Are internet access charges taxable in Kansas, and how should a phone company bill bundled internet and telephone charges?

Plain-English summary

A rural telephone company bills its telephone customers for internet service that another company (the internet access provider) actually performs, splitting the receipts with that provider. A customer complained about being charged sales tax on internet access, and the phone company asked whether it should be collecting tax on those charges.

The Department's answers:

• Internet access charges are not taxable. Kansas sales tax law never enumerated internet access as a taxable service, and recent federal legislation bars new state taxes on internet access.
• Telephone transmission services billed to an ISP are taxable. Under K.S.A. 79-3603(b), telephone services (like dedicated numbers and connections) that link the user to the internet provider's equipment are taxable, just like any other telephone service — and long-distance calls to reach an ISP are taxed like any other long-distance call.
• Don't tax the bundled lump sum. Because the phone company bills a single bundled charge in which the telephone piece is incidental to the internet service, charging sales tax on the whole lump sum is improper — it taxes services that shouldn't be taxed.

To remit the tax due only on the telephone portion, the Department described options: unbundle and bill internet access separately from the intrastate telephone usage; or treat the phone company as the ISP's collection agent, taxing the appropriate portion of receipts as a charge to the ISP for telephone usage (and excluding the company's bill-collection costs from tax). Depending on the contract with the ISP, the company may "factor" the tax out of its receipts (divide receipts by one plus the combined state and local rate; the tax is the difference).

What this means for you

If you're a carrier billing bundled internet and telephone charges in Kansas, separate the taxable telephone piece from the nontaxable internet access.

• Internet access itself isn't taxed. Don't charge Kansas sales tax on internet access charges.
• Telephone transmission to the ISP is taxed. Dedicated lines/numbers and connections billed to the internet provider are taxable under 79-3603(b); long-distance to reach an ISP is taxed like any long-distance call.
• A bundled lump sum is a trap. Taxing the whole bundle over-taxes the customer. Unbundle, or act as the ISP's collection agent and tax only the telephone portion.
• Check your ISP contract. It may let you factor the tax out of receipts and should address who bears any additional tax due.

Common questions

Are internet access charges taxable in Kansas?
No. Kansas never enumerated internet access as taxable, and federal law prohibits new state taxes on internet access.

What part of the bill is taxable?
The telephone transmission services — dedicated numbers/connections billed to the internet provider, and long-distance calls to reach the ISP — are taxable under 79-3603(b).

Can I just tax the whole bundled charge?
No. Taxing the lump sum improperly taxes the nontaxable internet access. Unbundle the charges, or act as the ISP's collection agent and tax only the telephone portion.

How do I compute the tax if I factor it out?
Divide the receipts by one plus the combined state and local sales tax rate (as a decimal); the tax owed is the difference between the telephone receipts and that result. Your ISP contract governs the details.

Citations and references

• K.S.A. 79-3603(b) — cited for taxing telephone transmission services billed to internet service providers (dedicated numbers/connections linking the user to the ISP's equipment), which are taxable like any other telephone service.
• The ruling also states, without a numbered citation, that Kansas sales tax law has never enumerated internet access as taxable and that recent federal legislation prohibits new state taxes on internet access.

Source

• Original ruling (DOCX): https://www.ksrevenue.gov/pildocs/rulings/P-1999-55.docx
• Kansas Policy Information Library: https://www.ksrevenue.gov/prpil.html

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research
January 15, 1999

X X X X
X X X X
X X X X

RE: Your letter of December 22, 1998

Dear X X X X:

I have been asked to answer your letter that we received last month. Your company provides telephone services to customers located in rural Kansas and in small Kansas towns. Your telephone company bills internet services to your telephone customers. These services are performed by another company that provides internet access services. You divide these receipts with the internet access provider. This arrangement allows you to be reimbursed for your taxable intrastate long distance costs and the internet provider to be reimbursed for their non-taxable services. One of your customers has complained that internet access charges are not subject to Kansas sales tax. You ask whether you should be collecting sales tax on these charges.

Internet access charges are not subject to sales tax. Kansas sales tax law has never enumerated internet access services as being a taxable service. Recent federal legislation prohibits any new state taxes on internet access. However, telephone transmission related services that are billed to internet service providers are subject to Kansas sales tax. See K.S.A. 79-3603(b). These services often include dedicated telephone numbers and connections that are paid for by the internet provider rather than the internet user. These telephone services link the internet user to the internet access providers' equipment and are subject to sales tax just like any other telephone service.

Telephone calls sometimes allow the internet users to access internet service providers at distance locations. These calls are charged to the consumer and taxed just like any other long distance call. These telephone charges are not exempted by federal law or Kansas law.

In your case, you act as a collection agent for the internet provider and bill your customers a single, bundled charge that provides compensation to you for the cost of the telephone services and compensation to the internet access provider for the non-taxable internet access services. Because these charges are bundled and the telephone services are an incidental part of the internet services, it is inappropriate for you to charge your customers sales tax on lump sum amount. Charging tax on these bundled charges means that you are billing customers sales tax on services that should not be taxed.

You have a number of options for correctly remitting the tax that is due on the telephone portion of the bundled charge. One is to unbundle the charges and bill your customers separately for the internet access services and for the intrastate telephone usage that connects them with the internet service provider. Another is to treat your company as acting as a collection agent for the internet company and retaining the appropriate portion of the receipts as payment to you by the internet provider for their use of your telephone services and for your collection of their billing for internet access. The appropriate amount of the receipts for the telephone services would then be taxed as a charge being billed to the internet provider for telephone usage. This approach is similar to a telephone company billing sales tax to an internet provider for the use of dedicated lines and for other charges. It should recognize your costs as a bill collection agent for the internet provider and exclude them from tax.

The terms of your contract with the internet provider may allow you to factor the tax due from your receipts. Factoring is done by first dividing the receipts by one plus the state and local sales tax rate stated as a decimal. The sales tax that should be paid to the state is the difference between the receipts for the telephone charges minus the result of the division. The approach that you choose will depend on the terms of your contract with the internet service provider. Hopefully, the contract fixes responsible for any additional taxes that are due under your business arrangement.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination. Please call me if you wish to discuss this matter further.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 04/27/1999 Date Modified: 10/11/2001

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