Internet Tax Freedom Act Amendments Act of 2007.
• K.S.A. 2007 Supp. 79-3603(b), (k), and (s).
• K.S.A. 2007 Supp. 79-3602(pp), (uu)-(zz), and (aaa).
• K.S.A. 2007 Supp. 79-3686(c).

Subject

Kansas Sales Tax and Internet Service Providers

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 08-03

Original ruling text

Notice
Notice Number: 08-03
Tax Type: Kansas Retailers' Sales Tax
Brief Description: Kansas Sales Tax and Internet Service Providers
Keywords:
Approval Date: 06/26/2008

Body:
KANSAS DEPARTMENT OF REVENUE
NOTICE 08-03
Kansas Sales Tax and Internet Service Providers
Office of Policy & Research --- June 26, 2008

In 1998, Congress enacted the Internet Tax Freedom Act which placed a moratorium on state taxation of Internet
access charges. In 2007, Congress enacted the Internet Tax Freedom Act Amendments Act of 2007 (Amendments
Act) which extended the moratorium to November 1, 2014. Public Law 110-108. The Amendments Act also changed
the definition of "Internet access service" for purposes of the extended moratorium. This notice explains how Kansas
sales and use taxes apply to Internet service providers (ISP's) under the extended moratorium.

The Amendments Act defines "Internet access service" to mean a service that enables users to connect to the Internet
to access content, information, and other available services. The definition also lists certain services that are exempted
under the moratorium, and others that are not exempted. Under the definition, exempt Internet access services include:

 (a) the purchase, use, or sale of telecommunication services by an ISP to the extent that the telecommunication
 services are purchased, used, or sold:

             (1) to provide Internet access; or
             (2) to otherwise enable the Internet user to access content, information, or other services over the
             Internet. This includes Digital Subscriber Line (DSL) service that an ISP bills a customer for and
             uses to provide Internet access to the customer; and
 (b) services, such as home page, electronic mail and instant messaging (including voice- and video-capable
 electronic mail), video clips, and personal electronic storage capacity whether packaged with Internet access
 service or sold separately by a third-party that is not providing Internet access to its customer.

To document exempt sales of telecommunication services to an ISP, a telecommunication company is required to
secure an exemption certificate from the ISP that: (i) contains the name and address of the ISP; (ii) states that the ISP
is buying telecommunications service to provide Internet access to its customers; (iii) identifies the particular
telecommunication services and accounts being used to provide Internet access; and (iv) is signed by the ISP, either
manually or electronically.

The definition of "Internet access service" specifically excludes:

 charges for audio programming, video programming, voice, or other digitized products or services that utilize
 Internet protocol for which there is a charge, regardless of whether the charge is separately stated or bundled
 with the charge for Internet access.

These exclusions allow States to tax ISP charges for radio programming, television programming, Voice over Internet
Protocol (VoIP), and certain other digitized products and services. Kansas currently taxes: (i) subscriber charges to
access radio or television programming (K.S.A. 2007 Supp. 79-3603(k)); (ii) VoIP as defined at K.S.A. 2007 Supp. 79-
3602(aaa); and (iii) canned software whether delivered electronically or on a tangible medium. K.S.A. 2007 Supp. 79-

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3603(s). An ISP is required to collect sales tax on customer charges for these products and services, whether the
charges are separately stated or bundled with nontaxable changes.

Kansas does not tax charges for electronically-delivered computer downloads of digitized products other than canned
software, since an electronic download is not tangible personal property. Nontaxable electronic downloads include
movies, music, photographs, newspapers, and other similar products. However, when a digitized product is delivered
to a customer both electronically and on a tangible medium such as a back-up CD or DVD, the total amount that the
ISP bills to the customer is taxable. An electronic download of canned computer software is taxable since "tangible
personal property," by definition, includes "prewritten computer software." K.S.A. 2007 Supp. 79-3602(pp). Kansas
also does not tax a database provider's charges that allow an Internet user to electronically access information on the
provider's remote database to answer queries or extract information.

Services that remain subject to Kansas sales tax under the extended moratorium include:

 1. Telecommunication services, including telephone services, cellular services, paging services, and facsimile
 services. These service are taxable when sold to an ISP for use other than providing Internet access. K.S.A. 2007
 Supp. 79-3603(b).

 2. Ancillary services which include, but not limited to, detailed telecommunications billing, directory assistance,
 vertical services, voice mail, and conference bridging services. K.S.A. 2007 Supp. 79-3603(b); see K.S.A. 2007
 Supp. 79-3602(uu) through K.S.A. 2007 Supp. 79-3602(zz).

 3. VoIP and similar services that utilize Internet protocol. These services are excluded from Federal definition of
 "internet access service" and are subject to Kansas sales tax as a telecommunications service. Public Law 110-
 108; see K.S.A. 2007 Supp. 79-3602(aaa).

 4. Subscriber charges to access radio or television programming whether provided using cable, Internet protocol,
 or by some other electronic means. K.S.A. 2007 Supp. 79-3603(k). Charges for prewritten computer software are
 also taxable. These charges are taxable even when the charge is bundled with exempt charges for Internet access
 services.

 5. Internet access services that an ISP bundles with taxable services, unless the ISP can reasonably identify the
 charges for Internet access from it books and records kept in the regular course of business. See K.S.A. 2007
 Supp. 79-3686(c).

The effective date of the Amendments Act is June 30, 2008.

Date Composed: 07/07/2008 Date Modified: 07/07/2008

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