Are companies that provide enhanced fax services (formatting, merging, and broadcasting documents) taxed as telephone/transmission companies, telecommunications providers, or utilities, or under Article 9-A?
Plain-English summary
Ernst & Young LLP asked how to classify two affiliated companies that provide enhanced fax services -- they take a customer's data, merge and format it onto the customer's document, broadcast it simultaneously to many recipients (by fax, PC, telex, or e-mail), collect responses, and generate delivery reports. The question: are they telephone/transmission companies under sections 183/184, telecommunications providers under section 186-e, or utilities under section 186-a -- or Article 9-A taxpayers?
Classification turns on the nature of the business viewed in its entirety and from the customer's perspective (Stat Equipment, Capitol Cablevision). The customer is buying an office service -- formatting, distribution to multiple recipients, and delivery reporting -- and the transmission of the document is incidental to that service. So this is not the fax/telex business taxed under section 183 (CCC Telex distinguished).
Because the companies are not principally engaged in a telephone/transmission business, they are not subject to section 183 (and the section 184 questions are moot). They are not providers of telecommunication services under section 186-e because they do not separately charge for transmission. And they are not section 186-a utilities because they are not supervised by the Public Service Commission. They are subject to the Article 9-A franchise tax.
What this means for you
Classification looks at the whole business from the customer's view
A company is classified by what its customers actually buy and pay for, viewed in its entirety -- not by one feature of its operations. A corporation is generally principally engaged in the activity producing more than 50% of its receipts.
An enhanced/office service that merely transmits is Article 9-A, not a telephone business
Where formatting, merging, multi-recipient distribution, and delivery reporting are the service, and transmission is incidental, the provider is not a telephone or transmission company under section 183 -- it is a general business corporation under Article 9-A.
No separate transmission charge means no section 186-e excise; no PSC oversight means no 186-a
Without a separately stated charge for transmitting documents, the company is not selling telecommunication services and owes no section 186-e excise. And a company not supervised by the Public Service Commission is not a utility taxed on gross income under section 186-a.
Common questions
Q: Is an enhanced fax / fax-broadcast business a telephone company in New York?
A: No. Because the customer is buying an office service (formatting, distribution, delivery reports) and transmission is incidental, the business is taxed under Article 9-A, not as a telephone business under section 183.
Q: Does it owe the section 186-e telecommunications excise tax?
A: No, because it does not separately charge customers for transmitting documents, so it is not a provider of telecommunication services.
Q: Is it a utility taxed under section 186-a?
A: No. Only persons supervised by the Public Service Commission are utilities under section 186-a; these companies are not.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A business corporation franchise tax)
- Tax Law section 209.4 (corporation taxable under section 183 is not subject to Article 9-A)
- Tax Law section 183 (franchise tax on a telephone or telegraph business)
- Tax Law section 186-a (gross income tax on PSC-supervised utilities)
- Tax Law section 186-e (excise tax on telecommunication services; provider definition)
- Matter of Stat Equipment Corp, TSB-D-96(3)C; Matter of Capitol Cablevision (classification test)
- CCC Telex Service, Inc, TSB-A-89(9)C (July 18, 1989) (telex-fax service taxed under sections 183/184)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1997.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a97_19c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-97(19)C
Corporation Tax
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C960807A
On August 7, 1996, a Petition for Advisory Opinion was received from Ernst
& Young LLP, 787 Seventh Avenue, New York, New York 10019.
The issue raised by Petitioner, Ernst & Young LLP, is the treatment of fax
services for purposes of Article 9-A, and sections 183, 184, 186-a and 186-e of
Article 9 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Company X and Company Y, a subsidiary of Company X, are in the business of
providing enhanced fax services. Customers send information to Company X and
Company Y to be faxed or sent to various recipients either by fax machine,
personal computer, telex or electronic mail address. The enhancement feature of
the fax service means that a report is formatted by means of merging the customer
supplied data on the customer's document format for transmission.
Once the
documents are prepared, they are transmitted to multiple destinations and
recipients simultaneously, thereby allowing numerous recipients to receive the
document at the same moment. The destinations are determined by the recipient
list provided by the customer. Company X and Company Y also provide computer
access and storage services, equipment rental and supply sales. The computer
access and storage are in the form of an electronic mailbox. The mailbox may be
used by a customer to access a file, to obtain a message or document or report
on delivery status.
Customers can access the services of Company X and Company Y by FAX,
Personal Computer (PC), mainframe or minicomputer, or Local Area Network (LAN).
Company X and Company Y furnish customers with specialized software for access
through PCS and LANs.
Company X and Company Y personalize the documents for customers by
inserting a recipient's name, address or other unique information by means of a
file merge onto any document, such as the customer's letterhead, forms, such as
purchase orders or invoices, or other reports. Also, Company X and Company Y can
automate the collection and receipt of responses to fax documents sent to a
customer's recipients, such as the receipt of large volumes of survey responses,
completed questionnaires and inquiries. A key component of all services is the
generation of reports showing how and when documents are delivered.
Company X and Company Y provide both "broadcast" and "point-to-point"
services. "Broadcast" service involves the sending of the initial document from
the customer's computer or fax machine to Company X or Company Y's computer and
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switching facilities, which initial document Company X or Company Y then forwards
to various recipients at multiple fax, telex, or electronic mail address
locations simultaneously. "Point-to-point" service essentially involves the same
handling of the document as "broadcast" except that the document is sent to a
single destination.
All transmissions made by Company X originate in New Jersey. Company X
currently owns multiple switches within various states, however, these switches
are used to route calls and are not used to originate any transmissions. All of
Company Y's transmissions originate in New York State. These transmissions are
both intrastate and interstate, and may be intra-LATA or inter-LATA with respect
to those terminating within New York State.
Company X and Company Y bill their customers for "Usage" charges and "non
usage" charges. "Usage" includes charges for the delivery of a document to the
ultimate recipient and are billed at various rates, depending on the enhanced
feature purchased by the customer, such as report customization or the collection
of fax responses. The increase in the rate for the enhancement features provided
to the customers are not separately identified on the invoice so that Company X
and Company Y may remain competitive with other unrelated companies providing the
same service. The "usage" charge rate is then multiplied by a factor such as
time, pages, or number of characters per document to obtain the amount billed to
the customer. The type of factor used in calculating the total amount billed
varies among customers.
Certain service charge items, which are classified as "non-usage" charges,
are separately identified on the customer's invoices. These "non-usage" charges
include "form or logo" registration, mailbox rental, PC connect charges, and
recipient list update charge.
Section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax
on domestic or foreign corporations for the privilege of exercising a corporate
franchise, doing business, employing capital, owning or leasing property in a
corporate or organized capacity, or maintaining an office, in New York State.
Section 209.4 of the Tax Law provides that corporations liable for tax under
section 183 of Article 9 of the Tax Law are not subject to tax under Article 9-A.
Section 183 of Article 9 of the Tax Law imposes a franchise tax on a
domestic or foreign corporation formed for or principally engaged in the conduct
of a telegraph or telephone business, 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.
To determine the classification and proper taxability of a corporation
under either Article 9 or Article 9-A, an examination of the nature of the
corporation's activities is necessary, regardless of the purpose for which the
corporation was organized. In Matter of Stat Equipment Corp and Matter of BiCounty Ambulance and Ambulette Transport Corp, Dec Tax App Trib, January 25,
1996, TSB-D-96(3)C, the Tax Tribunal stated the test for proper classification
of business activities as follows:
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We stated the test in Matter of Capitol Cablevision Sys. (Tax
Appeals Tribunal, June 9, 1988):
"[i]t is well established that classification for corporation tax
purposes is to be determined by the nature of the taxpayer's
business and not by the words in its certificate of incorporation,
nor by focusing on one aspect of its business operations.
The
business must be viewed in its entirety and from the perspective of
its customers - what they buy and pay for. (Quotron Sys v Gallman,
39 NY2d 428; Matter of Holmes Elec. Protective Co. v McGoldrick, 262
AD 514, affd 288 NY 635; Matter of McAllister Bros. v Bates, 272 AD
511)" (Matter of Capitol Cablevision Sys.,supra).
Ordinarily, a corporation is deemed to be principally engaged in the
activity from which more than 50 percent of its receipts are derived. See e.g.
Re Joseph Bucciero Contracting Inc., Adv Op St Tax Commn, July 23, 1981, TSB-A
81(5)C.
In CCC Telex Service, Inc, Adv Op Comm T & F, July 18, 1989, TSB-A-89 (9)C,
it was held that where the petitioner was principally engaged in a telex-fax
service business, it would be classified as a transmission corporation and would
be subject to tax under sections 183 and 184 (as in effect prior to January 1,
1995) of the Tax Law.
Section 186-e.2(a) of Article 9 of the Tax Law imposes an excise tax "on
the sale of telecommunication services by a provider of telecommunication
services" from any intrastate telecommunication services and any interstate and
international telecommunication services (other than interstate and international
private telecommunication services) which originate or terminate in New York
State and which telecommunication services are charged to a service address in
New York State regardless of where the amounts charged for the services are
billed or ultimately paid.
Section 186-e.1(e) of the Tax Law defines "provider of telecommunication
services" as "any person who furnishes or sells telecommunications services
regardless of whether such activities are the main business of such person or are
only incidental thereto."
In the case of People ex rel Public Service Commn. v NY Telephone Co, 262
App Div 440 (1941), the hotels claimed that a separately stated charge for
providing telephone service was not a telephone charge but a charge for
additional hotel services, such as bookkeeping or secretarial services. The
opinion stated in part, "We think the distinction sought to be made as to the
type of charge is somewhat nebulous, but granting that some distinction exists
and that extra service is provided in many cases the main purpose is to furnish
the public telephone service." In Merchants Refrigerating Co v Taylor, 275 NY
113 (1937), New York City subjected Merchants total receipts which included
charges for refrigeration along with other charges to the tax on the furnishing
of utility services under a City provision substantially the same as section 186
a of the Tax Law.
The opinion stated in part, "The City has subjected the
appellant's entire refrigeration business -- storage and all -- to this utility
tax.
If the construction of the statute urged by the City is adopted, the
statute is unconstitutional as arbitrary and discriminatory -- unreasonable."
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However, the court did sustain the imposition of the tax on the company's
separately stated receipts from the sale of refrigeration by transmission through
pipes to its customers. (See also, Empire State Bldg v Dept of Taxation and
Fin., 219 AD2d 459 (1995).)
Petitioner's specific questions are as follows.
Question 1. If Company X and Company Y are primarily engaged in providing
enhanced fax services, are they considered transmission companies and thereby
subject to tax under Article 9 rather than Article 9-A of the Tax Law?
When determining the classification and proper taxability of Company X and
Company Y, the business activities of each company "must be viewed in its
entirety and from the perspective of its customers - what they buy and pay for"
as stated in Stat Equipment Corp, supra. The determination of whether Company
X and Company Y are subject to tax under Article 9-A or section 183 of Article
9, depends on what activity Company X and Company Y are principally engaged in.
Company X and Company Y provide enhanced fax services. The enhancement
feature of the fax service means that a report sent to Company X or Company Y is
formatted by means of merging the customer supplied data on the customer's
document format (i.e. letterhead, shipping invoice) for transmission and sent to
multiple destinations and recipients simultaneously by fax machine, personal
computer, telex or electronic mail address, thereby allowing numerous recipients
to receive the document at the same moment.
Company X and Company Y also
automate the collection and receipt of responses to fax documents sent to a
customer's recipients, such as the receipt of large volumes of survey responses,
completed questionnaires and inquiries. A key component of all services is the
generation of reports showing how and when documents are delivered.
The enhanced fax services provided by Company X and Company Y encompass
several activities, one of which is the transmission of a document. However,
Company X's and Company Y's overall activities in providing the enhanced fax
services to their customers is not a fax service as contemplated in CCC Telex,
supra. Rather, the enhanced fax service activities of Company X and Company Y
constitute an office service which includes the transmission of a document in
their efforts to provide the services that the customer has requested.
The
customer is paying Company X and Company Y to provide office functions; that is,
the merging and formatting of the data provided by the customer, the distribution
of the data to multiple destinations and recipients, simultaneously, as required
by the customer and the generation of reports showing how and when documents are
delivered.
Even though Company X and Company Y do transmit documents, the
transmission is an incidental activity to the overall service Company X and
Company Y provide for their customers. Therefore, the enhanced fax services
provided by Company X and Company Y do not constitute a business that is taxable
under section 183 of the Tax Law.
Further, the activities of Company X and Company Y in providing computer
access and storage services, equipment rental and supply sales, would not
constitute businesses that are taxable under section 183 of the Tax Law.
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Accordingly, it appears that Company X and Company Y are not principally
engaged in a business that is taxable under section 183 of the Tax Law and they
would not be subject to tax under section 183 of Article 9 of the Tax Law.
Company X and Company Y would be subject to tax under Article 9-A of the Tax Law.
Question 2.
Assuming that Company X is taxable under section 183 of
Article 9 of the Tax Law, is Company X, whose transmissions originate in New
Jersey and terminate in New York, in the form of transmission of image (i.e.
logos, photographs, etc.) as well as alpha and numeric information and data,
providing telecommunication services as a "local telephone business" subject to
tax under section 184 of the Tax Law?
Since it appears that Company X is not taxable under section 183 of the Tax
Law, this question is moot.
Question 3. Assuming that Company Y is taxable under section 183 of the
Tax Law, is Company Y, whose transmissions originate in New York, which are both
intrastate and interstate as well as intra-LATA or inter-LATA, providing
telecommunication service as a "local telephone business" subject to tax under
section 184 of the Tax Law?
Since it appears that Company Y is not taxable under section 183 of the Tax
Law, this question is moot.
Question 4. Are the enhanced fax services provided by Company X, which
originate in New Jersey, subject to the excise tax under section 186-e of the Tax
Law?
As established in the Answer to Question 1, the enhanced fax services which
Company X is providing its customers constitutes an office service. Company X's
activities in providing the enhanced fax services may include the use of
telecommunication services in its efforts to perform the services requested by
its customers, but Company X is not a provider of telecommunication services
because it is not furnishing or selling telecommunication services to its
customers. Therefore, the enhanced fax services provided by Company X would not
be subject to the excise tax under section 186-e of the Tax Law, because there
is no separately stated charge for the transmission of documents.
Question 5. Are the enhanced fax services provided by Company Y, which
originate in New York, subject to the excise tax under the provisions of section
186-e of the Tax Law?
As established in the Answer to Question 1, the enhanced fax services which
Company Y is providing its customers constitutes an office service. Company Y's
activities in providing the enhanced fax services may include the use of
telecommunication services in its efforts to perform the services requested by
its customers, but Company Y is not a provider of telecommunication services
because it is not furnishing or selling telecommunication services to its
customers. Therefore, the enhanced fax services provided by Company Y would not
be subject to the excise tax under section 186-e of the Tax Law, because there
is no separately stated charge for the transmission of documents.
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Question 6. Are Company X and Company Y, which are not regulated by the
Public Service Commission, subject to tax on their "gross income", other than
telecommunication service income, under section 186-a of the Tax Law?
No. Since Company X and Company Y are not subject to the supervision of
the Department of Public Service, they are not utilities subject to tax on their
"gross income" under section 186-a of the Tax Law.
DATED: August 6, 1997
NOTE:
/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.