Sales Tax Slice: AT&T, Subscribers Discover That Internet Tax Freedom Isn’t Free

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The Internet has come pretty far since it was just a series of tubes. Just how far it has come, and whether cellular data charges are nontaxable charges for Internet access, was previously the subject of a multistate class action lawsuit against AT&T. According to subscriber class members, AT&T erroneously collected tax on cellular data charges in violation of the Internet Tax Freedom Act (“ITFA”). ITFA prohibits states from taxing charges for Internet access.

AT&T settled the case 6 years ago. As of this month, it is still having difficulty obtaining refunds of taxes it collected on data charges. In particular, Alabama’s Department of Revenue continues to resist AT&T’s claim for a refund on behalf of its subscribers.  

In a final order issued in May of last year, the Alabama Tax Tribunal directed the Alabama Department of Revenue to refund AT&T almost $10 million, plus interest, for taxes collected on cellular data charges. The Department appealed to the Montgomery Circuit Court and then unsuccessfully moved to have the refund order overturned on jurisdictional grounds. Earlier this month, the Alabama Court of Civil Appeals rejected the Department’s petition for writ of mandamus seeking the same relief. The Department may still pursue its appeal on the case’s merits.  

Under the settlement agreement that AT&T entered into with its subscribers, the telecom giant will bear all costs of obtaining refunds from the states. Fees for the class members’ attorneys and the costs of administering the settlement, including disbursing refunded amounts to class members, will be paid out of the settlement fund.   

In AT&T’s defense, it may not have been entirely clear that cellular data charges were charges for Internet access within the meaning of ITFA. Such charges were unheard of when ITFA was first passed in 1998, and so the law (unsurprisingly) does not address them. Had AT&T interpreted ITFA’s ambiguity against taxation, it could quite conceivably have found itself defending against a qui tam lawsuit similar to the one brought against Sprint for not collecting tax on interstate cellular service. In Sprint’s case, the New York Court of Appeals held last year that the state unambiguously imposes tax on interstate cellular service.  

ITFA’s prohibition against taxes on Internet access was permanently extended earlier this year. Eight states have taxes on Internet access that are exempted from this ban under ITFA’s grandfather clause. The grandfather clause is scheduled to expire on June 30, 2020. Once it does, all states will be prohibited from taxing Internet access.  

Who are the biggest winners of the AT&T settlement agreement? Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn

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