Are a carrier's reciprocal compensation receipts excluded from the section 186-e tax, and are they subject to the section 184 local telephone tax?

Plain-English summary

PricewaterhouseCoopers LLP, for X Company (a non-facilities-based competitive local exchange carrier (CLEC) registered with the PSC), asked about receipts from reciprocal compensation arrangements with other carriers (CLECs/ILECs) for transporting and terminating calls. Two questions: do they qualify for the section 186-e sale-for-resale exclusion, and are they subject to the section 184 tax?

The Department held:

• Section 186-e (Issue 1). X's reciprocal compensation receipts are for the provision of telecommunication services for resale, so under section 186-e.2(b)(1) they qualify for the sale-for-resale exclusion and are not subject to the section 186-e tax.
• Section 184 (Issue 2). Section 184 imposes an additional franchise tax on a corporation principally engaged in local telephone business, defined to include service that originates and terminates within the same LATA. Because all of X's traffic occurs within the same LATA, its reciprocal compensation receipts are from a local telephone business; and since about 80% of X's receipts each year since 1997 are from that business, those receipts are subject to the section 184 tax.

What this means for you

One activity, two different telecom-tax results

A CLEC's reciprocal compensation receipts can be excluded from the section 186-e gross receipts tax (as a sale for resale) and still be subject to the section 184 local-telephone franchise tax. The two taxes apply on different terms.

Same-LATA traffic is "local telephone business"

Because X's calls originate and terminate in the same LATA, the receipts are from local telephone business under section 184.1 -- the kind of intrastate service that section 184 reaches.

Watch the "principally engaged" threshold

Section 184 applies to a corporation principally engaged in local telephone business. With about 80% of receipts from that activity, X met the threshold -- so check what share of your receipts comes from local telephone service.

Common questions

Q: Are reciprocal compensation receipts subject to the section 186-e tax?
A: No. They qualify for the sale-for-resale exclusion under section 186-e.2(b)(1).

Q: Are they subject to the section 184 tax?
A: Yes. Because the traffic is within the same LATA, they are local telephone business receipts subject to the additional franchise tax under section 184.

Q: Why does the LATA matter?
A: Section 184.1 defines local telephone business to include service that originates and terminates within the same LATA, which describes X's traffic.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 186-e (excise tax on telecommunication services)
- Tax Law section 186-e.2(b)(1) (sale for resale exclusion)
- Tax Law section 184 (additional franchise tax on local telephone business)
- Tax Law section 184.1 (local telephone business; same-LATA service)
- PricewaterhouseCoopers LLP, TSB-A-02(12)C (July 8, 2002)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a02_12c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(12)C
Corporation Tax
July 8, 2002

COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C010612B

On June 12, 2001, a Petition for Advisory Opinion was received from
PricewaterhouseCoopers LLP, 1301 Avenue of the Americas, 7th Floor, New York, New York
10019. Petitioner, PricewaterhouseCoopers LLP, submitted additional information with respect to
the Petition on November 30, 2001.
The issues raised by Petitioner are:
1. Whether receipts received by X Company under its reciprocal compensation
arrangements with competitive local exchange carriers (“CLEC”) qualify for a sale­
for-resale exclusion under section 186-e of the Tax Law.
2. Whether X Company’s receipts from its reciprocal compensation arrangements are
receipts from telecommunication services subject to the tax imposed under section
184 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
X Company (“X”) is a non-facilities-based CLEC that is registered with the New York State
Public Service Commission (“PSC”). Petitioner states that X is a reseller of local and enhanced
telecommunication services primarily to enhanced service providers (“Customers”), including
Internet service providers (“ISP”) and Voice Information Providers (“IP”) located in selected
markets in the United States.
X’s receipts at issue are from reciprocal compensation arrangements for the provision of (1)
dedicated access lines between CLECs’ switches and X’s Customers’ equipment (audiotex programs
and servers) and (2) collocation services that allow X’s Customers to collocate their equipment on
racks at a CLEC’s office.
Petitioner states that “reciprocal compensation” refers to an arrangement between two local
exchange carriers where the first carrier (typically an incumbent local exchange carrier or “ILEC”)
compensates the second carrier (typically a CLEC) for the transport and termination, on the CLEC’s
network facilities, of calls originating on the ILEC’s facilities. In other words, when a user on one
carrier’s network makes a local call to a user on a second carrier’s network, the first carrier must pay
the second carrier for terminating that call. Typically, such compensation is based on minutes of
use per call. These arrangements are of relatively recent origin, originating under the Federal
Telecommunications Act of 1996. (See, 47 USC §252(d)(2). Also see, PSC Opinion No. 99-10,

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Case 99-C-0529 - Proceeding On Motion of the Commission to Reexamine Reciprocal
Compensation (issued August 26, 1999), pp. 3-10.)
Petitioner states that the PSC requires that when an ILEC’s customer initiates a call that
terminates on a CLEC’s network, the originating ILEC must compensate the terminating CLEC for
the transport and termination of the call pursuant to an interconnection agreement (i.e., reciprocal
compensation arrangement.) Due to the regulatory nature of reciprocal compensation, the ILEC
must compensate the CLEC or X for terminating a call based on the rates established by the PSC.
The ILEC compensates the CLEC or X automatically (i.e., an invoice is not issued for services).
Petitioner has set forth the mechanics of a reciprocal compensation sharing arrangement in
the following example:
1. An ISP’s subscriber (i.e., the end-user) dials a local number to connect to the
ISP’s server. This call originates with the ILEC.
2. The ILEC then routes the call to the ISP in one of three ways:
(a) through X’s switches and dedicated access lines connected to the
ISP’s server;
(b) through a CLEC’s switch and then through X’s dedicated access
lines to the ISP’s server; or
(c) through a CLEC’s switch terminating at the ISP’s server
collocated at the CLEC offices pursuant to an agreement with X.
It should be noted that under scenario 2(a) the ILEC pays reciprocal compensation directly
to X, whereas under scenarios 2(b) and(c) X and CLEC share the reciprocal compensation paid by
the ILEC.
X has exclusive reseller agent agreements for its services with three other CLEC’s. Under
these agreements, the CLECs allow X to collocate certain electronic and computer equipment at the
CLECs’ offices. CLECs place a long distance block on all lines assigned to X’s Customers.
Accordingly, X and its Customers are liable for basic local access line or trunk charges only.
CLECs appoint X as their exclusive sales/reseller agent for services provided for X’s Customers
(ESP services). In return, X agrees to provide CLECs exclusive rights to handle X’s traffic in a
given market. All traffic generated by X’s equipment or X’s Customers’ equipment occurs within
the same Local Access Transport Area (“LATA”).
These agreements provide that X shares in the CLECs’ reciprocal compensation received
from ILECs for traffic terminated by CLECs to either X’s equipment or X’s Customers’ equipment.

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CLECs pay X reciprocal compensation based on usage by ISPs and IPs at rates determined by the
agreements. X’s products generate very large volumes of inbound traffic and no outbound traffic.
Accordingly, the CLECs, and consequently X, receive much more in reciprocal compensation than
they pay out. X’s receipt of the reciprocal compensation is contingent upon the other CLECs
receiving the reciprocal compensation payments from ILECs. CLECs usually pay X on an
installment basis, dependent upon how much reciprocal compensation the CLECs collect from
ILECs. X also enters into some agreements directly with originating ILECs. X’s share of reciprocal
compensation represents approximately 80 percent of X’s total revenues in each year since 1997.
Petitioner states that absent the reciprocal compensation requirement, X would simply bill
the CLEC or ILEC, as the case may be, for connecting calls to an ISP’s server that are initiated by
ISP’s subscribers. X would receive a resale certificate from the CLEC or ILEC since the services
X provides are telecommunication services that are subsequently resold as telecommunication
services.
Discussion
Issue 1
Section 186-e.2(a) of the Tax Law imposes an excise tax on “the sale of telecommunication
services by any person which is a provider of telecommunication services ....” The tax is imposed
on gross receipts from: (1) any intrastate telecommunication services; (2) any interstate and
international telecommunication services (other than interstate and international private
telecommunication services) which originate or terminate in New York State and which
telecommunication services are charged to a service address in New York State, regardless of where
the amounts charged for such services are billed or ultimately paid; and (3) interstate and
international private telecommunication services, the gross receipts of which are apportioned as
prescribed in section 186-e.3 of the Tax Law.
Section 186-e.1(g) of the Tax Law defines “telecommunication services”as “telephony or
telegraphy, or telephone or telegraph service, including, but not limited to, any transmission of
voice, image, data, information and paging, through the use of wire, cable, fiber-optic, laser,
microwave, radio wave, satellite or similar media or any combination thereof and shall include
services that are ancillary to the provision of telephone service ....”
Section 186-e.1(e) of the Tax Law defines “provider of telecommunication services” as “any
person who furnishes or sells telecommunications services regardless of whether such activities are
the main business of such person or are only incidental thereto....”
Section 186-e.2(b)(1) of the Tax Law provides that there shall be excluded from the tax
imposed by section 186-e of the Tax Law the sale of telecommunication services to a provider of
telecommunication services which is an interexchange carrier or a local carrier where such services

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are purchased by such provider for resale as telecommunication services to its purchasers. In order
to qualify for this exclusion, the purchaser must sell the purchased telecommunication services as
telecommunication services. Moreover, the purchaser must be an interexchange carrier or local
carrier. Pursuant to Technical Services Memorandum TSB-M-95(3)C, December 13, 1995,
a provider may accept a Certificate of Public Convenience and Necessity issued by the PSC as
evidence that a carrier is eligible for the resale exclusion. Also, see New York State Department of
Taxation and Finance Publication 41(12/95) Treatment of Sales-for-Resale Under Section 186-e of
the Tax Law for a list of local carriers, interexchange carriers, and facilities-based cellular common
carriers eligible for the sale-for-resale exclusion as of November 1995.
Section 186-e.1(b)(1) of the Tax Law defines “interexchange carrier” as “any provider of
telecommunication services between two or more exchanges that qualifies as a common carrier.
Common carrier means any person engaged as a common carrier for hire in intrastate, interstate or
foreign telecommunication services.”
Section 186-e.1(b)(2) of the Tax Law provides that a “local carrier” means any provider of
telecommunication services for hire to the public, which is subject to the supervision of the PSC and
is engaged in providing carrier access service to a switched network. For the sole purpose of the
application of the sale for resale exclusion under section 186-e.2(b) of the Tax Law, a reference to
an “interexchange carrier” or “local carrier” shall include a cellular common carrier which is a
facilities-based cellular common carrier without regard to a determination of whether such carrier
is providing local or interexchange service as such.
In this case, X is a CLEC and registered with the PSC. The receipts X derives from the
reciprocal compensation arrangements are similar to traditional sales of telecommunications services
for resale. Pursuant to section 186-e.1(g) of the Tax Law, X provides telecommunication services
for an ILEC consisting of the transport and termination of calls originating on the ILEC’s facilities.
The ILEC charges its customers for the entire call, that is, for originating, transporting and
terminating the call, and X receives a portion of the ILEC’s receipts as compensation for X’s
transport and termination of the call. The sharing of reciprocal compensation between X and
another CLEC does not change the underlying characteristics of the transactions which are the
provision of telecommunications services for resale pursuant to section 186-e.2(b)(1) of the Tax
Law.
Accordingly, pursuant to section 186-e.2(b)(1) of the Tax Law, the receipts received by X
under its reciprocal compensation arrangements with CLECs and ILECs qualify for the sale-for­
resale exclusion and are not subject to the tax imposed under section 186-e of the Tax Law.
Issue 2
Section 184.1 of the Tax Law provides that a corporation is subject to the additional
franchise tax under section 184 for the privilege of exercising its corporate franchise, doing business,
employing capital, owning or leasing property in a corporate or organized capacity or maintaining

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an office, in New York State, if it is formed for or principally engaged in the conduct of local
telephone business.
Section 184.1 of Article 9 of the Tax Law, provides that the term “local telephone business”
means the provision or furnishing of telecommunication services for hire wherein the service
furnished by the provider thereof consists of carrier access service or the service originates and
terminates within the same LATA. It also provides that the term “telecommunication services” has
the same meaning for purposes of section 184 as for section 186-e of the Tax Law.
In this case, X provides telecommunication services as described in section 186-e.1(g) of the
Tax Law. Petitioner states that all traffic generated by X’s equipment or X’s Customers’ equipment
occurs within the same LATA. Accordingly, X’s receipts from reciprocal compensation
arrangements with CLECs and ILECs are receipts from the provision of a local telephone business
under section 184.1 of the Tax Law. Since approximately 80 percent of X’s receipts each year, since
1997, are from such local telephone business, such receipts are subject to the tax imposed under
section 184 of the Tax Law.

DATED: July 8, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.