Is a web-hosting company's purchase of internet 'bandwidth' from telecommunications carriers exempt from New York sales tax as interstate or international telephone service?

Plain-English summary

A Delaware corporation ("XYZ," requested through KPMG LLP) runs a popular web site hosted at a New York facility. Over 40% of its site traffic originates outside the United States, and only a small slice comes from New York — most domestic traffic actually arrives through AOL's Virginia servers. To handle the sheer volume of connections, XYZ buys "bandwidth" — essentially the carrying capacity of the telecommunications circuits linking its servers to the internet — from telecom carriers, paying one undifferentiated monthly fee that doesn't break out where the traffic originates.

New York taxes telephony/telephone service generally but carves out an exemption for interstate and international telephone service. XYZ argued its bandwidth purchase should qualify for that carve-out, since most of its actual visitor traffic crosses state and national lines. The Department disagreed, drawing a sharp distinction between two different things: (1) the interstate/international telecommunications that carry individual visitors' connections from wherever they are to XYZ's site, which XYZ itself never purchases (its customers or their own internet providers handle that), and (2) the bandwidth capacity XYZ buys for its own incoming circuits at its New York facility, which is a distinct transaction analogous to a company leasing local phone lines to handle "1-800" call volume. Because that bandwidth service is delivered to and consumed entirely by XYZ at its New York location — and the billing doesn't even track where the traffic comes from — it's treated as local/intrastate telephone service, not exempt interstate telephony, regardless of where XYZ's actual end users happen to be located.

What this means for you

Web hosting companies and high-traffic site operators

Where your visitors are physically located doesn't determine the tax treatment of your own bandwidth/circuit-capacity purchases from telecom carriers. What matters is where that service is delivered to and consumed by you — if your servers and the purchased capacity sit in New York, expect the purchase to be taxed as intrastate telephone service even if the vast majority of your actual traffic originates elsewhere.

Businesses buying bulk telecom capacity for online services

This is the same analysis the Department applies to companies leasing phone lines for toll-free ("1-800") call centers: buying capacity to receive incoming communications at your own facility is a distinct, local transaction from whatever interstate/international communications your callers or website visitors separately arrange to reach you.

Accountants and tax professionals

The key precedent is TSB-A-4(33)S (Commonwealth Long Distance), extending the same "leased lines are a local telephone service purchase" logic from traditional telecom infrastructure to internet bandwidth. Note the resale argument fails too: because XYZ's own customers merely access web content (not telephony service), XYZ's bandwidth purchase isn't a purchase for resale either.

Common questions

Q: Is a company's internet bandwidth purchase exempt just because most site visitors are out of state?
A: No — what matters is where the bandwidth service itself is delivered to and consumed by the purchaser, not where the eventual visitors connecting to the site are located.

Q: Why isn't this treated as interstate telephony service?
A: Because the company itself never purchases the interstate/international telecommunications carrying its visitors' individual connections — it only buys circuit capacity at its own New York facility, a separate and local transaction.

Q: Could a company claim its bandwidth purchase is a purchase for resale?
A: Not on these facts — the company's own customers are just accessing web content, not purchasing telephony service, so there's no resale of a taxable telephony service happening.

Q: Does it matter that the vendor's bill doesn't separately track where traffic originates?
A: That actually supports taxability here — since the service can't be broken into interstate/intrastate portions and is delivered as one undifferentiated capacity purchase consumed at the New York facility, the whole charge is treated as intrastate.

Q: Can another web hosting company rely on this exact bandwidth-taxability conclusion?
A: No. This opinion binds the Department only for this petitioner's specific facts and can't be relied on by any other taxpayer.

Citations and references

Statutes, regulations, and precedent:

• Tax Law § 1105(b)(1)(B) (telephony/telephone service tax; interstate/international exclusion)
• 20 NYCRR § 527.2 (utility services; telephony/telegraphy, incl. Example 3, Example 7)
• TSB-A-94(33)S, Commonwealth Long Distance, Inc., July 29, 1994

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a02_5s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(5)S
Sales Tax
April 3, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S001013A

On, October 13, 2000, the Department of Taxation and Finance received a Petition for
Advisory Opinion from KPMG LLP, 345 Park Avenue, New York, New York, 10154.
The issue(s) raised by Petitioner, KPMG LLP, are whether the purchase of “bandwidth” by
its client, XYZ, a Delaware corporation, constitutes the purchase of interstate or international
telephony service and is therefore exempt from the imposition of New York State sales tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
XYZ, a Delaware corporation with its principal place of business located in New York State,
is a worldwide network of properties and services with a core mission to help customers find and
communicate with people of similar interests. XYZ operates its business principally through its
proprietary Web site, www.XYZ.com. End-users visit XYZ's Web site via the Internet. XYZ's
servers and data processing systems are primarily hosted at a third party provider's facilities located
in New York State. XYZ's Web site contains content that is not geographic specific. Over 40% of
the telecommunications traffic that visits XYZ's Web site originates without the United States. Of
the approximately 60% of telecommunications traffic that originates within the United States, about
one-half comes from AOL's servers located in Virginia. The remainder of the domestic traffic
comes from users located throughout the United States. Therefore, only a very small percentage of
telecommunications traffic that visits XYZ's Web site originates in New York State.
To enable end-users to utilize its Web site, XYZ's servers are connected to the Internet
through links or circuits provided by telecommunications service providers. To handle the
quantity of telecommunications traffic that visits XYZ's Web site, XYZ purchases "bandwidth".
"Bandwidth" essentially represents the volume of telecommunications traffic that a circuit can carry
at any given time, and is critical to a company that hosts Web sites, because insufficient bandwidth
means that users encounter delays or "down times" when attempting to visit the Web site. Generally
speaking, bandwidth is directly proportional to the amount of data transmitted or received per unit
time. In digital systems, bandwidth is expressed as data speed in bits per second (bps). In a
qualitative sense, bandwidth is proportional to the complexity of the data for a given level of system
performance. For example, it takes more bandwidth to download a photograph in one second than
it takes to download a page of text in one second. Large sound files, computer programs, and
animated videos require still more bandwidth for acceptable system performance. Virtual reality
and full-length three-dimensional audio/visual presentations require the most bandwidth of all. In
digital cable and fiber optic systems, there is an ever-increasing demand for higher data speeds. In

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TSB-A-02(5)S
Sales Tax
April 3, 2002

hard-wired systems, available bandwidth can literally be constructed without limit by installing more
and more cables.
XYZ is charged a monthly fee based upon the amount of bandwidth purchased. Due to the
nature of the service provided, charges are not itemized on XYZ’s monthly invoice by the state
where XYZ’s Web site traffic originates. Rather, the monthly fee covers all "bandwidth" purchases.
Applicable Law and Regulations
Section 1105 of Article 28 of the Tax Law provides, in part:
Imposition of sales tax. On and after June first, nineteen hundred
seventy-one, there is hereby imposed and there shall be paid a tax of four percent
upon:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
(b)(1) The receipts from every sale, other than sales for resale, of the
following:
(A) gas, electricity, refrigeration and steam, and gas, electric,
refrigeration and steam service of whatever nature; (B) telephony and
telegraphy and telephone and telegraph service of whatever nature
except interstate and international telephony and telegraphy and
telephone and telegraph service; . . . .
Section 527.2 of the Sales and Use Tax Regulations provides, in part:
Sale of utility and similar services.
Imposition.

(Tax Law, Section 1105(b)) (a)

(1) Section 1105(b) of the Tax Law imposes a tax on the receipts from every
sale, except a sale for resale or a sale specifically exempt under section 1115(b) (i)
and (ii), (c) or (e) of the Tax Law, of
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(ii) telephony and telegraphy and telephone and telegraph service of
whatever nature, except interstate and international telephony and telegraphy and
telephone and telegraph service.

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TSB-A-02(5)S
Sales Tax
April 3, 2002

(2) Although this tax is generally known as the "consumer's utility tax," the
intention of the statute is to tax the enumerated sales and services whether or not
rendered by a company subject to regulation as a utility company. The words "of
whatever nature" indicate that a broad construction is to be given the terms
describing the items taxed. The inclusion of the word "service" indicates an intent
to tax, under this provision, items that are furnished as a continuous supply while the
vendor-vendee relationship exists.
(3) A charge for installing equipment, such as transmission equipment,
which a gas, electric, or telephone or telegraph company makes, according to a tariff,
to a real property developer is deemed to be a charge for gas, electric, telephone or
telegraph service. The charge may be for reimbursement of the company's cost of
doing the work itself, or for the cost the company incurred in having a contractor
perform the work.
*

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*

(d) Telephony and telegraphy; telephone and telegraph service.
*

*

*

(2) The term telephony and telegraphy includes use or operation of any
apparatus for transmission of sound, sound reproduction or coded or other signals.
*

*

*

Example 3: Message switching services, transmitted to a computer over
lines leased from a communication carrier are telegraph services subject to the tax
imposed under section 1105(b) of the Tax Law.
*

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*

(5) The tax on utility services applies to every charge for any telephone and
telegraph service. Among these charges are monthly message rate and intrastate toll
charges and charges for special services, such as installation, change of location,
conference connections, tie-lines, WATS lines and the furnishing of equipment.
Example 7: A telephone company installs station apparatus, owned by it, on
the premises of a customer. The installation is a service taxable under section
1105(b) of the Tax Law.

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TSB-A-02(5)S
Sales Tax
April 3, 2002

Opinion
Petitioner’s client, XYZ, purchases “bandwidth” from various providers in order to be able
to provide potential users with access to its Web site. In Commonwealth Long Distance, Inc., Adv
Op Comm T&F, July 29, 1994,TSB-A-4(33)S, the petitioner paid a local or interexchange carrier
for leased lines. The leased lines were considered to be a taxable purchase of an intrastate telephone
service from the local or interexchange carrier. The purchases of bandwidth by XYZ from a
telecommunications carrier for XYZ’s Web site are similar to the purchase or lease of phone lines
by persons providing information or services via “1-800" numbers. XYZ’s purchases of bandwidth,
therefore, are purchases of intrastate telephone service.
The bandwidth service purchased by XYZ is not interstate or international in nature. XYZ’s
bandwidth purchases are a distinct transaction from the purchases by XYZ’s customers or their
Internet access providers of telecommunications services linking XYZ’s customers to XYZ’s
servers in New York State. The international, interstate and intrastate telephony and telegraphy
services which may be involved in transmitting XYZ's customers' communications to and from
XYZ's Web site are not purchased by XYZ. Rather XYZ merely purchases sufficient bandwidth to
ensure that the customers’ communications may be connected with XYZ's Web site servers. This
sale to XYZ of incoming circuit capacity is similar to a leased telephone line service, and is a
telephone, telegraph, telephony and telegraphy service which is delivered to and consumed by XYZ
at its New York State location. The billing for this service does not distinguish between transmittals
that are intrastate, interstate, or international in origin. This service only ensures that the bandwidth
capacity of the circuits connected to XYZ’s Web site is sufficient to handle the incoming volume.
As such, this service is local or intrastate in nature and operation.
In the instant case, XYZ is not selling telephony and telegraphy or telephone and telegraph
service to its customers. Its customers are merely accessing information contained on XYZ’s Web
site. Accordingly, XYZ’s purchases of bandwidth are not purchases for resale. XYZ’s purchases
of bandwidth are, therefore, subject to the state and local sales taxes imposed on intrastate telephone
service.

DATED: April 3, 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.