Do a carrier's sales of telecommunication services to a foreign prepaid calling card reseller qualify for the section 186-e sale-for-resale exclusion?

Plain-English summary

Primus Telecommunications, Inc. described Teleco P (a Delaware company holding a New York PSC certificate) selling telecommunication services -- trunk, switching, and sub-sea cable access through its New York point of presence -- to FORCO, a foreign prepaid calling card reseller that operates entirely outside the U.S. and routes its customers' calls through Teleco P's New York switch for worldwide termination. The question: do Teleco P's sales to FORCO qualify as sales for resale excluded from the section 186-e gross receipts tax?

The Department held it depends on FORCO's status:

• Teleco P is a New York provider of telecommunication services taxable on gross receipts from intrastate and mobile telecommunication services (sections 186-e.1(e), 186-e.2(a)).
• The sale-for-resale exclusion (section 186-e.2(b)(1)) requires the buyer to be an interexchange carrier or local carrier that resells the services as telecommunication services.
• FORCO is not defined as a carrier in its home country, so the exclusion may not apply on its face.
• However, if FORCO can show that its activities, if conducted in New York, would be those of an interexchange or local carrier (sections 186-e.1(b)(1)-(2)), it is treated as a carrier (following Arthur Andersen LLP, TSB-A-01(16)C), and Teleco P's sales to it qualify for the resale exclusion.

What this means for you

Selling telecom for resale can be tax-free -- if the buyer is a carrier

A New York telecom provider's sales are excluded from the section 186-e tax when made to a buyer that is an interexchange or local carrier reselling the service. The exclusion turns on the buyer's carrier status, not just the resale.

Foreign resellers are judged by a "would-be-a-carrier-here" test

A buyer that is not formally a carrier abroad can still qualify if its activities would make it a carrier if performed in New York. Foreign legal labels do not control; the functional test does.

Keep documentation of the buyer's activities

To claim the resale exclusion on sales to a foreign reseller, the seller should be able to demonstrate that the buyer's operations would constitute carrier activities under New York's definitions.

Common questions

Q: Is selling telecom service to a reseller automatically tax-exempt under section 186-e?
A: No. The resale exclusion applies only if the buyer is an interexchange or local carrier reselling the service as telecommunication services.

Q: The foreign buyer is not a carrier in its home country -- does that end it?
A: Not necessarily. If its activities would be carrier activities if conducted in New York, it is treated as a carrier and the exclusion applies.

Q: Who has to prove the buyer's carrier status?
A: The taxpayer must be able to demonstrate that the foreign buyer's activities would constitute carrier activities under New York's definitions.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 186-e (excise tax on telecommunication services)
- Tax Law section 186-e.2(a) (tax on gross receipts from telecommunication services)
- Tax Law section 186-e.2(b)(1) (sale for resale exclusion)
- Tax Law section 186-e.1(b)(1) and (b)(2) (interexchange carrier; local carrier)
- Arthur Andersen LLP, TSB-A-01(16)C (Apr. 17, 2001)
- Primus Telecommunications, Inc., TSB-A-02(17)C (Nov. 6, 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_17c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(17)C
Corporation Tax
November 6, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C020222A

On February 22, 2002, a Petition for Advisory Opinion was received from Primus
Telecommunications, Inc., 1700 Old Meadow Road, McLean, Virginia 22102-4302.
The issue raised by Petitioner, Primus Telecommunications, Inc., is whether sales by Teleco
P, as described below, to a foreign-based reseller of long distance services through prepaid calling
cards, qualify as sales for resale that are exempt from the gross receipts tax imposed under section
186-e of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Foreign prepaid calling card seller, FORCO, is incorporated under the laws of a foreign
country and operates exclusively outside of the United States. FORCO sells prepaid calling cards
which permit the user to make prepaid long distance calls to an 800 number which routes the call
to the billing platform in the host country, and subsequently worldwide. FORCO is not subject to
regulation by New York State. FORCO is not defined as a carrier in its home country.
Teleco P is incorporated in Delaware and holds a Certificate of Public Convenience and
Necessity issued by the New York State Public Service Commission (PSC). Teleco P sells
telecommunications services to FORCO, i.e., minutes of international traffic. FORCO card user
calls are switched from their billing platform to Teleco P’s switch in New York for termination
worldwide.
For example, FORCO’s customer calls an access number located in the customer’s home
country. When prompted, the customer enters the account number and personal identification
number. After the billing platform determines the validity of the calling card, the customer is
prompted for the call destination data. The call is then routed to other switches depending on the
billing platform contracts that have been negotiated by FORCO, which includes the Teleco P switch.
When FORCO’s customer in Toronto places a call to London, the call is routed from the billing
platform through Teleco P’s switch in New York to its termination in London. The call origination
point is unknown to Teleco P, and the call terminates in London.
The sale of telecommunication services by Teleco P to FORCO includes the charges for the
trunk from the billing platform, switching services and sub-sea cable access through the point of
presence (POP) in New York.

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Applicable 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 ... and also include any equipment
and services provided therewith. Provided, the definition of telecommunication services shall not
apply to separately stated charges for any service which alters the substantive content of the message
received by the recipient from that sent.”
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(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....”
Section 186-e.2(a) of the Tax Law provides that the tax is imposed on “gross receipt from:
(1) any intrastate telecommunication services, except any telecommunication services the gross
receipt from which is subject to tax under subparagraph four of this paragraph; (2) any interstate and
international telecommunication services (other than interstate and international private
telecommunication services and any telecommunication services the gross receipt from which is
subject to tax under subparagraph four of this paragraph) which originate or terminate in this state
and which telecommunication services are charged to a service address in this state, regardless of
where the amounts charged for such services are billed or ultimately paid; (3) interstate and
international private telecommunication services, the gross receipt to which the tax shall apply shall
be determined as prescribed in subdivision three of this section, except any telecommunication
services the gross receipt from which is subject to tax under subparagraph four of this paragraph;
and (4) mobile telecommunications service provided by a home service provider where the mobile
telecommunications customer’s place of primary use is within this state.”
Section 186-e.2(b)(1) of the Tax Law provides that “There shall be excluded from the tax
imposed by this section the sale of telecommunication services to a provider of telecommunication
services which is an interexchange carrier or a local carrier where such services are purchased by
such provider for resale as telecommunication services to its purchasers....” 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.
Section 186-e.1(b)(1) of the Tax Law provides that “interexchange carrier” means “any
provider of telecommunication services between two or more exchanges that qualifies as a common

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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 “local carrier” means “any provider of
telecommunication services for hire to the public, which is subject to the supervision of the public
service commission 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 paragraph (b) of subdivision
two of this section, 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.”
Opinion
Petitioner states that FORCO operates exclusively in its home country and is engaged in the
business of providing prepaid long distance calls to its customers. The customer dials an 800
number which routes the call to the billing platform in the host country. The call is then switched
to Teleco P’s switch in New York for termination worldwide. Petitioner states that Teleco P does
not know where the call originated. Teleco P sells telecommunication services to FORCO,
including charges for the trunk from the billing platform, switching services and sub-sea cable
access through its POP in New York.
Pursuant to section 186-e.1(e) of the Tax Law, Teleco P is a provider of telecommunication
services in New York State, and pursuant to section 186-e.2(a) of the Tax Law Teleco P is subject
to tax on its gross receipts from any intrastate telecommunication services and mobile
telecommunications services.
Section 186-e.2(b)(1) of the Tax Law provides that certain sales for resale of
telecommunication services are excluded from the tax imposed by section 186-e.2(a). In order to
qualify for the exclusion, FORCO must be an interexchange carrier or a local carrier, and it must
purchase telecommunication services that are resold as telecommunication services to its customers.
In this case, Petitioner states that FORCO is not defined as a carrier in its home country. Therefore,
Teleco P’s gross receipts for telecommunication services provided for FORCO with respect to the
prepaid international calls may not qualify for the sale for resale exclusion provided in section
186-e.2(b)(1) of the Tax Law.
However, if FORCO can demonstrate that its activities in the country in which it operates,
if conducted in New York State, would constitute the activities of an interexchange carrier as
defined in section 186-e.1(b)(1) of the Tax Law or a local carrier as defined in section 186-e.1(b)(2)
of the Tax Law, FORCO would be treated as an interexchange carrier or a local carrier for purposes
of section 186-e of the Tax Law. (See Arthur Andersen LLP, Adv Op Comm T&F, April 17,2001,
TSB-A-01(16)C.) In that case, Teleco P’s sales of telecommunication services to FORCO would

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Corporation Tax
November 6, 2002

qualify for the sale for resale exclusion under section 186-e.2(b)(1) where FORCO resells the
telecommunication services, as such, to its customers.

DATED: November 6, 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.