Does an Internet Service Provider owe New York sales tax on the Digital Subscriber Line (DSL) connections it buys from a telecom carrier to link its customers to its network, even though the ISP's own Internet-access charges to its customers are tax-exempt?

Plain-English summary

Bway.net, Inc. is an Internet Service Provider (ISP) that does not itself sell telephone or telegraph service and isn't licensed as a telecommunications carrier anywhere. Its customers connect to Bway.net's network over high-speed Digital Subscriber Line (DSL) circuits that Bway.net buys from a telecommunications provider ("Provider"). Data travels from the customer over the local phone company's equipment, onto Provider's national ATM network, and is "handed off" to Bway.net at its New York City network operations center, where it's converted to Internet Protocol and routed onward. Bway.net asked whether its purchases of this DSL service from Provider are subject to New York sales tax.

The Department's answer separates two different transactions that are easy to conflate: (1) Bway.net's own sales of Internet access to its customers, which are squarely exempt under Tax Law § 1115(v) (the statute specifically created to keep Internet access tax-free), and (2) Bway.net's own purchases of DSL from its upstream telecom provider, which is a different transaction not covered by that exemption. Because Bway.net doesn't resell telephone service — it consumes the DSL connection itself to provide Internet access — the resale exclusion doesn't apply either. The DSL service is treated as ordinary telephone/telegraph service under § 1105(b), which New York taxes only when it's intrastate (both ends of the call/connection are in New York) and exempts when it's interstate or international.

Since Bway.net's router sits in New York City, the key fact for each customer becomes simple: is the customer also located in New York? If so, the DSL leg connecting that customer to the router is intrastate and taxable; if the customer is elsewhere (New Jersey, Florida, Massachusetts, etc.), that leg is interstate and exempt — regardless of what physical path the signal takes across the network, and regardless of what website content the customer is actually viewing. Provider (Bway.net's carrier) has to track each customer's location to charge tax correctly, and Bway.net can seek a refund on any DSL purchases it's mistakenly been charged tax on for out-of-state customers, within three years of when the tax was paid.

What this means for you

Internet Service Providers and similar network businesses

Don't assume that because your end-customer product (Internet access) is tax-exempt, everything you buy to build that product is automatically exempt too. The Department looks at each transaction separately — your own upstream purchases of network/telecom capacity are taxed under their own rules (here, ordinary intrastate/interstate telephone-service rules), independent of how your retail product is taxed.

Businesses buying network connectivity from a carrier

If your vendor's service crosses state lines to reach you, ask whether your invoice separates New York customers from out-of-state ones — that's the dividing line the Department uses here, not the physical routing of the signal. Keep records supporting your customers' locations in case you need to claim a refund on tax charged for out-of-state legs.

Accountants and tax professionals

This is a useful illustration of New York's core intrastate/interstate telephony distinction (§ 1105(b)(1)(B)) applied to modern network architecture, plus the separate, narrower Internet-access exemption (§ 1115(v)) — the two rules operate independently and shouldn't be confused with each other.

Common questions

Q: Is Internet access taxable in New York?
A: No — Internet access service, including start-up charges, is specifically exempted under Tax Law § 1115(v).

Q: If my product is exempt, are my own network purchases automatically exempt too?
A: Not necessarily. This opinion treated the ISP's purchase of DSL connectivity from its carrier as a separate, taxable telephone/telegraph service transaction, even though the ISP's own resale product (Internet access) is exempt.

Q: How do I know if a DSL/network purchase is taxable intrastate service or exempt interstate service?
A: It depends on where both ends of the connection are — here, whether the ISP's router (in New York) and the customer are both in New York (taxable) or the customer is out of state (exempt), regardless of the signal's actual physical route.

Q: Can I get a refund if I was charged tax in error on an interstate purchase?
A: Yes — a refund claim must be filed within three years of the date the tax was payable to the Department, per Tax Law §§ 1132(c)(1) and 1139(a).

Citations and references

Statutes and regulations:

• Tax Law § 1105(b) (utility/telephony tax; intrastate vs. interstate)
• Tax Law § 1115(v) (Internet access service exemption)
• Tax Law § 1132(c)(1) (presumption of taxability)
• Tax Law § 1139(a) (refund/credit procedure)
• 20 NYCRR § 527.2 (utility and similar services; telephony and telegraphy)

Prior rulings and cases referenced:

• Biscotti, Toback and Co., CPA's, PC, TSB-A-03(6)S
• Western Union Telegraph Company, TSB-H-83(57)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a03_37s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(37)S
Sales Tax
September 3, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S030319B

On March 19, 2003, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Bway.net, Inc., 459 Broadway, 2nd Floor, New York, New York, 10013.
Petitioner, Bway.net, Inc., provided additional information pertaining to the Petition on April 17,
2003, July 14, 2003, and July 30, 2003.
The issue raised by Petitioner is whether its purchases from a telecommunication provider
of Digital Subscriber Lines which Petitioner uses to provide Internet service to its customers are
subject to sales tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is an Internet Service Provider serving end user customers in New York State,
New Jersey, Florida and Massachusetts. Petitioner does not offer telephony or telegraphy services
to its customers, and Petitioner is not licensed as a competitive local exchange carrier or
interexchange carrier in New York or any other state, or as a telecommunications carrier under
federal law.
Petitioner's customers access Petitioner's services and the Internet by virtue of high-speed
data Digital Subscriber Line (DSL) connections. The DSL path is separate from the voice grade
telephone path. On March 28, 2001, Petitioner contracted with its telecommunication service
provider (Provider) to supply to Petitioner high-speed, high-capacity communications services over
Provider’s existing network. Provider agreed to use DSL technology, in part, for the connection
from the end user to equipment located at the local telephone company to achieve high data speeds
and capacity. The local telephone company uses this equipment to connect to Provider’s national
Asynchronous Transfer Mode (ATM) network. All traffic from the end user or customer travels
over Provider’s national ATM network until it is “handed-off” to Petitioner at Petitioner's network
operations center in New York City. At that point, the traffic is translated from ATM to Internet
Protocol ("IP") and is routed by Petitioner’s router to the appropriate Internet destination.
Petitioner's contract with Provider requires that Petitioner represent and warrant that:
(i)
Provider informed Petitioner "that the Services constitute telecommunications or
telecommunications services . . . as defined by federal law, and as a result, [Provider] will
assume the obligations of [inter alia] billing, collecting from [Petitioner] and remitting to
governmental authorities any applicable taxes . . . ;"
(ii)
Petitioner "shall not in the ordinary course of its business, when using Services, be
able to identify, and distinguish between, packet data transmissions that originate and

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terminate within the same state (intrastate transmissions), and those packet data
transmissions that originate and terminate in different states (interstate transmissions), and
states that it is impractical to identify, distinguish and measure its intrastate and interstate
transmissions on [Provider's] network;" and
(iii) Petitioner "estimates in good faith that more than ten percent (10%) of all data
packets transmitted through Services will consist of interstate transmissions. . . ."
Petitioner represents that it cannot provide voice grade local or toll telephony in New York
State because the DSL circuits Provider uses and to which Petitioner's end user customers have
access are not connected in any way to the public switched telephone network.
Applicable Law and Regulations
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax. On and after June first, nineteen hundred
seventy-one, there is hereby imposed and there shall be paid a tax of four percent
upon:
*

*

*

(b) (1) The receipts from every sale, other than sales for resale, of . . . (B)
telephony and telegraphy and telephone and telegraph service of whatever nature
except interstate and international telephony and telegraphy and telephone and
telegraph service. . . .
Section 1115(v) of the Tax Law provides:
Receipts from the sale of Internet access service, including start-up charges,
and the use of such service, shall be exempt from the taxes imposed under this
article. For purposes of this subdivision, the term "Internet access service" shall
mean the service of providing connection to the Internet, but only where such service
entails the routing of Internet traffic by means of accepted Internet protocols. The
provision of communication or navigation software, an e-mail address, e-mail
software, news headlines, space for a website and website services, or other such
services, in conjunction with the provision of such connection to the Internet, where
such services are merely incidental to the provision of such connection, shall be
considered to be part of the provision of Internet access service.
Section 1132(c)(1) of the Tax Law provides, in part:

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For the purpose of the proper administration of this article and to prevent
evasion of the tax hereby imposed, it shall be presumed that all receipts for property
or services of any type mentioned in subdivisions (a), (b), (c) and (d) of section
eleven hundred five . . . are subject to tax until the contrary is established, and the
burden of proving that any receipt . . . is not taxable hereunder shall be upon the
person required to collect tax or the customer.
Section 1139(a) of the Tax Law provides, in part:
In the manner provided in this section the tax commission shall refund or
credit any tax, penalty or interest erroneously, illegally or unconstitutionally
collected or paid if application therefor shall be filed with the tax commission (i) in
the case of tax paid by the applicant to a person required to collect tax, within three
years after the date when the tax was payable by such person to the tax commission
as provided in section eleven hundred thirty-seven, or (ii) in the case of a tax, penalty
or interest paid by the applicant to the tax commission, within three years after the
date when such amount was payable under this article . . . .
Section 527.2 of the Sales and Use Tax Regulations provides, in part:
Sale of utility and similar services.
(a) Imposition. (1) Section 1105(b) of the Tax Law imposes a tax on the
receipts from every sale, except a sale for resale or a sale specifically exempt under
section 1115(b)(i) and (ii), (c) or (e) of the Tax Law, of
(i) gas, electricity, refrigeration and steam, and gas, electric, refrigeration and
steam service of whatever nature; and
(ii) telephony and telegraphy and telephone and telegraph service of whatever
nature, except interstate and international telephony and telegraphy and telephone
and telegraph service.
(2) Although this tax is generally known as the "consumer's utility tax," the
intention of the statute is to tax the enumerated sales and services whether or not
rendered by a company subject to regulation as a utility company. The words "of
whatever nature" indicate that a broad construction is to be given the terms
describing the items taxed. The inclusion of the word "service" indicates an intent
to tax, under this provision, items that are furnished as a continuous supply while the
vendor-vendee relationship exists.
(3) A charge for installing equipment, such as transmission equipment, which
a gas, electric, or telephone or telegraph company makes, according to a tariff, to a

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real property developer is deemed to be a charge for gas, electric, telephone or
telegraph service. The charge may be for reimbursement of the company's cost of
doing the work itself, or for the cost the company incurred in having a contractor
perform the work.
*

*

*

(d) Telephony and telegraphy; telephone and telegraph service.
(1) The provisions of section 1105(b) of the Tax Law with respect to
telephony and telegraphy and telephone and telegraph service impose a tax on
receipts from intrastate communication by means of devices employing the
principles of telephony and telegraphy.
(2) The term telephony and telegraphy includes use or operation of any
apparatus for transmission of sound, sound reproduction or coded or other signals.
*

*

*

Example 3: Message switching services, transmitted to a computer over lines
leased from a communication carrier are telegraph services subject to the tax
imposed under section 1105(b) of the Tax Law.
*

*

*

(4) A service is not considered telegraphy or telephony if either of these
services is merely an incidental element of a different or other service purchased by
the customer.
*

*

*

(5) The tax on utility services applies to every charge for any telephone and
telegraph service. Among these charges are monthly message rate and intrastate toll
charges and charges for special services, such as installation, change of location,
conference connections, tie-lines, WATS lines and the furnishing of equipment.
Example 7: A telephone company installs station apparatus, owned by it, on
the premises of a customer. The installation is a service taxable under section
1105(b) of the Tax Law.
(6) Where a customer has telephones at a single location connected to
exchanges in different localities, and a tie-line to a locality in which he is not located,

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the tax rate applicable for each service is the tax rate in effect in the locality to which
the exchange is assigned.
Example 8: A business located in Nassau County has two telephone
numbers, one with a Nassau exchange and one with a Queens exchange. This
enables his Queens customers to phone him toll free. Service on the Queens
exchange is considered to be purchased in Queens County even though the
telephone is physically located in Nassau County.
Opinion
Petitioner is an Internet Service Provider (ISP) and does not sell telephone or telegraph
services. Petitioner’s charges to its customers for access to the Internet are not subject to sales tax.
See section 1115(v) of the Tax Law. Petitioner has contracted for and purchases Digital Subscriber
Lines (DSL) from Provider. The DSL services purchased by Petitioner from Provider are
considered to be telephone or telegraph services which provide a high capacity data transfer between
Petitioner’s router and its customers to facilitate its customers’ access to the Internet. See section
1105(b) of the Tax Law, and Biscotti, Toback and Co., CPA’s, PC, Adv Op Comm T & F, March 3,
2003, TSB-A-03(6)S. Petitioner is not purchasing telephone or telegraph services from Provider
other than those used to transmit data from Petitioner’s customer to Petitioner’s Internet router.
Since Petitioner is an ISP and does not sell telephone or telegraph services to its customers,
it does not purchase the DSL services from Provider for resale. Rather, Petitioner uses or consumes
its purchases of DSL in the provision of high speed Internet access to its customers. Since Petitioner
is purchasing the DSL to connect its customers to its Internet router via Provider’s network and local
telephone lines, such purchases are taxable purchases of telephone or telegraph services where the
services are intrastate in nature. Purchases by Petitioner of interstate or international telephone or
telegraph services are not subject to the sales tax. See section 1105(b)(1)(B) of the Tax Law and
section 527.2 of the Sales and Use Tax Regulations. In Western Union Telegraph Company, Dec
St Tx Comm, February 4, 1983, TSB-H-83(57)S, the State Tax Commission determined that a
telegraph service where the messages originated and terminated in New York was taxable intrastate
telegraphy regardless of the fact that the messages were routed through computers located in
New Jersey. Therefore, if Petitioner’s Internet router is located in New York State, Petitioner’s
purchase of DSL connecting Petitioner’s customers to its router is taxable when Petitioner’s
customer is located in New York State since such purchase constitutes a purchase of intrastate
telephone or telegraph services. Petitioner’s purchase of DSL connecting Petitioner’s customers to
its router located in New York State is not taxable when Petitioner’s customer is located outside
New York State, since such purchase constitutes a purchase of interstate or international telephone
or telegraph services. This is so regardless of the route that the signal may take between Petitioner’s
router and its customer. See Western Union Telegraph Company, supra. It is also immaterial that
Petitioner’s customers may be visiting Web sites located outside New York State since Petitioner
is only purchasing telephone or telegraph services from Provider between Petitioner’s customer and
Petitioner’s router.

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Provider in this case must maintain records indicating the location of each of Petitioner’s
customers in order that Provider may properly collect sales tax from Petitioner on those charges
pertaining to Petitioner’s customers located in New York State, and exclude from tax those charges
pertaining to Petitioner’s customers located outside New York State. Likewise, Petitioner may
apply for a refund of the sales tax it has paid to Provider on purchases of DSL if it can show that
those charges pertain to Petitioner’s customers located outside New York State. Such claims for
refund of sales tax must be submitted within three years after the date that the tax was payable by
Provider to the Department of Taxation and Finance. See sections 1132(c)(1) and 1139(a) of the
Tax Law.

DATED: September 3, 2003

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.