PORTFOLIO

Sales and Use Taxes: Communications Services and Electronic Commerce (Portfolio 1350)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. In this Portfolio, our expert authors discuss the application of state sales and use taxes to communications services and electronic commerce. 

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DESCRIPTION

The Sales and Use Taxes: Communications Services and Electronic Commerce Portfolio provides a historical discussion of the Bell System's monopoly and the effects of its breakup. The current status of telephone services and broadcast media is reviewed, including the Telecommunications Act of 1996.


The authors analyze what constitutes a sufficient connection between the taxing state and the taxpayer and between the taxing state and the taxpayer's activity such that the state may have jurisdiction to impose a tax. The Multistate Tax Commission's publication “Draft Guidelines for Application of State's Sales and Use Tax to an Out–of–State Business” is also reviewed, in an attempt to further understand the constitutional principles involved. 


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AUTHORS

THOMAS H. STEELE, ESQ.
Thomas H. Steele is a partner with Morrison & Foerster and co-chairs the firm's State and Local Tax Practice Group. Thomas has focused his practice on state and local tax matters, particularly litigation involving such issues. In addition, he has special expertise in state and local tax issues faced by national communication companies, including both traditional telecommunications providers as well as emerging technologies. His most recent articles have focused upon constitutional issues faced by multistate business. Mr. Steele is Deputy Chair of BNA's Multistate Tax Advisory Board, was Chairman of the Tax Section of the Bar Association of San Francisco, and has lectured on tax subjects at Council On State Taxation (COST), Tax Executive Institute (TEI), Institute for Professionals in Taxation (IPT) and various universities. Thomas is listed as one of Northern California's tax “Super Lawyers” by Super Lawyer Magazine(2004-2009). He is a member of the California and Colorado bars.

JAMES P. KRATOCHVILL, ESQ.

James P. Kratochvill is Of Counsel with Morrison & Foerster, LLP, focusing on state and local transaction tax matters, including advocacy, advice and planning regarding all forms of telecommunications, information and other high technology service transactions. He is former Chief Counsel for state & local taxes at AT&T, and has numerous articles and is co-editor of the book, Telecommunications: Taxation of Services, Property and Providers (2002). James served for over 13 years on the Board of Directors for the Council On State Taxation (COST).

 

Credentials / James received his B.A. degree from the University of Pittsburgh, and his J.D. degree and Order of Coif from the Case Western Reserve School of Law. He is currently admitted to practice in New Jersey and Ohio.


PILAR MATA, ESQ.

Pilar Mata is an associate in the law firm Sutherland, focusing on state and local tax matters, with an emphasis on litigation. Pilar's clients have included members of the cable and satellite television industries, traditional and VoIP telecommunications providers, and several companies whose products and services are founded upon IP technologies. She has been a speaker at tax conferences and has co-authored numerous articles. Prior to joining Sutherland, Pilar was an associate with Morrison & Foerster LLP in San Francisco. She also is a Certified Public Accountant.

 

Credentials / Pilar received her J.D. from the University of California at Berkeley School of Law, her M.S. in Finance, honors, from San Diego State University and her B.B.A., cum laude, from the University of San Diego.


TABLE OF CONTENTS

Detailed Analysis

1350.01. INTRODUCTION

1350.02. OVERVIEW AND DESCRIPTION OF THE INDUSTRY

A. Overlap Between Tax Issues Affecting Communications and Electronic Commerce

B. Other Taxes

C. Basic Description of the Communications Industry and Electronic Commerce

D. The Bell System's Monopoly

1. The Beginning of the Monopoly

2. The Dismantling of the Bell System

E. Post MFJ Structure of the Telecommunications and Information Services Industries

1. Local Telephone Service

2. Long Distance Service

3. Wireless Telephone Service

a. Cellular Telephony

b. Specialized Mobile Radio

c. Personal Communications Service

d. Paging

4. Broadcast Media and Cablecast Services

a. Commercial Television and Radio

b. Cable Television

(1) History and Overview

(2) FCC Regulation of Cable

c. Satellite Broadcast Services

5. The Internet and the World Wide Web

6. Electronic Commerce

F. The Telecommunications Act Of 1996

1350.03. CONSTITUTIONAL LIMITATIONS INVOLVING NEXUS

Introductory Material

A. Overview of the Analytical Framework Governing Nexus Issues

1. Jurisdiction Is Tested at the State Level

2. Jurisdiction over the Subject of the Tax

3. Assuming the State Has Jurisdiction Over the Subject of the Tax, Must the State Also Have Jurisdiction Over the Taxpayer?

4. Nexus Claims Over the Taxpayer or Tax Collector Need Not Be Related To the Subject of the Tax

B. What Constitutes Sufficient Connection Between The Taxing State And The Taxpayer Or Collection Agent?

C. Survey of the Continuing Nexus Controversies

1. Do Periodic Visits By Sales Representatives Create Nexus?

2. Does the Presence of Delivery Trucks and Related Personnel in the State Constitute Substantial Nexus?

3. Nexus Through the Activities of Third Parties

4. Nexus through the "Presence" of Intangible Property within the State

5. Reactions to Geoffrey

6. Reflections upon Nexus Based upon the Presence of Intangible Property within the State

D. Court Decisions Directly Considering Electronic Commerce

E. The MTC Guidelines

1. The MTC's View of the Due Process Requirements

2. The MTC's View of the Commerce Clause Requirements

3. The MTC's Definition of Physical Presence

4. Treatment of the Internet and Electronic Commerce

F. The Road Ahead: Potential Theories to Support Taxation of Communications Services and Electronic Commerce

1. Constructive Property Rights Nexus

2. Intangible Property Located within the State

3. Agency Nexus

4. Constructive Employee Presence Nexus

5. Evaluation of these Potential Theories

G. Concluding Remarks Concerning Nexus

H. State Legislative Action

1. California

2. New York

1350.04. CONSTITUTIONAL LIMITATIONS OTHER THAN NEXUS

Introductory Material

A. Early Commerce Clause Restrictions

B. Apportionment

1. Goldberg v. Sweet: The Traditional Telephone Call

2. Apportionment of Sales Taxes Upon Other Communications Services: Jefferson Lines

3. When Apportionment of Communications Services and Electronic Commerce May Be Required: Beyond Goldberg and Jefferson Lines

C. Discrimination

1. Fair Relation Between the Tax and Services Provided by the State

D. Additional Constitutional Protections

1350.05. SALES AND USE TAXES - AN OVERVIEW

A. Sales Taxes Generally

B. Tax Base: Intra-state v. Inter-state Telecommunications

C. Tax Base: Taxation of Content

1350.06. DETERMINING WHETHER THE SERVICE IS TAXABLE AS TELECOMMUNICATIONS

A. Statutory Guidance

1. Regulatory Definitions

2. The Federal Excise Tax

3. Model Tax Codes

B. Judicial and Administrative Interpretations

C. Recent Expansion of Statutory Reach

1350.07. TAXATION OF INTERSTATE TELECOMMUNICATIONS SERVICES

A. The Interstate Telephone Call

B. WATS/800 Telecommunications Services

1. Ohio

2. Tennessee

3. Arkansas

C. Private Line Services

1. Apportionment of PLS

a. To the Border Method

b. MTC's Attribution Method

2. Taxation of PLS as Intrastate Service

1350.08. TAXATION OF INTERSTATE ACCESS CHARGES

Introductory Material

A. Background

B. Characteristics of Interstate Access Services

C. Taxation of Access Services as an Intrastate Telecommunications Service

1. States Characterizing Purchase of Access Services as an Intrastate Transaction

2. States Characterizing Purchase of Access Services as a Non–taxable Interstate Transaction

D. Treatment of Access Services as a Sale for Resale

1. States Treating Access Charges as a Sale for Resale

a. Florida

b. Massachusetts

c. South Carolina

d. Texas

e. Wisconsin

2. States Not Treating Access Charges as a Sale for Resale

E. Tax Treatment of Other "Access Services"

F. Gross Receipts Tax Treatment of Access Services

1350.09. TAXATION OF INTERNET ACCESS CHARGES

Introductory Material

A. Description of Internet Access

B. Principles Governing Taxation of Internet Access

C. Taxation of Internet Access

D. Internet Access as Telecommunications

1. Principles Affecting Taxation of Internet Access as Telecommunications

E. State by State Treatment of Internet Access as Telecommunications

F. Analysis of States' Decisions Treating Internet Access as Telecommunications

1350.10. TAXATION OF 900 SERVICES

Introductory Material

A. Characteristics of 900 Services

B. Treatment of 900 Services for Federal Excise Tax Purposes - As Instructive

C. State Taxation of 900 Services as Telecommunications

1. Ohio

2. Connecticut

3. Illinois

D. State Taxation of 900 Services as Information

1. New York

2. Vermont

E. State Taxation of 900 Services as Resold Telecommunications Services

1. Colorado

2. Massachusetts

F. Billers as Tax Collectors/Remitters

1350.11. SOURCING ISSUES

A. No Universal Rule for Sourcing Services

B. Goldberg Holding

C. Difficulties Presented by Mobile Communications

D. The Mobile Telecommunications Sourcing Act

E. Difficulties Presented by Prepaid Telephone Calling Cards

1350.12. OTHER SIMILAR TAXES AND FEES

Introductory Material

A. State Gross Receipts Taxes

B. Local Utility Users Taxes

C. Franchise Fees

D. Federal Excise Taxes

1350.13. TO TAX OR NOT TO TAX: POLICY INITIATIVES DIRECTED AT ELECTRONIC COMMERCE

Introductory Material

A. Internet Tax Freedom Act

1. Provisions of the Act

2. Effect on States

B. Simplified Sales Tax Project

C. Treasury White Paper

D. White House Policy

1350.14. STATE-BY-STATE ANALYSIS

A. Overview

B. Specific States

1. Alabama

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

2. Alaska

3. Arizona

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

4. Arkansas

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

5. California

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

6. Colorado

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

7. Connecticut

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

8. Delaware

9. District of Columbia

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

10. Florida

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

11. Georgia

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

12. Hawaii

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

13. Idaho

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

14. Illinois

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

15. Indiana

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

16. Iowa

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

17. Kansas

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

18. Kentucky

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

19. Louisiana

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

20. Maine

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

21. Maryland

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

22. Massachusetts

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

23. Michigan

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

24. Minnesota

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

25. Mississippi

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

26. Missouri

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

27. Montana

28. Nebraska

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

29. Nevada

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

30. New Hampshire

31. New Jersey

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

32. New Mexico

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

33. New York

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

34. North Carolina

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

35. North Dakota

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

36. Ohio

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

37. Oklahoma

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

38. Oregon

39. Pennsylvania

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

40. Rhode Island

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

41. South Carolina

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

42. South Dakota

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

43. Tennessee

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

44. Texas

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

45. Utah

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

46. Vermont

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

47. Virginia

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

48. Washington

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

49. West Virginia

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

50. Wisconsin

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services

51. Wyoming

a. Telecommunications

b. Internet Access

c. Electronic Commerce

d. Computer Software and Services


WORKING PAPERS

Working Papers

Item Description Sheet

Worksheet 1 Electronic Commerce via a Web site

Worksheet 2 Diagram of Long Distance Telephone Call

Worksheet 3 Diagram of Mobile Telephone Service

Worksheet 4 Interlocking Modern Communication Systems

Worksheet 5 States That Tax Interstate Telecommunications Services

Worksheet 6 States With Localities That Tax Interstate Telecommunications Services

Worksheet 7 States That Exempt Interstate WATS or 800 Services

Worksheet 8 States In Which Access Charges Are Exempt from Gross Receipts

Worksheet 9 Point of Sale Taxation of Prepaid Phone Cards

Worksheet 10 [Reserved.]

Worksheet 11 Sales and Use Taxes on Computer Software

Worksheet 12 [Reserved.]

Worksheet 13 [Reserved.]

Worksheet 14 [Reserved.]

Worksheet 15 [Reserved.]

Worksheet 16 [Reserved.]

Worksheet 17 [Reserved.]

Worksheet 18 [Reserved.]

Worksheet 19 [Reserved.]

Worksheet 20 Goldberg v. Sweet 488 U.S. 252 (1989)

Opinion

Worksheet 21 Internet Tax Freedom Act Amendments Act of 2007

Worksheet 22 Treasury Department Paper: "Selected Tax Policy Implications of Global Electronic Commerce" (November 26, 1996)

Worksheet 23 "A Framework for Global Electronic Commerce" 1996)

Worksheet 24 Initial Public Participation Working Group Draft of the Constitutional Nexus Guideline for Application of a State's Sales and Use Tax to an Out-of-State Business (DRAFT 03/97)

Worksheet 25 PUBLIC LAW 108–435 DEC. 3, 2004 118 STAT. 2615 Public Law 108-435 108th Congress An Act To make permanent the moratorium on taxes on Internet access and multiple and discriminatory taxes on electronic commerce imposed by the Internet Tax Freedom Act.

Worksheet 26 Internet Tax Freedom Act (as enacted October 21, 1998)

Worksheet 27 Advisory Commission on Electronic Commerce Report to Congress (Issued 4/12/00)

Worksheet 28 National Tax Association

Worksheet 29 Internet Tax Nondiscrimination Act

Bibliography

Bibliography