Is a telephone answering service subject to the section 186-e excise tax on telecommunication services, and is it taxed as a telephone business under sections 183 and 184?

Plain-English summary

Kurt E. DeSoto asked, for "Company A," whether a telephone answering service is subject to (1) the section 186-e excise tax on telecommunication services and (2) the franchise taxes on transmission corporations under sections 183 and 184. Company A's receptionists answer calls intended for customers, distill the caller's message into a short note, enter it in a computer, and transmit it to the customer's pager. Customers pay a flat monthly rate covering a fixed allowance of calls.

Classification (sections 183/184 vs. Article 9-A). A corporation's tax classification turns on the nature of its business viewed "in its entirety and from the perspective of its customers -- what they buy and pay for" (Capitol Cablevision; Stat Equipment). What Company A's customers buy is a telephone answering service, not telephone service. Following CCC Telex and the "Center" entity in Marken Properties, Company A is engaged in general business activities and is taxed under Article 9-A, not sections 183 and 184.

Section 186-e excise tax. Company A does transmit messages to customers' pagers, but -- like "Center" in Marken Properties -- it does not separately bill for paging airtime; those charges are bundled into the flat answering-service fee. Because the paging is not resold as a separately billed service, Company A is not a "provider of telecommunication services" under section 186-e.1(e) and is not subject to the section 186-e excise tax.

What this means for you

Look at what the customer actually buys

Tax classification is determined by the business as a whole from the customer's viewpoint, not by one component (here, the paging used to relay messages).

Bundled paging is not a taxable telecom sale

Folding paging airtime into a single answering-service charge -- rather than separately billing it -- keeps the provider outside the section 186-e excise tax.

Answering services are Article 9-A businesses

A telephone answering service is a general business corporation taxed under Article 9-A, not a telephone business under sections 183 and 184.

Common questions

Q: Why isn't an answering service a "telephone business"?
A: From the customer's perspective it sells message-taking and relay, not telephone transmission; its overall activity is general business.

Q: When would an answering service owe 186-e tax?
A: If it separately billed and resold paging airtime or other telecommunication services, it could be a provider subject to the excise tax.

Q: Does using pagers create telecom-provider status?
A: Not where the paging charge is bundled into the answering-service fee rather than separately billed.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 183 (franchise tax on telephone and other transmission corporations)
- Tax Law section 184 (additional franchise tax; local telephone business)
- Tax Law section 186-e (excise tax on telecommunication services)
- Tax Law section 186-e.1(e) (provider of telecommunication services)
- Tax Law section 186-e.1(g) (definition of telecommunication services)
- Tax Law section 209.4 (corporation taxable under 183/184 not taxable under Article 9-A)
- Matter of McAllister Bros., Inc. v Bates, 272 AD 511
- CCC Telex Service, Inc., TSB-A-89(9)C (July 18, 1989)
- Marken Properties, Inc., TSB-A-97(16)C (June 26, 1997)
- Kurt E. DeSoto, TSB-A-98(16)C (Sept. 9, 1998)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a98_16c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(16)C
Corporation Tax
September 9, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C980512B

On May 12, 1998, a Petition for Advisory Opinion was received from Kurt E.
DeSoto, 1776 K Street, NW, Washington, D.C. 20006.
The issues raised by Petitioner, Kurt E. DeSoto, are (1) whether an
answering service is subject to the excise tax imposed on telecommunication
services under section 186-e of the Tax Law; and (2) whether a company that is
providing an answering service is subject to the franchise taxes imposed on
transportation and transmission corporations under sections 183 and 184 of the
Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Company A provides an answering service to its customers. To provide the
answering service, a Company A employee (referred to as a receptionist) answers
telephone calls intended for the Company A's customers.
The receptionist
explains that the customer is unavailable and asks the caller whether he or she
would like to leave a message for the customer. The caller then explains the
reason for the call and the receptionist distills the information and formulates
a relatively short message for the customer. The receptionist enters the name
and telephone number of the caller and the message for the customer into a
computer. After reading back the message to confirm that it conveys the caller's
intent, the receptionist is ready to transmit the message to the customer's pager
unit.
In distilling the information from the caller and formulating a message for
the customer, the receptionist would not ordinarily transcribe a message provided
by the caller verbatim. As example of a routine call received by the answering
service is as follows:
Receptionist:

Good morning.

Mr. Jones' office.

Caller:

Hello, may I speak with Mr. Jones please.

Receptionist:

Mr. Jones is unavailable.
Would you like to
leave a message for Mr. Jones?

Caller:

Yes. He sent us some documents relating to the
Acme purchase and we have several questions about
them. We really need to speak with him before
5:00 today.

Receptionist:

Is that 5:00 Eastern Standard Time?

Caller:

No. 5:00 Pacific Standard Time.

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Receptionist:

Your name please.

Caller:

Mr. Smith.

Receptionist:

At what number can he reach you?

Caller:

My number is 111-222-3333.

Receptionist:

Your message will be as follows:
Please call Mr. Smith before
5:00 p.m. Pacific Time at 111­
222-3333 to discuss questions
re: the Acme purchase documents
Is that correct?

Caller:

Yes.

That's correct.

Receptionist:

Thank you very much.

After verification, the message is then transmitted to Mr. Jones' pager
unit along with the time and date of the call in accordance with the terms of
Company A's agreement with the particular customer.
In some instances, the information provided by the caller will be longer
or more complicated or the caller will be less clear in providing the
information. In those instances, the process of distilling the information and
formulating a message to transmit to the customer's pager will require more
effort on the part of the receptionist. Some callers may ask questions regarding
the customer's hours of operation or when the customer will be available or will
call back.
In response, the receptionist will explain that the caller is
speaking with the customer's answering service and that the customer will be
contacted immediately and will respond as quickly as possible. The receptionist
may provide general information such as office hours and may direct the message
to a specific individual other than the person originally requested by the
caller.
In many cases, the receptionist may refer to a "painted screen" which
prompts questions intended to solicit the specific information which the customer
may need in order to respond appropriately to the caller.
Again, the
receptionist may often need to interpret the caller's responses or re-phrase the
questions in order to obtain the relevant information. In certain emergency
situations, the receptionist or other Company A employees may contact the
customer directly by telephone or may transmit the message to more than one
individual until receipt of the message is acknowledged.
Company A bills its customers at a contracted monthly rate which includes
a fixed allowance of calls to be answered. To the extent that the customer's
call volume exceeds the monthly allowance, a supplemental bill is rendered. The
billable call volume is based upon the number of calls answered for the customer

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rather than the number of messages transmitted. For example, the billable call
count would include calls when the caller does not leave a message, including
those when general information is provided. All calls, other than those which
are clearly dialed to a wrong number, are logged and customers may retrieve
messages by calling in to speak with a receptionist or by requesting written
details.
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 a corporation liable for tax under
sections 183 and 184 of Article 9 of the Tax Law is not subject to tax under
Article 9-A of the Tax Law.
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 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.
Section 184.1 of the Tax Law provides that a corporation is subject to the
franchise tax under section 184 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, if
it is formed for or principally engaged in local telephone business. The term
"local telephone business" means 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"). The term "telecommunication
services" has the same meaning for purposes of section 184 as for section 186-e
of the Tax Law.
Section 186-e.1(g) of the Tax Law defines "telecommunication services" as
"telephony or telegraphy, or telephone or telegraph service, including, but not
limited to, any transmission of voice, image, data, information and paging,
through the use of wire, cable, fiber-optic, laser, microwave, radio wave,
satellite or similar media or any combination thereof and shall include services
that are ancillary to the provision of telephone service ... and also include any
equipment and services provided therewith.
Provided, the definition of
telecommunication services shall not apply to separately stated charges for any
service which alters the substantive content of the message received by the
recipient from that sent."
To determine the classification and proper taxability of a corporation
under either Article 9-A or sections 183 and 184 of Article 9, an examination of
the nature of the corporation's activities is necessary, regardless of the
purposes for which the corporation was organized.
See Matter of McAllister
Bros., Inc. v Bates, 272 AD 511, 517. In Matter of Stat Equipment Corp and
Matter of Bi-County Ambulance and Ambulette Transport Corp, Dec Tax App Trib,

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January 25, 1996, TSB-D-96(3)C, the Tax Tribunal stated the test for proper
classification of business activities as follows:
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-e.2(a) of the Tax Law imposes an excise tax "on the sale of
telecommunication services by any person which is a provider of telecommunication
services...."
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 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 telephone
answering service business, it would be classified as a general business
corporation and would be subject to tax under Article 9-A of the Tax Law.
In Marken Properties, Inc, Relay Communications Center, Inc, and Relay
Communications Corporation, Adv Op Comm T & F, June 26, 1997, TSB-A-97(16)C, the
issues involved the taxation of Marken, which held the assets of the three
corporations; Corp, which was a licensed radio common carrier of voice and
conventional paging airtime services; and Center, which was a provider of
telephone answering services. Center conducted all administrative and billing
functions for the three corporations and the bills separately stated the charges
for the telephone answering services and retail equipment sales made by Center
and the charges for voice paging airtime services and resold paging airtime
services made by Corp. The opinion held that Marken and Center were principally
engaged in general business activities and were subject to tax under Article 9-A
of the Tax Law, and it appeared that Corp was principally engaged in a telephone
business that was taxable under section 183 of the Tax Law. If more than 50
percent of Corp's receipts are derived from local telephone business as defined
in section 184.1 of the Tax Law, Corp would also be taxable under section 184 of
the Tax Law. The opinion also held that the voice paging airtime services and

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resold
conventional
paging
airtime
services
provided
by
Corp
were
telecommunication services under section 186-e.1(g) of the Tax Law, and, as a
provider of telecommunication services, Corp was subject to the excise tax
imposed under section 186-e.
With respect to Center, it may provide its
customers with pagers as part of its provision of telephone answering services.
However, Center does not separately bill for paging airtime services. Those
charges are included in the charges for the telephone answering services.
Therefore, the opinion held that since the paging airtime services provided by
Center were not resold as separately billed paging services, Center was not
considered the provider of telecommunication services under section 186-e.1(e)
of the Tax Law and not subject to the excise tax imposed section under 186-e.
In this case, from the perspective of Company A's customers (see, Stat
Equipment, supra), what they buy and pay for is a telephone answering service.
Like CCC Telex, supra, and Center in Marken Properties, supra, Company A is
engaged in general business activities and is subject to franchise tax under
Article 9-A of the Tax Law rather than sections 183 and 184 of the Tax Law.
Company A, in providing its telephone answering services, transmits
customer's messages to the customer's pager unit. However, like Center in Marken
Properties, supra, Company A does not separately bill for paging airtime
services. Those charges are included in the amount billed to the customer for
the telephone answering services which is a contracted monthly rate that includes
a fixed allowance of calls to be answered, whether or not there is a message to
transmit. Since the paging services provided by Company A are not resold as
separately billed paging services, Company A, like Center in Marken Properties,
supra, is not considered the provider of telecommunication services under section
186-e.1(e) of the Tax Law. Accordingly, Company A is not subject to the tax
imposed under section 186-e of the Tax Law.

DATED:

NOTE:

September 9, 1998

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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