Since 1990, can a long-distance reseller still deduct the cost of local exchange carrier access service it buys and resells, and does it owe New York's section 186-a excise tax on international calls it merely routes through a New York gateway?

Plain-English summary

ATC Long Distance, through subsidiaries Claydesta Digital and Microtel, Inc., resells long-distance telecommunications service based in the Southeast and Southwest. Its network terminates calls in New York using local exchange carrier access service, but it has no New York customers and does not originate traffic here using that access service. It also routes most of its international traffic through a New York gateway, though none of those international calls terminate in New York. It asked two things under Tax Law section 186-a (the 3% excise tax on utility gross/gross operating income): can it still claim a resale exemption for the local exchange access service it buys and resells, and does it owe section 186-a tax on the international traffic merely passing through the New York gateway?

The resale-exclusion answer: the old exclusion is gone, replaced by a deduction on the other side of the transaction. A 1989 amendment shifted section 186-a taxation to the initial sale of telephony within New York (rather than taxing the ultimate consumer), and a 1990 amendment then eliminated the exchange carrier's resale exclusion for carrier access service entirely. So, since July 1, 1990, a local exchange carrier selling carrier access service to an interexchange carrier must include those receipts in its own section 186-a tax base -- the tax is not imposed on the interexchange carrier that buys the service. To prevent double taxation, the interexchange carrier (the buyer/reseller) is instead allowed a deduction for the purchase price of that access service, but only if (1) the purchase price was already taxed to the exchange carrier under section 186-a, and (2) the interexchange carrier resells the service to its own customers rather than consuming it itself. The same deduction mechanism (section 186-a.2-a) applies to resold international-gateway access charges, applied before apportionment to New York.

The international-gateway answer: incomplete on this record. A carrier providing gateway access for international traffic includes its New York-attributable share of foreign-transmission revenue (computed under section 184.4(c)) in its own section 186-a base; that tax isn't imposed on the interexchange carrier using the gateway. But the Department could not determine from the facts submitted whether ATC Long Distance, Claydesta Digital, or Microtel is itself subject to section 186-a tax at all -- a threshold question that has to be resolved before either the resale deduction or the gateway-tax exposure can be pinned down.

What this means for you

Long-distance resellers and interexchange carriers

Since July 1, 1990, there is no exchange-carrier resale exclusion for carrier access service -- expect the local exchange carrier's rates to reflect that added tax cost. As the buyer/reseller, your relief comes through the deduction mechanism (sections 186-a.2 and 186-a.2-a), not an exclusion, and only if you're yourself subject to section 186-a and actually resell (rather than consume) the service.

Companies routing international traffic through New York gateways

Merely passing international traffic through a New York gateway carrier doesn't automatically create section 186-a liability for you as the interexchange carrier -- the gateway carrier bears that tax on its New York-attributable share of revenue. But whether YOU independently owe section 186-a tax depends on your own separate activities and status, which must be established on the specific facts.

Accountants and tax professionals

This ruling is a clean explainer of the 1989/1990 mechanical shift in section 186-a from a resale-exclusion regime to a tax-then-deduct regime -- useful for any telecom client restructuring carrier-access purchasing arrangements post-1990.

Common questions

Q: Is there still a resale exclusion for local exchange carrier access service?
A: No, not since July 1, 1990 -- the exchange carrier must include those receipts in its own tax base, and the interexchange carrier gets a deduction instead, conditioned on prior taxation and actual resale.

Q: Does merely routing international calls through a New York gateway create section 186-a liability for the interexchange carrier?
A: The gateway carrier bears the tax on its New York-attributable share of revenue; the tax isn't imposed on the interexchange carrier for that gateway access itself.

Q: Why didn't the Department give a final answer here?
A: The facts submitted weren't sufficient to determine whether the petitioner or its subsidiaries are themselves subject to section 186-a tax -- a threshold question the ruling couldn't resolve on this record.

Citations and references

Statutes and regulations:

• Tax Law section 186-a (utility excise tax)
• Tax Law section 186-a.2 (definitions, resale deduction)
• Tax Law section 186-a.2-a (resale deduction against interstate/international revenue before apportionment)
• Tax Law section 184.4(c) (apportionment of international transmission revenue)
• Laws of 1989, ch. 61; Laws of 1990, ch. 190 (amendments eliminating the exchange-carrier resale exclusion)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a91_17c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91(17)C
Corporation Tax
September 20, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C910419B

On April 19, 1991, a Petition for Advisory Opinion was received from ATC Long Distance,
1515 South Florida Highway, Suite 400, Boca Raton, Florida 33432.
The issue raised by Petitioner, ATC Long Distance, is whether under section 186-a of the Tax
Law, a long distance carrier of telecommunications services that does not originate nor bill to any
service address in New York, can still maintain the resale exemption for local exchange carrier
access service and whether Petitioner must pay the section 186-a tax on international traffic passing
through New York State.
Petitioner through its subsidiaries, Claydesta Digital and Microtel, Inc., is a long distance
reseller of telecommunications services based in the Southeast and Southwest United States.
Petitioner's network allows usage to terminate in New York using local exchange carrier access
services. However, Petitioner does not have any customers in New York nor does it originate any
traffic in New York using those local exchange carrier access services.
Petitioner sends most of its international traffic through an international gateway in New
York. None of the international calls terminate in New York State.
Section 186-a of the Tax Law imposes a tax equal to three percent of the gross income of
every utility subject to the supervision of the New York State Department of Public Service, which
has gross income in excess of $500, and a tax equal to three percent of the gross operating income
of every utility, not subject to the supervision of the New York State Department of Public Service,
that is doing business in New York State and has gross operating income in excess of $500.
Section 186-a.2 of the Tax Law provides that the word "utility" includes every person
(whether or not such person is subject to the supervision of the Department of Public Service) who
sells telephony or telegraphy delivered through mains, pipes or wires, or furnishes telephone or
telegraph service by means of mains, pipes or wires; regardless of whether such activities are the
main business of such person or are only incidental thereto. The word "person" means persons,
corporations, companies, associations, etc.
Section 186-a.2 also provides that the words "interexchange carrier" mean and include any
seller of telephone service between two or more exchanges that qualifies as a common carrier within
the meaning of section 153(h) of Title 47 of the United States Code.
Section 186-a.2 of the Tax Law further provides that the words "gross income" and "gross
operating income" with respect to the sale of telephony and telegraphy or the furnishing of telephone
TP-9 (9/88)

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TSB-A-91(17)C
Corporation Tax
September 20, 1991
or telegraph service shall include receipts received in or by reason of all sales made or service
furnished in New York State (whether or not for ultimate consumption or use by the purchaser) but,
if telephony, including carrier access service, or telegraphy which is sold in New York State by a
utility or telephone service, including carrier access service, or telegraph service which is furnished
in New York 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
reseller or furnisher for such telephony or telegraphy or telephone or telegraph service. For the
purpose of such deduction, the fact that an interexchange carrier which has purchased carrier access
service for resale, is not able to specifically identify and separate the portion of such service which
was actually resold in a particular sale of telephone service to its customers shall not be grounds to
disallow such deductions.
Section 186-a.2 of the Tax Law was amended by Chapter 61 of the Laws of 1989 to insure
against the double taxation of receipts of telephone and telegraph corporations by providing for the
taxation on the initial sale or furnishing of telephony or telegraphy 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. The amendment provided that the sale for resale deduction
(other than exempt carrier access services sold by an exchange telephone company to an
interexchange telephone company) is not allowed on or after July 1, 1989. This made into law, the
policy existing at that time which allowed an exchange telephone company to deduct from gross
income the receipts received from the sale of carrier access service within New York State to an
interexchange telephone company, where the interexchange telephone company resold the carrier
access service as part of interexchange telephone company service.
Chapter 190 of the Laws of 1990 also amended section 186-a.2 of the Tax Law by
eliminating any resale exclusion to an exchange carrier. This conforms the sale of carrier access
service to the remainder of resold telephone service under section 186-a. Concomitant with the
inclusion of carrier access service in the taxable base of the seller thereof, the purchaser (the
interexchange carrier) of such service, if it resells the same, is allowed a deduction of the purchase
price it paid for such service if (1) the purchase price of such services paid by the interexchange
carrier was taxed under section 186-a to the exchange carrier and (2) the interexchange carrier resells
such service to its customers, rather than self-using such service or consuming it for other than resale
as telephone service.
Accordingly, on and after July 1, 1990 there is no provision in section 186-a of the Tax Law
for a resale exemption for a local exchange carrier selling carrier access service to an interexchange
carrier who resells such service. Therefore, the local exchange carrier is required to include in the
determination of its gross income or gross operating income, its receipts for providing, in New York
State, carrier access service to interexchange carriers. The section 186-a tax imposed on the sale of
such carrier access service is not imposed on the interexchange carrier. It should be noted, that the
local exchange carrier's tariff set by the Public Service Commission reflects the increased cost
incurred by the local exchange carrier because of the 1990 amendment to section 186-a of the Tax
Law.

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Corporation Tax
September 20, 1991
Accordingly, if Petitioner or its subsidiaries, Claydesta Digital or Microtel, Inc., is subject
to tax under section 186-a, such taxpayer is authorized to make a deduction, pursuant to section 186­
a.2, for the purchase price of carrier access service that was taxed to the local exchange carrier and
which is resold by such taxpayer to its customer. If Petitioner, Claydesta Digital or Microtel, Inc.
is not subject to tax under section 186-a, such corporation is not entitled to relief for the section 186­
a tax on carrier access service paid by the local exchange carrier.
With respect to international traffic passing through New York State, the international carrier
that is providing access to the gateway in New York for international traffic includes in its
determination of gross income or gross operating income, that portion of its revenue from the foreign
transmission service that is attributable to New York State, computed pursuant to the provisions of
section 184.4(c) of the Tax Law. The section 186-a tax imposed for providing such access to the
gateway in New York is not imposed on the interexchange carrier. It should be noted, that the
international carrier's tariff set by the Federal Communications Commission reflects the cost incurred
by the international carrier for the tax imposed under section 186-a of the Tax Law.
Section 186-a.2-a of the Tax Law provides that the deduction permitted in section 186-a.2
with respect to resold telephony or telegraphy or telephone or telegraph service which was purchased
in New York (including the provision relating to resold carrier access service) shall be allowed
against interstate and international revenues prior to apportionment to New York.
Accordingly, if Petitioner or its subsidiaries, Claydesta Digital or Microtel, Inc., is subject
to tax under section 186-a, such taxpayer is authorized to take a deduction, pursuant to section 186­
a.2-a, for the purchase price of service that was taxed to the international carrier and which is resold
by such taxpayer to its customer. If Petitioner, Claydesta Digital or Microtel, Inc. is not subject to
tax under section 186-a, such corporation is not entitled to relief for the section 186-a tax on service
paid by the international carrier.
It should be noted that the facts submitted by the Petitioner are not sufficient enough to
enable a determination as to whether Petitioner, Claydesta Digital or Microtel, Inc. is subject to tax
under section 186-a of the Tax Law.

DATED: September 20, 1991

s/PAUL B. C0BURN
Deputy Director
Taxpayer Services Division

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