Are charges for Internet access taxable in Utah as telephone/telecommunications service, back when Internet service providers first emerged?

Plain-English summary

An Internet service provider offering dial-up on-line access in Salt Lake City, Ogden, and Provo wrote to the Utah State Tax Commission for a written ruling on whether it had to charge sales tax on its access charges. Commission employees had previously told the company it must collect the tax, but the company had heard the position might have changed and wanted clarity.

The Commission acknowledged the underlying problem: the telecommunications field was developing rapidly, and Utah's tax statutes hadn't kept up. Existing law taxed charges paid to a telephone corporation for intrastate phone service, but didn't specifically address the kind of Internet access service this company provided. The legislature had hired a consultant to study telecommunications taxation broadly, but that study wouldn't be finished in time for the 1996 legislative session, meaning any statutory fix likely wouldn't arrive until after the 1997 session. In the meantime, the Commission gave its own answer: charges for on-line Internet access are not taxable as phone service. Two reasons supported that conclusion. First, the customer's underlying phone service (the actual dial-up connection) is already separately taxed by the customer's local phone company and long-distance carrier -- so taxing the Internet access charge too would be layering tax on top of an already-taxed phone service rather than taxing the phone service itself. Second, an access provider like this one typically does more than just carry signals over a phone line -- it might set up home pages, e-mail addresses, or advertising space for customers -- making its service meaningfully different from the intrastate phone service a telephone corporation sells.

The Commission was careful to draw a line, though: only the Internet access charges themselves were held nontaxable. If the same company also sold or rented computer equipment, or "canned" (prewritten) software, those separate transactions remained fully taxable under ordinary sales tax rules.

What this means for you

Early context for Internet service providers and telecom-adjacent businesses

This ruling is a historical snapshot of how Utah first approached taxing the Internet, before the federal Internet Tax Freedom Act and before Utah developed its own more comprehensive telecommunications tax statutes. The core reasoning -- that bundling extra functionality (like hosting, email, or advertising space) with the transmission of signals makes a service different from ordinary "phone service" -- has echoes in how later Utah rulings analyzed similar telecom bundling questions (see, for example, the Commission's later cable-TV billing-bucket analysis).

Businesses selling access/service together with hardware or software

Even where the access or connectivity charge itself may be nontaxable, don't assume the same treatment automatically extends to equipment or software sold alongside it. This ruling drew that line clearly: Internet access charges were nontaxable, but computer equipment and canned software sales stayed taxable regardless.

Accountants and tax professionals

Treat this ruling as historical background rather than current authority. It predates the federal Internet Tax Freedom Act (which later restricted state/local taxation of Internet access specifically) and predates whatever telecommunications-specific statutes Utah's legislature eventually adopted after the study referenced here concluded. Confirm current federal and Utah law before advising a client based on this 1995 reasoning.

Common questions

Q: Were Internet access charges taxable in Utah under this 1995 ruling?
A: No -- the Commission held that charges for on-line access to the Internet were not taxable as phone service, distinguishing Internet access from the intrastate phone service a telephone corporation sells.

Q: Why weren't Internet access charges taxed as phone service?
A: The Commission reasoned that the customer's underlying phone connection was already taxed separately by phone companies, and that Internet access providers typically offer more than signal transmission (like email, home pages, or advertising space), making it a different kind of service.

Q: Did this exempt everything an Internet provider sold?
A: No. Sales or rentals of computer equipment or "canned" (prewritten) software by the same provider remained taxable -- only the access charge itself was addressed by this ruling.

Q: Does this 1995 ruling reflect current Utah or federal law on taxing Internet access?
A: Not necessarily. It predates the federal Internet Tax Freedom Act and any telecommunications-specific statutes Utah adopted after the legislative study the Commission mentioned. Consult a Utah tax professional and verify current law before relying on this reasoning today.

Citations and references

No specific Utah Code section or administrative rule is cited in this ruling. The Commission explicitly noted that Utah's tax statutes had not kept pace with the telecommunications field and that the legislature had commissioned a study expected to result in later statutory changes.

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/95-094.htm

Original ruling text

95-094

Response
December 21, 1995

Request

Ms.
Shearer,

This
is a request for an advisory opinion on taxing Internet service providers. We are an Internet provider offering on-line
services in Salt Lake, Ogden, and Provo.
We have been told by Tax Commission employees that we must charge sales
tax and we have been. However, rumor
has it that this ruling has changed.
Please send us written ruling on whether or not we are suppose to charge
sales tax.

Thank
you for your prompt attention to this matter.

Sincerely,

XXXXX

XXXXX

RE: Advisory Opinion - Application of sales
tax to charges for access to the Internet

Dear XXXXX,

We have
received your request for guidance as to whether you must collect sales tax on
charges for on-line access to the Internet.
As you know, the telecommunications field is developing rapidly. Unfortunately our tax statutes have not kept
pace. For instance, current Utah law
imposes sales tax on charges paid to a telephone corporation for intrastate
phone service, but the law does not specifically address the type of service
you are providing. The legislature has hired
a consultant to review the entire telecommunications field. On completion of the study, the legislature
will consider statutory changes that may impact your business. The study will not be completed in time for
the 1996 legislative session, so you may expect news on these issues some time
after the 1997 legislative session. In
the meantime, we find as follows:

Charges
for on-line access to the Internet are not taxable as phone service. Our conclusion is based on the fact that
your customers' phone services are already taxed by their local phone companies
and long distance carriers.
Additionally, access providers like XXXXX typically provide service
beyond the transmission of signals over a phone line. For instance, XXXXX may set up home pages, e-mail addresses, or
advertising space. In our view, the service that you are selling is
different from intrastate phone service sold by a telephone corporation.

XXXXX
charges for access to on-line access to the Internet are not subject to sales
tax. However, if XXXXX engages in the
sale or rental of computer equipment or "canned software," those
transactions are taxable.

Please
let us know if we can be of further assistance.

For the Commission,

Alice Shearer

Commissioner