Does Nebraska sales tax apply to Internet or on-line service connection and access charges?

Plain-English summary

This 1996 ruling drew an early line for Nebraska sales tax on Internet and on-line services: the software is what gets taxed, not the access.

The two holdings. Under Revenue Ruling 1-96-1:

• A charge to an end user for the initial connection to the Internet or an on-line information service is taxable when the connection includes computer software.
• A charge to an end user for accessing the Internet or an on-line service is not taxable.

How the connection charge works. A service provider connects subscribers to information resources over a phone line, and subscribers need communication software plus a computer, modem, and phone line. The software may or may not come from the provider, which typically charges an initial connection or "start-up" fee. That fee is:

• Taxable if the provider furnishes the necessary software — whether bundled in a connection package or given as "free" software.
• Fully taxable if the software charge is included in the connection fee (the whole fee is then taxed).
• Not taxable if no software is provided.

How the access charge works. Once service is established, the provider bills for time on-line — a flat rate per billing period, a fee based on actual time, or a combination. Regardless of billing method, access charges are not taxable, because the charge for access is not a charge for telephone communication service.

What this means for you

An Internet or on-line service provider (1996-era treatment)

Separate the software from the service. If your start-up/connection package includes software (even "free" software), that connection charge is taxable — and if you don't break out the software, the entire connection fee is taxable. If you provide no software, the connection fee isn't taxable. Your ongoing time/flat-rate access charges are not taxable at all. Note this is a 1996 ruling; the taxation of digital and telecommunications services has evolved, so confirm current treatment before relying on it.

A subscriber or business buying access

Expect no sales tax on your monthly/hourly access charges. Tax could appear on an initial sign-up charge only if it bundled in software.

Common questions

Q: Is my monthly Internet access fee taxable under this ruling?
A: No. Charges for accessing the Internet or an on-line service are not taxable, regardless of whether they're flat-rate or time-based.

Q: When is the connection/start-up fee taxable?
A: When the provider furnishes computer software as part of the connection. If the software charge is included in the connection fee, the whole fee is taxable; if no software is provided, the fee isn't taxable.

Q: Why isn't access taxed as a telephone service?
A: The ruling states the charge for access does not constitute a charge for telephone communication service.

Citations and references

• The connection-charge rule — an initial connection charge is taxable when the connection includes computer software (bundled or "free"); fully taxable if the software charge is included in the fee; not taxable if no software is provided.
• The access-charge rule — charges for accessing the Internet or an on-line service are not taxable, as they are not charges for telephone communication service.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr019601.pdf

Original ruling text

Revenue Ruling 1-96-1
November 7, 1996
Sales and Use Tax - Charges for Connection to or Furnishing Access to the Internet and Online Information Services. CHARGES TO END USERS FOR INITIAL CONNECTION TO
THE INTERNET OR AN ON-LINE INFORMATION SERVICE, ARE TAXABLE WHEN THE
CONNECTION INCLUDES COMPUTER SOFTWARE. CHARGES TO END USERS FOR
ACCESSING THE INTERNET OR AN ON-LINE SERVICE ARE NOT TAXABLE.
Advice has been requested regarding the application of sales and use tax to charges for the initial
connection to the Internet or an on-line information service and to charges for continuing access to
the Internet or on-line information services.
Providers of Internet access and on-line information services (service providers) furnish end users
(subscribers) with a connection to the information resources via a telephone line. Connection to the
Internet or an on-line information service requires that subscribers have communication software
as well as a computer, a modem, and a phone line. The software may or may not be furnished by
the service provider. The service provider normally charges for the initial connection or a “startup” fee. Once the service is established, subscribers are charged additional fees for the time they
are on-line using the service.
Charges for the initial connection to such services are not taxable unless the service provider
furnishes software. If the service provider furnishes the necessary software, as part of a connection
package or as “free” software, the charge is taxable. If the charge for the software is included in
the connection fees, the entire amount of the connection fee is taxable. If software is not provided,
the connection fee is not taxable.
The service provider charges the subscriber for the time they have access to the Internet or the
information service. This charge may be a flat rate per billing period, a fee based on actual time
the subscriber has access to the Internet or the information service or a combination of both types
of billing. Regardless of the method used for billing, the charges for access are not taxable as the
charge does not constitute a charge for telephone communication service.
APPROVED:

M. Berri Balka
State Tax Commissioner
November 7, 1996

Nebraska Department of Revenue, P.O. Box 94818, Lincoln, Nebraska 68509-4818