Is the sale of flat-rate Internet access subscription services to New York customers subject to New York sales and use tax or the section 186-e telecommunications excise tax?

Plain-English summary

Netcom On-Line Communication Services, Inc., an out-of-state Internet service provider with several New York points-of-presence, asked whether its flat-rate Internet access subscription services sold to New York customers are subject to sales and use tax (Articles 28/29) or the section 186-e telecommunications excise tax. It offers dial-up and network (point-to-point and frame-relay) access, plus bundled extras at no extra cost (a daily newsletter, custom web-sites, e-mail, Internet software, and toll-free support).

No. Under the Department's Internet policy effective February 1, 1997 (TSB-M-97(1)C and (1)S), Internet access charges are an unenumerated service -- not among the services subject to sales tax under section 1105(b), and not a telecommunication service subject to the section 186-e excise. This covers dial-up and both kinds of network access (see Hometown Online, TSB-A-97(30)S).

The bundled extras -- newsletter, web-site, e-mail, software, and toll-free customer service furnished as part of the flat monthly fee -- are incidental to Internet access and do not make the charge taxable. So Netcom's flat monthly access fees are not subject to sales/use tax or the section 186-e excise tax.

What this means for you

Internet access is an unenumerated service, so it is not subject to sales tax

Since February 1, 1997, New York treats Internet access charges as an unenumerated service -- not telephony or a telephone service under section 1105(b) -- so they are outside the sales and use tax.

Internet access is not a telecommunication service for the 186-e excise

Internet access is not a telecommunication service, so a provider does not owe the section 186-e excise tax on its access charges, whether the customer connects by dial-up or by point-to-point or frame-relay network service.

Bundled extras don't make a flat access fee taxable

E-mail, a newsletter, custom web-sites, navigation software, and toll-free support furnished as part of a combined Internet access charge are incidental to access and do not subject the flat monthly fee to tax.

Common questions

Q: Is Internet access subject to New York sales tax?
A: No. Since February 1, 1997, Internet access charges are an unenumerated service not subject to New York State and local sales and use taxes.

Q: Does Internet access owe the section 186-e telecommunications excise tax?
A: No. Internet access is not a telecommunication service, so it is not subject to the section 186-e excise tax.

Q: Do bundled e-mail, web hosting, or software make the access fee taxable?
A: No. When furnished as part of a combined Internet access charge, those extras are incidental to access and do not make the flat fee taxable.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1105(b) (sales tax on telephony and telephone/telegraph services)
- Tax Law section 186-e (telecommunications excise tax on telecommunication services)
- Articles 28 and 29 (New York State and local sales and compensating use taxes)
- TSB-M-97(1)C and (1)S (January 24, 1997) (Internet access not subject to sales or telecom-excise tax)
- Hometown Online, TSB-A-97(30)S (May 28, 1997) (Internet access is an unenumerated service)

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/multitax/a97_49s_17c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(49)S
Sales Tax
TSB-A-97(17)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z970403B

On April 3, 1997, a Petition for Advisory Opinion was received from Netcom
On-Line Communication Services, Inc., Two North Second Street, Plaza A, San Jose,
California 95113.
The issue raised by Petitioner, Netcom On-Line Communication Services,
Inc., is whether the sale of Internet access subscription services to New York
customers is subject to the sales and use taxes under Articles 28 and 29 of the
Tax Law or to the telecommunications excise tax under section 186-e of Article
9 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is domiciled outside of New York State and its activities
described below.

are

Internet Access Services
Petitioner is in the business of providing subscription services to
individuals and businesses for access to the Internet.
Petitioner offers
subscribers unlimited use of the Internet for a low, flat-rate monthly fee.
Petitioner's Internet access services are available to subscribers on a
nationwide basis by way of a national Point-of-Presence ("POP") network. A local
Internet gateway provides the individual user access to the Internet on a local
rate basis. This network extends to virtually every major market and constitutes
Petitioner's main operational asset.
Petitioner has several POPs located in New York. A POP typically consists
of a leased office building room with modems and routing equipment. There are
no employees at any of Petitioner's POP locations in New York. In the event of
technical difficulties at a POP, an attempt is made to correct the problem via
remote communication. If this is not successful, a technician is sent to the
Petitioner's POP to correct the problem. Each POP has a local phone number which
a customer calls to access Petitioner's services.

-2­
TSB-A-97(49)S
Sales Tax
TSB-A-97(17)C
Corporation Tax

Petitioner has two types of accounts: a "dial-up" account and a "network"
account. Petitioner's dial-up account customers in New York will initiate a
communications program on their computer which instructs the computer to dial
Petitioner's POP at the designated local access number. A central office (i.e.,
a regional telephone operating company ("RTOC") maintains the connection between
customer's computer and Petitioner's POP. Charges for this connection are billed
to the customer by the RTOC.
It is important to note that Petitioner is not able to determine the
physical location from which a subscriber's computer initiates communications
with Petitioner's POP.
However, at the close of each billing cycle (i.e.,
monthly) Petitioner's billing system is able to identify the latest POP accessed
by a subscriber.
Petitioner also maintains records of subscribers' billing
addresses.
Once connected to Petitioner's POP, the customer is routed through one or
more central offices to Petitioner's Hub in New Jersey. Petitioner has no Hub
in New York.
All communication charges incurred beyond the POP are paid by
Petitioner. Once connected to the New Jersey Hub, the customer is then routed
through one or more central offices to Petitioner's main operation center.
Petitioner's main operation center is located outside of New York.
Once connection is established with the main operation center, a customer's
user identification and password are authenticated. The customer is then routed
back to the POP into which the customer was initially connected and is assigned
an "IP" (or identification) address by the POP equipment. The customer is now
enabled to access the Internet.
From this point on, all activity of the customer will be routed from the
local POP to the New Jersey Hub and then onto the "Internet."
Once a customer
leaves Petitioner's network and gets onto the Internet, there is no way to track
the geographic termination point of the customer's activity.
For "network" accounts, the above steps also apply, but with some
modifications.
First, all network customers generally maintain a dedicated
connection between their place of business and Petitioner's POP. There is no
authentication process for network customers.
These dedicated connections can be either point-to-point or frame-relay.
Under point-to-point, both the connection from the customer's place of business
to the RTOC and from the RTOC to Petitioner's POP are lines leased by the network
customer from the RTOC. Petitioner may arrange for the line, but all customer
billings for these leased lines are handled by the RTOC. With frame-relay, only
the connection from the network customer's place of business to the RTOC is
leased by the network customer from the RTOC.
The connection from the RTOC is
leased from the RTOC by Petitioner. As with "dial-up" customers, the geographic
termination point of network customers' activities over the Internet cannot be
determined.

-3­
TSB-A-97(49)S
Sales Tax
TSB-A-97(17)C
Corporation Tax

Other Incidental Product/Service Offerings
As described above, Petitioner's core business is providing Internet access
to customers for a low, flat-rate monthly fee. In its effort to be the premier
provider of Internet access and to insure that its subscribers enjoy a rich,
dynamic and valuable Internet experience, Petitioner offers, generally at no
extra cost to subscribers, various "incidental" products and services.
Specifically, Petitioner provides its subscribers with access to the following:
1. a personalized, daily electronic newsletter;
2. the ability to create a custom web-site;
3. an electronic mail service ("E-mail");
4. 1-800 telephone service providing access to customer/sales
support personnel as well as an alternative means of accessing the
Internet; and
5. various Internet software tools designed to make it easier for
subscribers to have a more enjoyable and powerful Internet
experience.
With certain exceptions, section 1105(b) of the Tax Law imposes sales tax
upon receipts from the sales of telephony and telegraphy and telephone and
telegraph services.
With certain exceptions, section 186-e of the Tax Law
imposes a telecommunications excise tax on the sale of telecommunication services
by any person which is a provider of telecommunication services.
A recent Technical Services Bureau Memorandum, Internet Access Charges Not
Subject to Sales Tax and Telecommunications Excise Tax, January 24, 1997, TSB-M­
97(1)C and (1)S provides in part:
Effective on or after February 1, 1997 the Department is
implementing the new Internet policy recommended in its January 1997
report on Improving New York State's Telecommunications Taxes.
Internet access charges are considered an unenumerated service not
subject to the New York State and local sales tax.
Neither is
Internet access considered a telecommunications service subject to
the Section 186-e telecommunications excise tax.
Internet access is the connection provided to the Internet usually
by a "dial-up" service using a modem or a direct connection...
Internet
access
charges
may
also
include
items
such
as
communications/navigation
software,
E-mail
privileges,
news
headlines, and certain website services. When these services are
furnished as part of a combined Internet access charge, they are
deemed incidental to the provision of Internet access and the charge
is not subject to sales tax....

-4­
TSB-A-97(49)S
Sales Tax
TSB-A-97(17)C
Corporation Tax

Under the new Internet policy implemented February 1, 1997, the Internet
access service that is provided by Petitioner to its customers (whether the
customers are located within or without New York State) through "dial-up" or
either type of "network" service (point-to-point or frame relay) is not included
among the enumerated services that are subject to the New York State and local
sales and compensating use taxes under Articles 28 and 29 of the Tax Law (see,
Hometown Online, Adv Op Comm T&F, May 28, 1997, TSB-A-97(30)S) and is not
considered a telecommunications service subject to the telecommunications excise
tax under section 186-e of the Tax Law.
Furthermore, the daily electronic
newsletter, the ability to create a custom web-site, the e-mail access, the
Internet software, and the toll-free customer service that are included as part
of Petitioner's flat-rate monthly fees are incidental to the Internet access
service and do not make the service taxable. Accordingly, beginning February 1,
1997, the flat-rate monthly fees that Petitioner charges its customers for access
to the Internet and related amenities are not subject to the New York State and
local sales and compensating use taxes under Articles 28 and 29 of the Tax Law
or the telecommunications excise tax under section 186-e of the Tax Law.

DATED: July 23, 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.