How is a Public Service Commission-regulated reseller of telephone service taxed under Article 9 before and after the 1995 telecommunications tax changes?

Plain-English summary

RGT Utilities, Inc., a Public Service Commission-regulated reseller of telephone service in Manhattan office buildings, asked how it was taxed under Article 9 before January 1, 1995 and how the 1995 telecommunications tax restructuring (Chapter 2 of the Laws of 1995) changed its status.

Classification turns on the nature of the business viewed from the customer's perspective (Stat Equipment). Substantially all of RGT's revenue is from regulated telephone service, so it is principally engaged in a telephone business and taxed under section 183 -- and, under section 209.4, it is not an Article 9-A taxpayer.

Before January 1, 1995: RGT was subject to section 184 (then imposed on any telephone business) and to section 186-a (gross income of a PSC-supervised utility). On and after January 1, 1995: section 184 now applies only if more than 50% of receipts come from a local telephone business -- a question of fact the opinion cannot resolve. Section 186-a still applies because RGT remains PSC-supervised, but "gross income" no longer includes telecommunication-service receipts; those are now taxed under the new section 186-e excise tax, and RGT is a provider of telecommunication services subject to it.

What this means for you

A PSC-regulated telephone reseller is taxed under Article 9, not Article 9-A

A corporation principally engaged in a telephone business is taxed under section 183, and section 209.4 keeps any section 183 taxpayer out of the Article 9-A franchise tax.

The 1995 changes narrowed section 184 to local telephone business

Before 1995, section 184 reached any telephone business. After January 1, 1995, it applies only to a corporation principally engaged in a local telephone business -- meaning more than 50% of receipts from carrier-access or intra-LATA service, a factual determination.

Section 186-a still applies, but telecom receipts shifted to the 186-e excise

A PSC-supervised utility remains subject to the section 186-a gross income tax, but after 1995 gross income excludes telecommunication-service receipts, which are taxed instead under the section 186-e excise tax on providers of telecommunication services.

Common questions

Q: Is a regulated telephone reseller an Article 9-A taxpayer?
A: No. It is principally engaged in a telephone business, taxed under section 183, and section 209.4 excludes it from Article 9-A.

Q: Did the 1995 law change whether section 184 applies?
A: Yes. After January 1, 1995, section 184 applies only if more than 50% of the company's receipts come from a local telephone business; whether that test is met is a question of fact.

Q: How are the company's telephone-service charges taxed after 1995?
A: Under the new section 186-e telecommunications excise tax; they are no longer part of "gross income" for the section 186-a utility tax, which still applies to the company's other gross income.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.4 (section 183 taxpayer not subject to Article 9-A)
- Tax Law section 183 (franchise tax on a telephone or telegraph business)
- Tax Law section 184 (additional franchise tax; local telephone business after January 1, 1995)
- Tax Law section 186-a (gross income tax on PSC-supervised utilities)
- Tax Law section 186-e (telecommunications excise tax; provider of telecommunication services)
- Chapter 2 of the Laws of 1995 (telecommunications tax restructuring); TSB-M-95(3)C
- Matter of Stat Equipment Corp, TSB-D-96(3)C (classification from the customer's perspective)

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_25c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(25)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.C971015A

On October 15, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from RGT Utilities, Inc., 1221 Avenue of the
Americas, New York, New York 10020.
The issue raised by Petitioner, RGT Utilities, Inc. is whether it was
subject to tax under Article 9 of the Tax Law before January 1,1995 and whether
its tax status was changed by the enactment of Chapter 2 of the Laws of 1995,
effective January 1, 1995.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner is a Delaware corporation qualified to do business in New York
State. It maintains its principal offices in the City of New York. Its sole
business is to provide telecommunications services to businesses located in the
Rockefeller Center complex and adjacent office buildings, as well as other office
buildings, in Manhattan. Substantially all of the revenues of Petitioner are
derived from the provision of regulated telephone services.
Petitioner is regulated by the Public Service Commission as a telephone
utility. It was issued a Certificate of Public Convenience and Necessity by the
Public Service Commission to operate as a reseller of telephone service on
January 14, 1986, in Case 29240. That Certificate authorized Petitioner "to
provide all forms of telephone service on an inter-city basis throughout New York
State". Petitioner was issued an Amended Certificate of Public Convenience and
Necessity by the Public Service Commission on March 17, 1992, in Case 91-C-0690.
In addition to the inter-city authority contained in the original Certificate,
the Amended Certificate authorized Petitioner "to provide all forms of telephone
services on an intracity basis throughout New York State."
Petitioner currently has on file with the Public Service Commission a full
and detailed tariff setting forth the rates, terms and conditions for its
offering of local and toll telephone services, on a resale basis, throughout New
York State.
In addition, over the years Petitioner has been required to comply with the
provisions of the Public Service Law and the Public Service Commission's Rules
and Regulations applicable to telephone corporations. Over the years, Petitioner
has been required to seek, and has received, Public Service Commission approval
to, among other things, change its rates, terms and conditions for providing
telephone service; change the manner in which it timed and billed for calls;
change its name; transfer its assets or property; effectuate a corporate
reorganization; and issue securities and/or debt.

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TSB-A-97(25)C
Corporation Tax

Petitioner is deemed a telephone utility by the Federal Communications
Commission(FCC). It possesses a Section 214 Certificate from the FCC authorizing
it to provide international telephone service as a reseller; it also has on file
with the FCC tariffs governing the rates, terms and conditions for its
international service as well as for its resale of interstate long distance
service.
Applicable Law
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.
For taxable years commencing before January 1, 1995, section 184 of Article
9 of the Tax Law imposed an additional franchise tax on every corporation formed
for or principally engaged in the conduct of telephone or telegraph business.
As amended by Chapter 2 of the Laws of 1995, for taxable years beginning
on or after January 1, 1995, section 184 of Article 9 of the Tax Law imposes an
additional franchise tax on every corporation formed for or principally engaged
in the conduct of local telephone business, or telegraph business.
Section 184.1 of Article 9 of the Tax Law defines "local telephone
business" as "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"), ... or within the LATA-like Rochester non-associated
independent area. The term "telecommunication services" shall have the meaning
ascribed to such term in section one hundred eighty-six-e of this article."
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
Bi-County 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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TSB-A-97(25)C
Corporation Tax

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.
Section 186-a of Article 9 of the Tax Law provides, in part:
1. Notwithstanding any other provision of this chapter, or of any
other law, a tax equal to three and one-half per centum of its gross
income is hereby imposed upon every utility doing business in this
state which is subject to the supervision of the state department of
public service ... which taxes shall be in addition to any and all
other taxes and fees imposed by any other provision of law for the
same period.
2. As used in this section, (a)(i) the word "utility" includes every
person (including every provider of telecommunication services)
subject to the supervision of the state department of public service
... (b) the word "person" means ... corporations ... (c) the words
"gross income" mean and include receipts received in or by reason of
any sale, conditional or otherwise ... made or service rendered for
ultimate consumption or use by the purchaser in this state ...
without any deduction ... "Gross income" also includes profits from
the sale of securities ... profits from the sale of real property
... profit from the sale of personal property ... also receipts from
interest, dividends, and royalties ... without any deduction
therefrom for any expenses whatsoever incurred in connection with
the receipt thereof, also profits from any transaction (except sales
for resale and rentals) within this state whatsoever.
As amended by Chapter 2 of the Laws of 1995, section 186-a(2) of Article
9 of the Tax Law also states, "Provided, however, gross income with respect to
a provider of telecommunication services shall not include receipts from the sale
of telecommunication services as such services are defined in section one hundred
eighty-six-e of this article."

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TSB-A-97(25)C
Corporation Tax

Section 186-e.2(a) of Article 9 of the Tax Law, added by Chapter 2 of the
Laws of 1995, 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 Article 9 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."
Section 186-e.1(g) of Article 9 of the Tax Law defines "Telecommunication
services" as "telephony or telegraphy, or telephone or telegraph service...."
Opinion
When determining the classification and proper taxability of Petitioner,
the business activities "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 Petitioner is subject to tax under Article
9-A or section 183 of Article 9, depends on what activity Petitioner is
principally engaged in.
Herein, Petitioner is a corporation that operates as a telephone utility
subject to the jurisdiction of the State Public Service Commission and the Public
Service Law. Substantially all of its revenues are derived from the provision of
regulated telephone services. It provides all forms of telephone service on an
inter-city and intra-city basis throughout New York State. It offers local and
toll telephone services as well as international telephone service and interstate
long distance service. As such, Petitioner is principally engaged in the conduct
of a telephone business and subject to tax under section 183 of Article 9 of the
Tax Law.
Chapter 2 of the Laws of 1995 (effective for taxable years beginning on or
after January 1, 1995) amended section 184 of Article 9 of the Tax Law to provide
that a telephone corporation is subject to tax only if it is formed for or
principally engaged in the conduct of a local telephone business. Prior to the
enactment of such chapter, a telephone corporation was subject to tax under
section 184 if it was principally engaged in the conduct of a telephone business.
Accordingly, for taxable years beginning before January 1,1995, Petitioner
was principally engaged in the conduct of a telephone business and subject to tax
under section 184. Moreover, as Petitioner is subject to franchise tax under
section 183 of Article 9 of the Tax Law, it is not subject to tax under Article
9-A of the Tax Law.

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TSB-A-97(25)C
Corporation Tax

For taxable years beginning on or after January 1, 1995, Petitioner is
principally engaged in a local telephone business if more than 50 percent of its
receipts are derived from the conduct of a local telephone business. However,
the determination of whether Petitioner is principally engaged in a local
telephone business so that it is subject to tax under current section 184 is a
question of fact not susceptible of determination in an Advisory Opinion. An
Advisory Opinion merely sets forth the applicability of pertinent statutory and
regulatory provisions to "a specified set of facts" Tax Law, S 171, subd.
twenty-fourth; 20 NYCRR 901.1(a).
Section 186-a of the Tax Law was amended by Chapter 2 of the Laws of 1995
to remove the provisions subjecting telephone and telegraph service receipts to
tax under that section. The charges representing these receipts are now subject
to tax under newly enacted section 186-e of the Tax Law, Excise Tax on
Telecommunication Services. (See 1995 Legislation Affecting Telephone and
Telegraph Businesses and Other Providers of Telecommunication Services, Technical
Services Bureau Memorandum, December 13, 1995, TSB-M-95(3)C.)
Since Petitioner was and is subject to the supervision of the Department
of Public Service, it is subject to tax on its "gross income" under current
section 186-a and under section 186-a prior to January 1, 1995. On and after
January 1, 1995, "gross income" does not include receipts from the sale of
telecommunication services which are subject to tax under section 186-e of the
Tax Law.
The services provided by Petitioner constitute telecommunication
services as described in section 186-e.1(g) of the Tax Law and Petitioner is a
provider of telecommunication services as described in section 186-e.1(e)of the
Tax Law. Petitioner’s receipts from these services are subject to tax under
section 186-e of the Tax Law.

DATED: October 28, 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.