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

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Bloomberg Tax Portfolio, Sales and Use Taxes: Communications Services and Electronic Commerce, No. 1350–3rd, discusses the application of state sales and use taxes to communications services and electronic commerce. As state and local governments determine whether and how to tax electronic commerce and the communications services through which they are carried, taxpayers seek answers to whether their transactions are subject to tax. Communications services include both services provided by traditional telecommunications companies, as well as the newly emerging technologies, such as mobile telephony and paging, wireless telephone services, and the internet.

The 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. Next, the Portfolio analyzes other constitutional issues including whether taxes upon interstate services must be apportioned.

The Portfolio then turns to determining whether a service is taxable as telecommunications, examining the taxation of traditional telecommunications services as well as non-traditional services such as information services, internet access, VoIP and communications services bundles. The Portfolio also examines the taxation of traditional interstate telecommunications services, private communications services, WATS/800 services, 900 services and interstate access services.

In addition, the Portfolio covers the historical and current treatment of internet services, including a discussion of the several versions of the federal internet Tax Freedom Act; the sourcing of various forms of telecommunications services; and some of the major issues and developments regarding taxes other than sales taxes.

Updates to the print and Internet version of the portfolio will be incorporated directly into the Detailed Analysis.

Subscribers to the print version of the portfolio will find late-breaking developments reported in the Bloomberg Tax Multistate Tax Report . Subscribers to the internet version of the portfolio will find late-breaking developments reported in the Bloomberg Tax Daily Tax Report - State.

This portfolio may be cited as 1350-3rd T.M., Sales and Use Taxes: Communications Services and Electronic Commerce.


James P. Kratochvill, Esq.

James P. Kratochvill is a Sr. Counsel in the State Tax Group at Reed Smith LLP, New York office. His practice focuses on state and local transactional tax matters, including advocacy, advice, and planning regarding all forms of telecommunications, information, cloud computing, digital products, and other high-technology transactions. Jim brings special expertise to addressing the complex state and local tax issues faced by companies engaged in communications and electronic commerce, and has represented a diverse group of multi-state corporate clients providing telecommunications (wireline/wireless), prepaid communications, VoIP, Internet, computer application and other online services and products. As the former Chief Counsel for state & local taxes at AT&T, and as former Of Counsel at Morrison & Foerster LLP, Jim has over 42 years of state and local tax expertise. Jim has also written extensively in the field, and is the co-author of the earlier versions of this Bloomberg Tax Multistate Tax Portfolio (1997, 2009). Additionally, he also served for over 18 years on the Board of Directors for the Council on State Taxation (COST).

Pilar Mata, Esq.

Pilar Mata is Tax Counsel at the Tax Executives Institute in Washington, D.C., where she supports the advocacy and educational efforts of TEI's members. In this role, Ms. Mata authors amicus briefs filed with the U.S. Supreme Court and state appellate courts, comment letters filed with state and local tax authorities, and policy statements reflecting TEI's position on important administrative and procedural issues. She is also responsible for facilitating liaison meetings and ongoing discussions with state and local tax authorities and governmental organizations.

Prior to joining TEI, Ms. Mata was Counsel in the law firm of Sutherland Asbill & Brennan LLP, focusing on state and local tax matters, with an emphasis on litigation. Ms. Mata'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 is a frequent speaker at tax conferences and has co-authored numerous articles. Before joining Sutherland, Pilar was an attorney with Morrison & Foerster LLP.

R. Gregory Roberts Esq.

R. Gregory Roberts is a partner in Reed Smith LLP's New York office. His practice focuses on the resolution of state and local tax controversies throughout the country. He has represented individuals and corporations in administrative and judicial forums throughout the United States. Gregg also has extensive experience in advising multistate and multinational corporations on the tax ramifications of complex business transactions and corporate restructurings. Gregg has extensive experience in matters involving telecommunications, cloud computing, digital products, online marketplaces, and other similar technology transactions. Gregg advises wide variety of clients, including clients engaged in telecommunications, e-commerce, satellite and cable television, broadcasting, and clients providing a range of online services. 

Rebecca M. Ulich-Balinskas, Esq.

Rebecca Midori Ulich-Balinskas is an associate in the State and Local Tax Group in Morrison & Foerster's New York office. Her practice focuses on state and local tax controversies across the country at the audit, administrative, and judicial levels. Mrs. Balinskas’ practice encompasses matters regarding sales and use tax, property tax, franchise and income tax, gross receipts tax, insurance tax, and telecommunications tax, among others. Mrs. Balinskas has written and spoken on various state and local tax issues. In addition, she is a co-editor of the firm's newsletter State + Local Tax Insights.

Table of Contents

Detailed Analysis
A. Introduction
B. Traditional Communications Industries
1. The Telephone Industry
a. Regulatory Background
b. The Public Switched Telephone Network
c. Wireless Communications Services
(1) Wireless Telephone Service
(2) Specialized Mobile Radio
(3) Paging
d. Voice over Internet Protocol
2. The Television and Radio Industry
a. Commercial Broadcasting
b. The Cable Industry
c. The Satellite Industry
(1) Home Satellite Dish Service
(2) Direct Broadcast Satellite Service
(3) Satellite Radio Service
(4) Miscellaneous Satellite Services
d. Fiber Optic Television
e. Video Streaming Services
3. The Internet, World Wide Web and IP-Based Technologies
a. History
b. The Structure and Functionality of the Internet
c. The World Wide Web and IP-Based Technologies
d. The Internet of Things
e. Access to the Internet
(1) Digital Subscriber Lines
(2) Cable Modem Service
(3) Fiber Optic Cables
(4) Wireless Technologies
(5) Satellite
(6) Power Lines
C. Convergence of Voice, Video, and Data Services
A. Introduction
B. 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
C. What Constitutes Sufficient Connection Between the Taxing State and the Taxpayer or Collection Agent?
D. Nexus Controversies Arising Under Quill
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
E. Due Process Considerations
1. History of the Due Process “Purposeful Direction” Requirement
2. Early Internet Cases
3. Zippo Sliding Scale
4. General Acceptance of Zippo's Sliding Scale
A. Introduction
B. Early Commerce Clause Restrictions
C. Apportionment
1. Goldberg v. Sweet: The Traditional Telephone Call
2. Apportionment of Sales Taxes Upon Other Communications Services: Jefferson Lines
3. Apportionment of Taxes on Gross Receipts Taxes
4. When Apportionment of Communications Services and Electronic Commerce May Be the Right Answer: Beyond Goldberg and Jefferson Lines
D. Discrimination
1. Fair Relation Between the Tax and Services Provided by the State
E. Additional Constitutional Protections
A. Statutory Guidance
1. Regulatory Definitions
2. The Federal Excise Tax
3. Model Tax Codes
B. Judicial and Administrative Interpretations
1. State Decisions Regarding Whether Service Is Telecommunications
a. Arizona
b. Colorado
c. Connecticut
d. Florida
e. Illinois
f. Indiana
g. Iowa
h. Kansas
i. Massachusetts
j. Missouri
k. New York
l. Pennsylvania
m. South Carolina
n. Tennessee
o. Texas
p. Vermont
q. Virginia
r. Washington
s. Wisconsin
2. State Decisions Involving High-Speed Internet Access
3. Court Decisions Regarding the Definition of Telecommunications for Regulatory Purposes
C. Taxation of Bundled Services
1. Background
2. The Communications Services Bundling Legislation
a. Reasonable Allocation
(1) Arizona
(2) Mississippi
b. Forced Allocation
(1) Connecticut
(2) Georgia
(3) Mississippi
c. Bundling Statutes Requiring Additional Conditions
(1) Colorado
d. Bundles That Include Internet Access
(1) Colorado
(2) Texas
e. Additional Bundled Services Statutes
(1) Arkansas
(2) Missouri
(3) New Hampshire
(4) Virginia
3. SSUTA Bundling
4. Other Issues
a. What Is a Bundle?
b. How Should a Communications Service Bundle be Sitused for State and Local Transaction Taxes?
D. Taxation of Voice over Internet Protocol (VoIP) Services
1. Federal Regulatory Characterization of VoIP
2. State and Local Taxation of VoIP
a. Administrative Rulings
(1) Illinois
(2) Iowa
(3) Minnesota
(4) Missouri
(5) New Jersey
(6) New York
(7) Pennsylvania
(8) South Carolina
(9) Tennessee
(10) Wisconsin
b. Court Decisions
(1) Maryland
(2) Washington
A. The Interstate Telephone Call
B. Interstate vs. Intrastate
1. Arizona
2. Colorado
3. Illinois
4. Indiana
5. Iowa
6. New Mexico
7. New York
8. Pennsylvania
9. Washington
10. Wyoming
C. Private Line Services
1. Exemption of PLS
a. Arkansas
b. Kansas
c. New Mexico
d. Oklahoma
e. The SSUTA Method
2. Apportionment of PLS
a. To the Border Method
b. The “Termination Points” Methodology
c. The SSUTA Method
3. Taxation of Interstate PLS as Intrastate Service
a. New York
b. Rhode Island
c. Texas
D. WATS/800 Telecommunications Services
1. Arkansas
2. Ohio
3. Tennessee
A. Introduction
B. Description of Internet Access
C. Principles Influencing Early Taxation of Internet Access
1. Principles Governing Taxation of Access Services Generally
D. Internet Access as Telecommunications
E. The ITFA and Its Aftermath
1. The 1998 ITFA
2. The 2004 ITNA
3. The 2007 ITFA
4. The 2014 ITFA
5. The 2015 ITFA
6. The Permanent Internet Tax Freedom Act (PITFA)
A. Background
B. Characteristics of 900 Services
C. Treatment of 900 Services for Federal Excise Tax Purposes - As Instructive
D. State Taxation of 900 Services as Telecommunications
F. State Taxation of 900 Services as Resold Telecommunications Services
G. Billers as Tax Collectors/Remitters
A. No Universal Rule for Sourcing Sales of Services
B. Sourcing Sales of Wireline Telecommunications Services
C. Sourcing Sales of Wireless Telecommunications Services
1. Difficulties Presented by Mobile Telecommunications
2. The Mobile Telecommunications Sourcing Act
D. Sourcing Sales of Telephone Calling Cards
E. The Streamlined Sales and Use Tax Agreement (SSUTA)
A. Introduction
B. State Gross Receipts Taxes
1. Judicial Decisions Regarding Scope of Gross Receipts Taxes
a. Kentucky
b. Pennsylvania
C. The Gross Receipts Tax Surcharge
1. Federal Regulatory Authority for Gross Receipts Tax Surcharges
a. Wireline Carriers
b. Wireless Carriers
2. The Kentucky Litigation
3. Other Federal Court Decisions
D. Federal Excise Tax
E. Local Utility Users Taxes
F. 911 Fees
1. Arizona
2. Texas
3. Washington
G. Franchise Fees
1. DBS Service Provider Challenges
2. Franchise Fee Caps
3. Fee Versus Tax

Working Papers

Item Description Sheet
Worksheet 1 MTC Uniform Principles Governing State Transactional Taxation of Telecommunications
Worksheet 2 Federal Telecommunications Act of 1996
Worksheet 3 Mobile Telecommunications Sourcing Act of 2000
Worksheet 4 Streamlined Sales and Use Tax Agreement, as amended through Dec. 19, 2017
Worksheet 5 Internet Tax Freedom Act