New York Advisory Opinion TSB-A-09(15)C: What documentation supports the telecommunications-excise-tax exemption for telecom sold to an ISP to provide Internet access?

Plain-English summary

A telecommunications provider sells telecom services to Internet Service Providers (ISPs) that use them to deliver Internet access. Since November 1, 2005, federal law (the Internet Tax Freedom Act) and Tax Law section 179 mean those sales are not subject to the section 186-e telecommunications excise tax. The provider asked what documentation proves a given sale qualifies.

The Department's conclusions:
- No specific form exists for this exemption. The provider should keep records for three years (Tax Law section 186-e.5) showing the buyer's name and a statement that the telecom will be used to provide Internet access.
- Form CT-120 (Resale Certificate for Telecommunications Purchases) cannot be used here -- the ISP isn't reselling telecom service as telecom service; it's using it to provide a different service (Internet access).
- Form ST-121 (the sales-tax Exempt Use Certificate), if properly completed (including the specific box (U) language about ISP Internet-access use), will be accepted as some evidence, but not conclusive proof of the exemption. Normally sales-tax forms are irrelevant to the excise tax, but here the form documents facts relevant to both.
- Importantly, the vendor protection in Tax Law section 1132(c)(1) (which shifts the burden of proof to the purchaser when a vendor timely takes a good-faith exemption certificate for sales tax) has no counterpart in section 186-e. For excise-tax purposes, the burden of proving the transaction is exempt stays with the provider.

What this means for you

Telecom carriers selling to ISPs

You can support the ISP exemption with ordinary business records -- no special certificate is required -- but keep them for three years and capture that the telecom is for Internet access. A correctly completed ST-121 helps but won't end the inquiry, and the resale certificate (CT-120) is the wrong tool.

Accountants and tax professionals

Don't assume a good-faith ST-121 shields the provider for excise-tax purposes the way it would for sales tax. There is no section 186-e analog to section 1132(c)(1), so the provider always bears the burden of proving the excise-tax exemption.

Common questions

Q: Is there a form to claim the ISP telecom exemption from the section 186-e excise tax?
A: No. Keep three years of records identifying the buyer and the Internet-access use; a properly completed ST-121 is helpful but not conclusive.

Q: Does a good-faith ST-121 protect the provider from excise tax like it does for sales tax?
A: No. The vendor protection in Tax Law section 1132(c)(1) applies only to sales tax; the burden of proving the excise-tax exemption stays with the provider.

Citations and references

• Tax Law § 186-e (telecommunications excise tax); Tax Law § 186-e.5 (three-year recordkeeping requirement)
• Tax Law § 179 (Internet access service is not a telecommunication service)
• Tax Law § 1132(c)(1) (sales-tax vendor protection -- no section 186-e equivalent)
• Federal Internet Tax Freedom Act (47 USC § 151 note); Forms ST-121, CT-120

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2009.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a09_15c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(15)C
Corporation Tax
September 1, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C090529A

Petitioner name and address redacted, requests an Advisory Opinion about the documentation needed
to substantiate an exemption from gross receipts for the sale of Internet access service for purposes of the
telecommunications excise tax imposed by Tax Law § 186-e. We conclude that there is no specific form
provided for this purpose, but that Petitioner should maintain records for a period of three years that
demonstrate that a particular sale fulfills the criteria for the exemption. We further conclude that a properly
completed ST-121, New York State and Local Sales Tax Exempt Use Certificate, will constitute some
evidence, but not conclusive proof, that the sale of telecommunication services was exempt from tax.
Facts
Petitioner is a provider of telecommunication services subject to tax under Section 186-e of the Tax
Law. Among the services it offers, Petitioner sells telecommunication services to Internet Service Providers
(ISPs) that are used to provide Internet access service to the ISPs’ customers.
Analysis
The federal Internet Tax Freedom Act (ITFA) generally bars state and local taxes on Internet access
service. See 47 USC §151 (note § 1101). Before ITFA’s enactment, Internet access service was excluded
from the telecommunications excise tax imposed by Tax Law § 186-e, but the telecommunications used by
an ISP remained subject to tax. See Tax Law §179; TSB-M-97(1.1)C&S. In 2003, ITFA’s definition of
“Internet access service” was expanded to include “telecommunications services . . . purchased, used or sold
by a provider of Internet access to provide Internet access.” Federal law grandfathered New York’s tax on
this telecommunications component until November 1, 2005.
Consequently, Petitioner’s sales
of telecommunication services to ISPs that are used to provide Internet access services were not subject to
the telecommunications excise tax as of November 1, 2005. See TSB-M-08(4.1)C &(2.1)S.
Petitioner asks what it must do to document that its sales of telecommunication services to its ISP
customers for use in providing Internet access services are exempt from the telecommunications excise tax.
The Tax Department does not provide a specific form to document this exemption. Petitioner should retain
documentation of the details of these sales, including the name of the entity to which the telecommunication
service was sold and a statement from the purchaser that the telecommunication service will be used to
provide Internet access, in its books and records for a period of three years. See Tax Law § 186-e.5.
Petitioner asks whether form CT-120, Resale Certificate for Telecommunications Purchases, can be
used to document sales of telecommunication services to an ISP that will be used to provide Internet access.
Form CT-120 cannot be used for this purpose. That form is designed exclusively to document excluded sales
for resale, where the telecommunication services sold to the purchaser will be resold as telecommunication
services. When telecommunication services are sold to an ISP that uses the telecommunications to provide
Internet access services to its customer, the sale to the ISP’s customer is not a resale of telecommunication
services. Rather, it is the sale of a different service, and therefore the resale exclusion does not apply. Thus,
the CT-120 is not the appropriate documentation for this exclusion.

-2-

TSB-A-09(15)C
Corporation Tax
September 1, 2009

Petitioner also asks whether the Tax Department would accept Form ST-121, New York State and
Local Sales Tax Exempt Use Certificate, to document this exemption. If properly completed, the Tax
Department will accept this form as some evidence, but not conclusive proof, that the transaction is exempt
from the excise tax as a sale to an ISP of telecommunication services that will be used to provide Internet
access. Ordinarily, sales tax exemption forms have no relevance to the telecommunications excise tax. One
reason for this is that the legal incidence of the sales tax is on the purchaser, while the incidence of the excise
tax is on the provider. However, in this limited situation, the sales tax exemption form documents facts
about a particular sale or sales that are relevant to whether the exemption applies for both the sales and excise
taxes. Accordingly, if an ISP provides Petitioner with a properly completed ST-121 stating that the
telecommunications will be used to provide Internet access to the ISP’s customers, the Tax Department will
accept this form as some evidence that the particular transaction covered by the form (or group of
transactions in the case of a blanket exemption certificate) is exempt from the telecommunications excise tax.
However, we caution that the ST-121 will not be accepted for this purpose unless the certificate is
properly completed, including compliance with its instructions on how to identify the exempt use as being
for Internet access. Current instructions state that box (U) must be filled in as follows: “telecommunications
services used by an ISP to provide Internet access originating with the ISP point of presence (Tax Law
section 1105(b)(1)).” If that statement is missing or incomplete, then the ST-121 may be of little or no value
as evidence of the exemption. This is why we note, as mentioned above, that other documentation will
suffice, such as a letter from the purchaser to which the telecommunication service was sold with a statement
that the telecommunication service will be used to provide Internet access.
We note that the vendor protection obtained by Petitioner’s receipt of a properly completed ST-121
for sales tax purposes does not apply to the use of that form for excise tax purposes. Tax Law § 1132(c)(1)
expressly provides that when a person required to collect sales tax obtains a properly completed exemption
document in good faith within 90 days after the transaction, the burden of proving that the receipt is not
taxable is solely on the purchaser. There is no corresponding provision in Tax Law § 186-e. Therefore,
while a timely, properly completed ST-121 obtained in good faith relieves the provider of the burden of
proving that the transaction was subject to State and local sales taxes, it will not shift the burden of proof for
purposes of the telecommunications excise tax. For excise tax purposes, the burden of proving that the
transaction was exempt from tax remains with the provider.

DATED: September 1, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.