New York Advisory Opinion TSB-A-15(1)C: Is an Internet access provider subject to the Tax Law section 184 additional franchise tax when it sells Internet access alone or bundled with VoIP?

Plain-English summary

A company sold Internet access to end users and resellers over T1, DSL, ADSL and similar lines, sometimes bundled with VoIP (over 80% of a bundled charge was for Internet access), and also provided a non-VoIP local telephone service that made up about 30% of its receipts. It asked whether it owed the Tax Law § 184 additional franchise tax, which applies to corporations "formed for or principally engaged in" a local telephone business.

The Department said no. By statute (Tax Law § 179, enacted in 1998 and codifying prior policy in TSB-M-97(1)C), providing Internet access is not carrying on a telephone, local telephone, telegraph or transmission business for Article 9 purposes, including the § 184 tax. So the Internet-access sales — to end users or resellers — are outside § 184. The bundled service had a transmission (VoIP) component, but it was only about 20% of that service. And a corporation is "principally engaged" in an activity only when more than 50% of its receipts come from it; here local telephone service was just ~30% of receipts. Not principally engaged in a local telephone business, the provider was not subject to § 184.

What this means for you

Internet service providers and bundled-service sellers

Selling Internet access — even bundled with some voice service — does not, by itself, pull you into the § 184 local-telephone tax. Internet access is statutorily carved out, and the § 184 tax turns on being principally (more than 50% of receipts) engaged in a local telephone business.

Accountants and tax professionals

Two independent points control: (1) Tax Law § 179 removes Internet access from the Article 9 transmission/telephone tax base; and (2) the "principally engaged" test (more than 50% of receipts) decides whether the remaining telephone activity triggers § 184. Track the receipts mix and the bundled-charge allocation.

Common questions

Q: Is Internet access subject to the section 184 telephone tax?
A: No. Tax Law § 179 says Internet access is not a telephone, local telephone, telegraph, or transmission business for Article 9 purposes.

Q: What if some telephone service is also provided?
A: The § 184 tax applies only if the company is principally engaged (more than 50% of receipts) in a local telephone business. Here local telephone receipts were about 30%.

Q: Can my company rely on this opinion?
A: No. It binds the Department only as to this petitioner and these facts.

Citations and references

• Tax Law § 184 (additional franchise tax on corporations formed for or principally engaged in a local telephone business)
• Tax Law § 183 (Article 9 franchise tax)
• Tax Law § 179 (Internet access service is not a telephone/telegraph/transmission business for Article 9); TSB-M-97(1)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a15_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(1)C
Corporation Tax
March 23, 2015

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

PETITION NO. C121210A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTED
“Petitioner”. Petitioner asks whether it is subject to franchise tax under Tax Law § 184 when it
sells Internet access service alone or bundled with voice transmission.
We conclude that Petitioner is not subject to the § 184 tax because Petitioner’s primary
revenue source for its services is not from the operation of a local telephone business.
Facts
Petitioner provides internet access to customers located in the United States. The Internet
access is delivered to customers through various types of lines, including T1, DSL, ADSL, and
MPILS. Petitioner provides Internet access service to end users, who are the final consumers of
the service, and to other Internet access service providers who resell the Internet access to end
users. Petitioner occasionally sells Internet access together with standard Voice over Internet
Protocol (VoIP) service for a single bundled charge. Petitioner estimates that over 80% of the
bundled charge is for Internet access. Petitioner also provides in New York a non-VoIP
telephone service that is a local telephone service. Approximately 30% of Petitioner’s receipts
come from this local telephone service.
Analysis
Tax Law § 184.1 provides that a corporation subject to tax under Tax Law § 183 is
subject to the additional franchise tax under § 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 an office, in New York State, if it is formed for or principally
engaged in the conduct of a local telephone business. 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 local access and transport area (“LATA”). A LATA is that
geographic area as established and approved, and as so set and in existence on July first, nineteen
hundred ninety-four, pursuant to the modification of final judgment in United States v. Western
Electric Company (civil action no. 82-0192) in the United States district court for the District of
Columbia or within the LATA-like Rochester non-associated independent area. See Tax Law
§ 184.1.

-2-

TSB-A-15(1)C
Corporation Tax
March 23, 2015

The provision of Internet access service does not constitute the carrying on of a
telephone, local telephone, telegraph, or transmission business for purposes of the taxes imposed
under Article 9 of the Tax Law, including the § 184 tax. Tax Law § 179, which was enacted in
1998, codified The Tax Department’s policy that Internet access service does not constitute the
carrying on of a telephone, local telephone, telegraph, or transmission business for purposes of
the taxes imposed under Article 9. See TSB-M-97(1)C. Therefore, Petitioner’s sales of Internet
access service to end users or resellers of services are not telephone, telegraph, or transmission
service for purposes of § 184.
While Petitioner’s bundled service of Internet access and voice has a transmission
component, the VoIP component of the service is only 20% of the total service. A corporation is
deemed to be principally engaged in the activity from which more than 50% of its receipts are
derived. See, TSB-A-97(37)C. Because Petitioner’s Internet access service is Petitioner’s
principal business activity, Petitioner is not subject to the § 184 tax.

DATED: March 23, 2015

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy 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. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.