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A New York tax tribunal denied a bid by Verizon Wireless for a $19 million sales and use tax refund on purchases of computer hardware, software, and related services.
Verizon, the U.S. cellphone provider for some 100 million customers, petitioned for the refund revision after a July 2008-June 2010 audit. It argued that purchases it made to expand its data center systems in Orangeburg, N.Y., were covered by a New York exemption for telecommunications or internet-access hardware and software.
The data center expansion, which applied to customer service and billing systems, was needed to accommodate the 10 million new accounts added when Verizon acquired Alltel Corp. in 2009.
“This is an important case,” Joshua E. Gewolb, an attorney with Harter Secrest & Emery LLP in Rochester, N.Y., and co-chair of a New York State Bar Association state tax committee, told Bloomberg Tax April 24. “It deals with key principles about the scope and application of sales tax exemptions, and the amount of tax involved is simply humongous.”
At issue were audit findings denying refunds for purchases unrelated to actual telecommunications transmissions. Verizon conceded that cellphone signals don’t go through the equipment housed at Orangeburg, but said that the equipment is still “mission critical” to its business.
But the state Division of Tax Appeals countered that none of the equipment or software met the standard for the exemption. The Orangeburg center, the state said, “is merely the gatekeeper” to the cellphone systems that do meet it.
In the April 12 determination, Administrative Law Judge Kevin R. Law sided with the state agency. He found that the purchases for the Orangeburg upgrade weren’t “used or consumed directly and predominantly” in the activities covered by the exemption’s terms.
The systems in question, Law said, were used to manage customer accounts, rate customer usage, perform billing functions, control network access, and provide customer service. Cellular communications could still be carried out if the Orangeburg systems weren’t operational, he said.
“The tribunal took a narrow view—perhaps too narrow—of the exemption language,” Gewolb said of the case. “Significantly, it did not mention that in 1974, when the Legislature amended the telecom exemption standard from a ‘directly and exclusively’ standard to a ‘directly and predominantly’ standard, it was with the explicit intent of liberalizing the statute.”
It wasn’t surprising that the state agency read the exemption provision narrowly and wouldn’t extend it to purchases of property that weren’t “strictly part of Verizon’s wireless network or for use in the actual provision of wireless services,” said James P. Kratochvill, an attorney with Reed Smith LLP in New York and a former chief counsel for state and local tax at AT&T.
“What is perplexing to taxpayers, both within the telecommunications industry and without, is that if the same language used in the exemption was included in a state’s taxability statute, the statute could be read broadly such that ‘mission critical’ property or activities as were involved in this case would in all likelihood be included within its scope and deemed taxable—even though such interpretation would not be consistent or correct,” he told Bloomberg Tax April 24.
In Pennsylvania, for example, the state Supreme Court interpreted a tax imposed on “transmitting messages” to apply to every activity that in any manner facilitates the making of a telephone call, Kratochvill said. That finding came in a 2015 case, Verizon Pennsylvania Inc. v. Commonwealth of Pennsylvania.
Gewolb noted that the liberalizing legislative intent was central to a 2001 Tax Appeals Tribunal decision in Matter of Peoples Telephone Inc., which found in favor of the taxpayer on whether payphone pedestals and enclosures met the exemption’s terms. It was one of the cases cited by Verizon.
But in the Verizon case, Law said that while the equipment in question is “mission critical” to cellphone operations, “that factor alone does not lead to the conclusion that the exemption applies.” Drawing on a 1955 decision in Niagara Mohawk Power Corp. v. Wannamaker—which Verizon also cited—he said that cellular communications could still be carried out if the Orangeburg systems weren’t operational.
Gewolb suggested that Verizon will “almost certainly” challenge the decision. A Verizon spokesman declined to comment on the case.
In addition, Gewolb said, the decision’s reasoning “addresses the general exemption for property used in production, an area of frequent disputes.” Its narrow interpretation “may have an impact beyond the telecom space, particularly for companies purchasing computers for use in modern production processes,” he added.
Beyond New York, Kratochvill said, “exemptions similar to this are common in other states, and taxpayers should not anticipate that they would be read any more broadly.”
The case is In the matter of the petition of Cellco Partnership d/b/a Verizon Wireless , N.Y. Tax App. Trib., DTA No. 827179, 4/12/18 .
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