When a long-distance carrier offers a 900-number billing-and-collection service to business customers, are its billing/collection fees taxed the same as its communications charges under New York's transmission-company and utility-services taxes?

Subject

Whether MCI's proposed 900 Commercial Service — which bundles a communications charge and a billing/collection charge into one fee billed to business "Sponsors" — is taxable under the Article 9 transmission-company tax (§ 184) and the utility-services tax (§ 186-a).

Plain-English summary

MCI planned to launch a "900 Commercial Service": businesses ("Sponsors") would get a 900 phone number that callers ("End Users") could dial to buy goods or services, get information, vote in polls, donate to charity, or place orders. MCI would charge each Sponsor one bundled fee made up of two pieces — a communications charge (like an 800-number service) and a billing/collection charge for handling the End User's payment. MCI asked New York to confirm how each piece should be taxed, and whether it mattered if the two charges were billed separately or as a single lump sum.

The Department ruled that both components count as taxable revenue to MCI — the communications charge and the billing/collection charge — regardless of whether they're itemized or bundled into one line. The billing and collection service is treated as an integral, FCC-regulated part of MCI's telephone business (not some separate, unrelated activity), so MCI must include the full amount charged to Sponsors for both pieces in its "gross earnings" (§ 184) and "gross income" (§ 186-a), with no deduction for MCI's own cost of performing billing/collection. The Department rejected MCI's argument (based on a prior ruling about deducting the cost of raw materials from a sale of goods) that only its profit on the billing/collection piece should be taxed — that reasoning applies to selling goods, not providing a service. On the other hand, the money MCI merely collects from End Users on the Sponsor's behalf and passes through to the Sponsor (the actual price of the Sponsor's goods or services) is not part of MCI's own gross earnings/income, since MCI is just a pass-through conduit for those amounts.

What this means for you

Telecom carriers offering bundled 900-number or similar billing services

If you provide a communications service plus a billing/collection add-on, and the billing/collection function is regulated as part of your FCC-filed telephone tariff, expect New York to tax the whole charge to your business customer — you can't carve out and exclude your billing/collection costs the way a goods-seller might exclude raw material costs. Whether you itemize or bundle the charges on the invoice does not change the tax result.

900-number "Sponsors" and businesses using pay-per-call billing

The amounts your End Users actually pay for your goods/services, collected and passed through by the carrier, are not the carrier's taxable revenue — that revenue belongs to you as the Sponsor. Separately, be aware that under the 1989 amendment to § 186-a, even the Product 4 "party line" scenario (where the Sponsor isn't the End User's ultimate consumer) is now taxable, since the amendment shifted the tax trigger to the initial in-state sale/furnishing of service rather than "ultimate consumption."

Accountants and tax professionals

The core legal move is treating billing-and-collection revenue as inseparable from "gross operating revenues from transmission services" under 20 NYCRR § 72-1.1(d), based on the FCC's own Uniform System of Accounts classifying carrier billing/collection within the telephone company's regulated revenue accounts (47 CFR § 32.4999, § 32.5261, § 32.5270). The Department distinguished the Howgen Transport precedent (which allowed deducting the cost of "raw materials" from a goods sale under § 184) as inapplicable to a service business — expenses to provide a service aren't like raw materials incorporated into a sold good.

Common questions

Q: Does bundling vs. itemizing the two charges change the tax result?
A: No. Whether MCI bills the communications and billing/collection components as one lump sum or two separate line items, both pieces are taxable the same way.

Q: Can MCI deduct its own cost of running the billing/collection operation?
A: No. The Department held that, unlike a sale of goods (where raw-material costs can be excluded), MCI must include the gross amount charged for billing/collection services without deducting its costs.

Q: Are amounts MCI collects from End Users and pays over to the Sponsor taxed to MCI?
A: No. Pass-through amounts for the Sponsor's own goods or services (including any sales tax collected) are not part of MCI's gross earnings or gross income — MCI's own taxable revenue comes from what it charges the Sponsor for its own communications and billing/collection services.

Q: Can another telecom company rely on this ruling?
A: No. This advisory opinion binds the Department only for the taxpayer and facts presented, and cannot be relied on by anyone else. The sales tax questions raised in the same petition were addressed in a separate advisory opinion.

Citations and references

Statutes and regulations:

• Tax Law § 184 (Article 9 franchise tax on transmission companies, based on gross earnings)
• Tax Law § 186-a (tax on furnishing of utility services, 3% of gross income)
• 20 NYCRR § 72-1.1(a), (d) (gross operating revenues from transmission services)
• 20 NYCRR § 501.14 (profits from transactions within the state includable in gross income)
• 47 CFR § 32.4999, § 32.5261, § 32.5270 (FCC Uniform System of Accounts, billing/collection revenue classification)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_6c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(6)C
Corporation Tax
February 15, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C890619A

On June 19, 1989, a Petition for Advisory Opinion was received from MCI
Telecommunications Corporation, 1133 19th Street, N.V., Washington D.C. 20036.
The issue raised by Petitioner, MCI Telecommunications Corporation, is in regard to the tax
consequences resulting from the proposed introduction of a 900 Commercial Service. The questions
involve (1) Franchise Tax on Transmission Companies, section 184 of Article 9; (2) Tax on the
furnishing of Utility Services, section 186-a of Article 9; and (3) Sales Tax, Articles 28 and 29 of
the Tax Law. The sales tax questions will be considered in a separate Advisory Opinion to be
subsequently issued.
MCI Communications Corporation (hereinafter "MCI") is a corporation organized and
existing under and by virtue of the laws of the State of Delaware, with its principal office located in
Washington, D.C. MCI Telecommunications Corporation, MCI International Telecommunications
Corp.,RCA Global Communications, Inc. and Western Union International Inc. are wholly owned
operating subsidiaries of MCI. MCI and its subsidiaries are hereinafter collectively referred to as
MCI.
MCI is planning to introduce a Domestic 900 Commercial Service. The 900 Service offering
is a switch based interactive service. The service permits MCI's customer (hereinafter "900
Sponsor") to receive telephonic communications from callers located in all or a limited portion of
the country. Through use of the 900 Service, the 900 Sponsor will be able to offer various services
or goods for a fee to callers (hereinafter "End Users") calling its 900 number or to receive donations
from such End Users. As part of the 900 Service, MCI will offer billing and collection services to
the 900 Sponsor.
The MCI charge to the 900 Sponsor for the 900 Service will be made up of two functional
components that will appear as one charge. The first component of the charge will represent the cost
of the communications service which MCI is providing to the 900 Sponsor. This service is similar
to Domestic 800 Service functionally. The second component of the charge will represent the cost
of billing and collection services for the 900 Sponsor. MCI presently intends to bill these two
components, pursuant to a tariffed rate filed with the Federal Communications Commission
(hereinafter "FCC") at a flat charge to the Sponsor of 40 cents for the first minute and 4 cents for
each additional 6 second period. The amount of these charges is subject to change. The two
components will not be separately charged to the 900 Sponsor, although a Sponsor could break-out
the cost of each component by referencing MCI's tariffed rate for 800 Service.
TP-9 (9/88)

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The End User will pay a fee established by the 900 Sponsor for placing a call to the 900
number. MCI will not determine what such rate will be. The End User charges for goods or service
provided by the 900 Sponsor will be collected by MCI or its agents. If the End User is an MCI long
distance customer, MCI will bill and collect the charge. If the End User is not an MCI customer,
MCI will collect the charges by providing the Local Exchange Carrier (hereinafter "LEC") with the
billing information. The LEC will in turn bill the charge along with other MCI long distance traffic
and remit the amounts collected to MCI. MCI will pay over to the 900 Sponsor the amounts billed,
offset by: (i) the amount due MCI from the 900 Sponsor for the communications service; (ii) the
billing and collection services, and, (iii) an amount estimated to equal the uncollected amount billed
to End Users. (It is assumed that thebilling and collection services component of MCI's charge to
the 900 Sponsor includes both (ii) and (iii) above.) In addition, MCI or an LEC may undertake the
billing and collection of New York State sales taxes on products or services furnished to End Users.
Taxes so collected will either: (i) be paid over directly by MCI to the Department of Taxation and
Finance, or (ii) be turned over to the Sponsor for it to remit to the Department of Taxation and
Finance along with its filing of sales tax returns. In the former case, the remaining net balance will
be remitted by MCI to the 900 Sponsor. The offsetting of the amounts received by MCI from End
Users by the amount owed by the 900 Sponsor to MCI for services is being done solely for
administrative convenience. The 900 Sponsors have a separate, legal liability to pay for MCI's
communication and billing and collection services. That liability is not affected by whether the End
Users pay their bills for the Sponsor's goods or services.
Although an unlimited number of products or services may be offered by the 900 Sponsors,
MCI can envision at least six basic products or service categories which may be offered. These
product or service categories can be identified as follows:
Product 1: The 900 Sponsor will conduct an informal opinion poll. By telephoning a
selected number, the End User will be able to express an opinion without speaking. Typically, the
End User will be billed a nominal charge ($.50 - $1.00) for making the call. For example, a news
program will pose a question to its viewers. One telephone number will be established for
affirmative responses and a second number will be established for negative responses. Another
example of this type of product would be where the End User will answer a number of questions by
use of touch tone telephone. To express an answer to a specific question the End User will push the
appropriate number on a telephone which corresponds to the answer.
Product 2: The 900 Sponsor will provide a recorded message service. The End User will
be able to telephone the selected telephone number to listen to a prerecorded message. The End User
will be billed a charge (either fixed or variable based on the elapsed time of the call), which is
established by the 900 Sponsor. For example, this service could include what is commonly referred
to as dial-a-prayer, dial-a-recipe, newsline or sports-line.

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Product 3: The 900 Sponsor provides a financial or information service to an End User. The
End User, by telephoning a selected number (and entering an account number and/or a personal
identification number) will be able to access various data files through use of a touch-tone telephone.
The End User may be charged either a fixed or variable amount (based upon the elapsed time of
access to the service, or number of requests made) for accessing the service. For example, a bank
may offer its customers access to various account balance information over the telephone. The
customer would call the 900 number and enter a special access code to retrieve the data.
Product 4: The 900 Sponsor will provide an interactive conversation with one person, or a
party call with a number of other End Users. The End User will be charged a flat fee for the first
minute plus an additional charge for each additional minute. Examples of this type of service
include telephoning an attorney for legal advice or calling an astrologer to receive a personal
forecast. Another example may also include a service such as "teen-line", where the End User dials
into a "party line" to talk to other teenagers living throughout the United States.
Product 5: The 900 Sponsor will be a charitable organization. By calling the selected
telephone number an End User will be able to make a pledge or gift to the 900 Sponsor's
organization. These organizations could include either charitable organizations exempt from federal
income tax under section 501(a) of the Internal Revenue Code or non-exempt organizations.
Different numbers may be established for different pledge or gift amounts. For example, through
a telethon or by the use of other media, a 900 Sponsor may seek pledges by having viewers call a
specified number for pledge of one amount (e.g., $10) and another number for pledge of another
amount (e.g., $20). In conjunction with the pledge, the 900 Sponsor may have a pre-recorded
message thanking the End User. In addition, the 900 Sponsor might provide the End User with some
acknowledgment of the donation such as a commemorative book or token.
Product 6: The 900 Sponsor will be a dealer of goods. The 900 Sponsor will advertise a
product. The End User will telephone a selected telephone number for each product. The End User
may provide the 900 Sponsor with his name and address. The 900 Sponsor will deliver the
merchandise, and the End User will be billed for the merchandise on his telephone bill. For
example, a television shopping network may sell items such as a blender or a pocket fisherman by
calling a specified number.
MCI may agree with a 900 Sponsor to charge applicable New York sales taxes to the End
User. In such an event, MCI will bill, or cause the LEC to bill, sales taxes on the product or service
furnished to the End User. The amount of sales taxes received by MCI (or by the LEC which, in
turn, will pay this amount over to MCI) will either be remitted to the 900 Sponsor or paid to the
Department of Taxation and Finance.
Issue I Franchise Tax on Transmission Companies - Section 184

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1. Are the amounts billed to End Users by MCI or an LEC subject to taxes imposed by
   section 184 of the Tax Law?
2. Are the amounts of MCI's charge to the 900 Sponsors for providing communications
   service to be included in MCI's "gross earnings" for purposes of section 1847
3. Are the amounts of MCI's charge to the 900 Sponsors for providing billing and collection
   services to be included in MCI's "gross earnings" for purposes of section 1847
4. Do the answers to questions (2) or (3) depend on whether the amounts charged to Sponsors
   are billed as one lump sum or are separately stated?
   MCI contends that the amounts billed to End Users by MCI or an LEC are not taxable under
   section 184 of the Tax Law. MCI acknowledges that the amount charged to Sponsors for
   communications service is taxable under section 184. However, MCI contends that charges for
   billing and collection services are not to be included in MCI's gross earnings because such services
   are not transmission services.
   The franchise tax imposed by section 184 of the Tax Law is based upon "gross earnings from
   all sources within this state". The term "gross earnings" has long been held to include "all receipts
   arising from or growing out of the employment of its capital" (People ex rel N.Y.C.& H.R.R.R. CO.
   v Roberts, 32 App Div 113, 115, aff'd, 157 NY 677).
   Section 72-1.1(d) of the Franchise Tax on Transportation and Transmission Corporations
   Regulations (hereinafter "Regulations") provides that a telephone or telegraph corporation shall
   include in its computation of gross earnings all gross operating revenues derived from intrastate
   transmission services and that portion of gross operating revenues from interstate and foreign
   transmission services attributable to New York State. For example, gross operating revenues of
   telephone corporations from transmission services include all operating revenues, such as Local
   Service Revenues (including subscribers' station revenues, public telephone revenues, service station,
   local private line services, and other local service revenues), Toll Service Revenues (including
   message tolls, wide area toll services, toll private line services and other toll service revenues) and
   Miscellaneous Revenues (such as telegraph commissions, directory advertising and sales, rent
   revenues, revenues from general services and licenses and other operating revenues not provided for
   elsewhere).
   Telecommunications corporations that are regulated by the FCC must keep their financial
   accounts according to the Uniform System of Accounts prescribed by the FCC in Part 32 of the FCC
   Regulations. (47 CFR 32) Under the prescribed system, the revenue accounts reflect a market
   perspective of natural groupings based primarily upon the products and services purchased by
   customers. Section 32.4999(a) of the FCC Regulations provides that the revenue accounts are
   intended to include the actual cash inflows (or equivalent) that occur as a result of the company's
   ongoing major or central operations. They include the revenues which arise from furnishing

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regulated telecommunications services to others, from directory advertising, rentals of
telecommunications assets and from providing other services which are directly associated with the
division of regulated telecommunication services. (47 CFR 32.4999(a))
Section 32.4999(i)(2) of the FCC Regulations provides that billing and collections service
provided under exchange access tariffs shall be included in the group of revenue accounts. (47 CFR
32.4999) Section 32.5261 of the FCC Regulations provides that the special billing arrangements
revenue account includes revenue derived from the provision, either under tariff or through
contractural arrangements, of special billing information to customers. Such special billing
information provides detail not normally provided in the standard billing rendered for the regulated
telephone services utilized by the customer. (47 CFR 32.5261) Section 32.5270 of the FCC
Regulations provides that the carrier billing and collection revenue account includes revenue derived
from the provision of billing and collection services to other telecommunications companies. This
includes amounts charged for services such as message recording, billing, collection, billing analysis,
and billing information services, whether rendered under tariff or contractural arrangements. (47
CFR 32.5270) Both the special billing arrangements revenue account and the carrier billing and
collection revenue account come within the "Miscellaneous Revenue" group of revenue accounts.
Accordingly, for purposes of the FCC, billing and collection revenues are considered directly
associated with the regulated telecommunications services. Therefore, for purposes of section 72­
1.1(d) of the Regulations, billing and collection revenues are operating revenues from transmission
services and are included in a telephone corporation's gross operating revenues.
Herein, MCI's charge to the 900 Sponsor for the 900 Service will be made up of two
components that will appear as one charge. The two components are:
1.

the cost of the communications service that MCI is providing to the 900 Sponsor
which is similar to Domestic 800 Service, and

2.

the cost of billing and collection services for the 900 Sponsor.

The billing and collection services will include the collection of the fee for placing a call to
the 900 number as well as other End User charges for goods or services provided by the 900
Sponsor. Such End User charges may include New York State sales tax on the goods or services
furnished to the End User.
For purposes of section 184 of the Tax Law, gross earnings should include only those receipts
arising from or growing out of the employment of a taxpayer's capital and does not include receipts
collected by a taxpayer which are required to be paid over to others. Herein, MCI's gross earnings
are derived from the charges to the 900 Sponsors. Therefore, the total amount billed (including any
sales tax) to an End User by MCI or an LEG is not included in MCI's gross earnings.

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In addition, it does not matter whether the charge to a 900 Sponsor is broken out separately
into the two components or whether the entire amount is billed as one lump sum.
Pursuant to section 72-1.1(a) of the Regulations, MCI must include in its gross earnings all
gross operating revenues from New York State intrastate transmission services and that portion of
gross operating revenues from interstate and/or foreign transmission services attributable to New
York State. Pursuant to section 72-1.1(d) of the Regulations, MCI's gross operating revenues include
both the component representing the cost of the communications service which MCI provides to the
900 Sponsor, and the component representing the cost of billing and collection services for the 900
Sponsor. The billing and collection component must be included in MCI's gross operating revenues
because a telephone corporation's gross operating revenues include all operating revenues from
transmission services. It has been established herein, that the revenue from billing and collection
services is directly associated with MCI's regulated transmission services.
MCI argues that if it is concluded that billing and collection services are included in
transmission services then only MCI's profit, as opposed to the gross amount, should be included.
MCI is relying on Howgen Transport Co., Inc., State of New York Tax Appeals Tribunal Decision,
January 12, 1989, TSB-D-89(1)C. Therein, it was held that "gross earnings", for purposes of section
184, do not include receipts from the sale of goods to the extent the receipts represent the "cost of
raw materials incorporated into the good". MCI contends that the rule should not be any different
where the subject is services rather than goods. In such a case, MCI contends that the cost of
providing the services is analogous to the "cost of the raw materials incorporated into the good"
However, MCI's reliance on Howgen Transport is misplaced. In Howgen Transport, it was
held that Howgen was not entitled to deduct the cost of hired trucks in computing its gross earnings
under Tax Law section 184. "The expenditures for the [hired] trucks represent Howgen's
employment of its capital, in the same manner as the purchase of trucks, to perform its transportation
services. The purchase or lease of trucks to provide a service is clearly distinguishable from the
purchase of raw materials which are sold as a commodity. The former are the employment of
capital, the gross earnings from which are specifically subject to tax (People v Roberts, supra; see
also, People ex rel, Westchester Lighting Co. v Gaus, 199 NY 147; Chesapeake & Potomac
Telephone Co. v District of Columbia, 137 F2d 674)." Howgen, supra.
The Tax Appeals Tribunal, in deciding Howgen Transport, supra, concluded that the
interpretation of gross earnings under section 186 of the Tax Law (as it existed prior to the 1907
amendment) is controlling. The Tribunal stated that the words "receipts arising from or growing out
of the employment of its capital" characterized those receipts to be included in the gross earnings
computation. However, those words are not defined further in Roberts, supra, but their meaning is
clarified in Brooklyn Union Gas Co. v Morgan (114 AD 266, aff’d 195 NY 616). In Brooklyn Union
the computation of gross earnings for Tax Law section 186 purposes was directly at issue and the
language under analysis was exactly the same as that used in section 184.

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The taxpayer bought coal and oil as raw materials which it converted into gas and sold to customers.
This purchase of raw materials was characterized as an investment of capital which came back to
the taxpayer in cash as part of the price of the gas sold. The Court stated, "Capital of a corporation
which must first be invested before it begins to earn anything cannot be said to be part of the
earnings of such corporation merely because it is turned into cash and thus in one sense becomes a
receipt of the corporation. Earnings do not include capital but are the productions or outgrowth of
capital" The essence of the Court's decision is that a section 186 taxpayer who actually sells a good
is entitled to deduct from the receipt for the good the cost of the raw materials incorporated into the
good to calculate his gross earnings. (Howgen Transport, supra.) Prior to the amendment of Tax
Law section 186 (L 1907, ch 734), sections 184 and 186 had identical language in that both merely
referred to gross earnings without any further explanation of the term. Section 186 was amended
to define "gross earnings" as "all receipts from the employment of capital without any deduction."
This amendment was made to overcome the result of Brooklyn Union (People ex tel Westchester
Lighting Co v Gaus, 199 NY 147). No similar amendment was made to section 184. Since the
statutes were enacted together (L 1896, ch 908) and they employed the term gross earnings in similar
ways, they may be considered as in pari materia as they respectively impose gross earnings taxes on
different types of businesses. Because of this close relationship between the two statutes, it is proper
to look to the interpretation of section 186 as an aid in interpreting section 184 when section 184 has
not been similarly addressed, as in the present case. The two expressions should be given the same
meaning in the absence of an indication that the Legislature intended a contrary meaning. (Howgen
Transport, supra.)
Accordingly, when computing gross earnings from the billing and collection services
component, MCI must include the gross amount charged to the 900 Sponsor for the billing and
collection component without any deductions. As in Howgen Transport, supra, "expenses incurred
to provide a service is clearly distinguishable from the purchase of raw materials which are sold as
a commodity."
Issue II - Tax on the Furnishing of Utility Services-Section 186-a

1. Are the amounts billed to End Users by MCI or an LEC subject to taxes imposed by
   section 186-a of the Tax Law?
2. Are the amounts of MCI's charge to the 900 Sponsor for providing communications service
   to be included in MCI's "gross income" for purposes of section 186-a?
3. Are the amounts of MCI's charge to the 900 Sponsors for providing billing and collection
   services to be included in MCI's "gross income" for purposes of section 186-a?
4. Do the answers to questions (2) or (3) depend on whether the amounts charged to Sponsors
   are billed as one lump sum or are separately stated?

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MCI contends that the amounts billed to End Users by MCI or an LEC are not taxable under
section 186-a of the Tax Law. MCI acknowledges that except for Product 4, the amount charged to
Sponsors for communications service is taxable under section 186-a. However, MCI argues that
receipts from Product 4 are not subject to tax because the Sponsor is not the ultimate consumer or
user of the "party line" service. In addition, MCI argues that the charge for providing the billing and
collection services for a Sponsor should not be included in MCI's gross income to the extent it
represents MCI's cost of providing such services. Therefore, MCI contends that only the profits from
providing such services should be taxable.
Section 186-a of the Tax Law imposes a tax on the furnishing of utility services, equal to 3%
of "gross income". Gross income is defined in section 186-a.2 of the Tax Law. Such section 186­
a.2, as amended by Chapter 61 of the Laws of 1989, provides that:
gross income with respect to the sale of telephony or telegraphy or the
furnishing of telephone or telegraph service, except as otherwise
provided with respect to the provision of carrier access service to
interexchange carriers, shall include receipts received in or by reason
of all sales made or service furnished in this state (whether or not for
ultimate consumption or use by the purchaser) but, if telephony or
telegraphy which is sold in this state by a utility or telephone or
telegraph service which is furnished in this state by a utility is then
resold by the purchaser with respect to such a sale, there shall be
allowed a deduction from the receipts of such purchaser from the
resale the amount paid to his seller or furnisher for such telephony or
telegraphy or telephone or telegraph service; provided, further that
receipts of an exchange carrier paid by interexchange carriers for the
provision of carrier access which is resold bysuch interexchange
carriers shall be excluded from the gross income of such exchange
carrier and no deduction shall be allowed to such interexchange
carriers for the amount so paid for such access service. "Gross
income" also includes.., profits from any transaction (except sales for
resale and rentals) within this state whatsoever .... (emphasis added)
The definition of gross income was amended to provide for taxation on the initial sale or
furnishing of telephony or telegraphy service within New York State rather than taxation on the sale
or furnishing of telephony or telegraphy for ultimate consumption or use by the purchaser within
New York State. Therefore, effective 3uly 1, 1989, the sale for resale deduction (other than exempt
carrier access services sold by an exchange telephone company to an interexchange telephone
company) will not be allowed. However, a reseller that purchases telephone or telegraph services
within New York State and subsequently resells such service is allowed to deduct

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from gross income the cost of such service on which tax under section 186-a was paid by the utility
which furnished such service to the reseller.
Herein, MCI's gross income is derived from the charges to the 900 Sponsors. The total
amount billed (including any sales tax) to an End User by MCI or an LEC is not included in MCI's
gross income. In addition, it does not matter whether the charges to a 900 Sponsor are broken out
separately into the two components or whether the entire amount is billed as one lump sum.
For purposes of section 186-a of the Tax Law, MCI must include in its gross income the
amount charged to a 900 Sponsors for providing communications service. However, MCI is allowed
to deduct from gross income, the cost of telephone service within New York State (other than carrier
access service) purchased from the utility which furnished such service to MCI where such utility
paid the tax under section 186-a. MCI may not deduct the cost of the carrier access service. Because
of the 1989 amendment to section 186-a, the amount charged to a 900 Sponsor for Product 4 is
subject to tax even though the Sponsor is not the ultimate consumer.
MCI must also include in its gross income, the amount charged to a 900 Sponsor for the
billing and collection services. However, MCI's contention that only the profits from such services
should be included in gross income is in error.
Section 501.14 of the Tax on the Furnishing of Utility Services Regulations, provides that
"profits from any transaction.., within this state whatsoever" shall be included in gross income.
"This class of transactions includes profits from labor not performed in the conduct of the taxpayer's
principal business and from sales of materials and supplies other than merchandise purchased for
resale .... "
Pursuant to Part 32 of the FCC Regulations, it has been established that the billingand
collection services MCI provides for its 900 Sponsors is directly associated with the regulated
telecommunication services and are included in the revenue accounts that reflect MCI's ongoing
major or central operations.
Therefore, since the billing and collection services are an integral part of the sale or
furnishing of telephone service within New York State, and the gross receipts from such services
must be included in gross income. These services may not be classified as transactions taxable on
the profits only because such services are performed in the conduct of MCI's principal business of
providing telephone service.
DATED: February 15, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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