Is a local phone company's flat End-User Common Line (EUCL) charge taxable, or is it an exempt interstate charge?

Plain-English summary

Rochester Telephone Corporation is a local exchange carrier serving six counties in Western Central New York. As part of basic service, it gives every subscriber an access line and dial tone that can make local and long-distance (intrastate and interstate) calls. To recover part of its cost of providing interstate access — under an FCC "Access Charge" plan — it bills every subscriber a flat monthly End-User Common Line ("EUCL") charge. It asked whether that charge is taxable under Tax Law § 1105(b) or is exempt as interstate service.

The Department held the EUCL charge is taxable as part of basic local service.

• What § 1105(b) taxes. Receipts from telephony and telephone service of whatever nature, except interstate and international service. Section 1101(b)(3) defines the "receipt" without any deduction for the provider's expenses.
• The single-sale rule. Under § 1101(b)(3), components that cannot be purchased separately are treated as one sale (Penfold v. State Tax Commission). A subscriber cannot buy local service without also getting the ability to reach long-distance — so the EUCL charge is merely a component of the charge for basic local service.
• A flat fee, not an interstate call charge. The EUCL is billed to every subscriber regardless of interstate calling, so it is not transactionally based; it is essentially an accounting device to segregate an expense item, and costs can't be subtracted out. The access it pays for is local — the subscriber and central office are in the same (Rochester) area.
• Result. The EUCL charge is part of basic local telephone service and is subject to sales tax under § 1105(b); it cannot be treated as exempt interstate service.

The Department reached the identical result on the same day for New York Telephone Company in TSB-A-88(8)S — the two EUCL opinions are companions.

What this means for you

A separately labeled line item can still be taxable if it can't be bought on its own. New York's single-sale rule taxes a charge that is a component of a taxable service the customer cannot purchase separately — even if broken out on the bill and even if styled as recovering an "interstate" cost.

"Interstate" labeling doesn't automatically make a charge exempt. The § 1105(b) interstate exemption turns on the nature of the service, not how the provider labels or accounts for a fee. A flat access charge tied to local service, billed whether or not the customer makes interstate calls, is taxable local service.

Providers can't back out their costs. Under § 1101(b)(3), taxable receipts are figured without deducting the provider's expenses.

Common questions

Q: Is the flat End-User Common Line charge on a New York phone bill taxable?
A: Yes. The Department held it is part of taxable basic local telephone service under § 1105(b), not exempt interstate service.

Q: It recovers an "interstate access" cost — why isn't it exempt as interstate service?
A: Because it is a flat charge billed to every subscriber regardless of interstate calling and cannot be bought apart from local service. Under the single-sale rule it is a component of taxable local service, and the interstate exemption doesn't reach it.

Q: Can the phone company deduct its costs before charging tax?
A: No. Section 1101(b)(3) defines the taxable receipt without any deduction for expenses.

Citations and references

Statute and case:

• Tax Law § 1105(b) — taxes receipts from telephony and telephone service of whatever nature, except interstate and international service
• Tax Law § 1101(b)(3) — defines "receipt" without deduction for expenses, and treats inseparable components as a single sale
• Penfold v. State Tax Commission, 114 A.D.2d 696 (1985) — supports treating inseparable components as one taxable sale

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_1s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88(1)S
Sales Tax
December 9, 1987

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S860911A

On September 11, 1986, a Petition for Advisory Opinion was received from Rochester
Telephone Corporation, 100 Midtown Plaza, Rochester, New York 14646.
The issue raised is whether the flat rate End-User Common Line charges ("EUCL")
Rochester Telephone Corporation assesses its customers in partial recovery of its costs of providing
telephone service in New York are subject to the sales tax imposed by section 1105(b) of the Tax
Law.
Petitioner is a local exchange company which provides telecommunication services to all or
parts of six counties in Western Central New York State. Petitioner furnishes each of its subscribers
with an access line, directly connecting each subscriber's premises with Petitioner's central office.
Through this access line, passes all of a subscriber's local and intrastate and interstate toll messages.
Petitioner provides local exchange telephone service and limited toll service within its franchised
service territory.
As part of the basic telephone service, Petitioner provides to all of its subscribers a dial tone
which gives such subscribers the ability to originate and receive local telephone calls and toll calls
across the state and across the nation. When, for instance, a subscriber makes a long-distance
intrastate call, the transmission passes over the subscriber's access line, through Petitioner's central
office facilities, to the point of interconnection in New York with an interexchange carrier. The
interexchange carrier would transmit the call to the appropriate local exchange telephone company,
whereupon such local exchange company would route the call over its facilities to the access line of
the called party. In the case of a long distance interstate call, the transmission is accomplished in the
same manner except that a different interexchange or local carrier is involved in completing the call.
Like a subscriber's individual access line, Petitioner's central office facilities are used in the
provision of local and intrastate and interstate toll calling. Interstate investment devoted to interstate
calling is determined through an accounting procedure termed "Separations". 47 C.F.R. 67.
Separations is "The process by which telephone property, costs, revenues, expenses, taxes and other
revenues are apportioned among operations." 47 C.F.R. 67.701.
Petitioner stated that the FCC has fashioned a system of "Access Charges" to compensate
local exchange companies for their participation in the origination and termination of interstate toll
calling. The FCC has mandated that local exchange companies, such as Petitioner, recover some of
its costs in providing interstate access service through charges levied on both its end-user
subscribers, as well as on interexchange carriers which use Petitioner's facilities for the origination
and/or termination of interstate calls made by the customers of such interexchange carriers.

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-88(1)S
Sales Tax
December 9, 1987

Pursuant to the FCC's Access Charge plan, local exchange telephone companies have
submitted tariffs for filing with the FCC designed to recover from their subscribers some of the
accounting separated costs of providing service with respect to interstate calling. A portion of
Petitioner's separated costs are assessed on a per minute of use basis against interexchange carriers
which incorporate these charges into their tariffed rates for interstate service. The balance of
Petitioner's separated costs are recovered by assessing all of their subscribers a flat fee, the EUCL
charge. Thus, this accounting separated cost is born by the local subscriber and paid as part of the
monthly charges for basic telephone service.
An example of the accounting nature of cost separation is shown by the following federal
regulation with respect to a purely local activity.
(a) If end user common line charges for intrastate toll access are assessed in a
particular state, one-half of the end user common line access charge billing expense shall be
apportioned to the interstate operations. If no end user common line charge is assessed for
intrastate toll access, all of the end user common line access charge billing expense shall be
assigned to interstate operations. (47 C.F.R. 67.385)
The EUCL charges are billed to each subscriber whether or not the subscriber makes or
receives any long-distance interstate telephone calls and regardless of how many such calls may be
made. Thus, the charge is not transactionally based. Furthermore, the service of providing its
subscribers with the ability to access petitioner's central office in New York and there connect with
an interstate carrier is local in that the Petitioner and the subscriber are both located in the Rochester
area.
Section 1105(b) of the Tax Law imposes a tax on "the receipts from every sale . . . of
telephony and telegraphy and telephone and telegraph service of whatever nature except interstate
and international telephony and telegraphy and telephone and telegraph service."
Section 1101(b)(3) defines receipt as "the amount of the sale price of any property and the
charge for any service taxable under this article . . . without any deductions for expenses . . .".
The effect of §1101(b)(3) of the Tax Law is to treat as a single sale any sale in which any of
the components cannot be singly purchased. Thus, even though the components of a particular sale
can be separately stated, calculated or estimated, if they cannot be separately purchased, the
combination of the items listed must be considered as one. Penfold v. State Tax Commission, 114
AD 2d 696 (1985). Because Petitioner's subscribers simply cannot purchase local service without
also receiving the ability to access long-distance services, it must be concluded that EUCL charges
are nothing more than an adjunct or component of the charges for local service. This access service
is part and parcel of basic telephone service supplied by petitioner to its customers.

-3­
TSB-A-88(1)S
Sales Tax
December 9, 1987

Moreover, it is also clear that section 1101(b)(3) does not permit Petitioner to subtract out
its costs of providing services when calculating taxable receipts from the provision of basic
telephone service.
The EUCL charges are billed to each subscriber without regard to the actual long-distance
interstate calls, if any, made by each subscriber. Although charged pursuant to an FCC tariff, the
EUCL charges are nothing more than an accounting procedure used in an attempt to segregate and
calculate from its basic charge, an item of expense incurred by Petitioner in providing each of its
subscribers with access to an interstate long-distance carrier. The EUCL charges do not necessarily
represent actual expenses incurred by Petitioner to provide interstate access to a particular subscriber
nor is the activity represented by such charges any more interstate than any other component of the
charges for basic telephone service.
Accordingly, it must be concluded that the access charge is a part of the basic service and
thus subject to the sales tax imposed under §1105(b) of the Tax Law.

DATED: December 9, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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