My company buys frame relay data service that connects our New York offices to our data center in New Jersey — is that subject to New York sales tax, even though the carrier separately bills for the New York-only segment of the connection?

Plain-English summary

Corporation X, a financial services company, buys "frame relay" service — a packet-switched data connection that simulates a dedicated high-speed line — from a telecommunications carrier. The service links each of Corporation X's New York offices to its New Jersey data center, which stores financial transaction records. Data flows in either direction over each connection, but critically, the service does not let Corporation X send data between its own multiple New York offices, even by routing through the New Jersey data center.

Each frame relay circuit has three pieces: (1) a "local loop" from a New York office to the carrier's New York point of presence, (2) a "permanent virtual circuit" (a fixed, dedicated path) between the carrier's New York and New Jersey points of presence, and (3) a second local loop from the carrier's New Jersey point of presence to Corporation X's New Jersey data center. All three pieces are necessary to complete one transmission. The carrier separately states charges for each piece and already collects New York sales tax on the first piece (the New York-only local loop).

The Department first confirmed that frame relay service counts as "telephony and telegraphy... of whatever nature" — a broadly construed category that includes any transmission of data, regardless of whether it uses packet-switching or other digital protocols, so it's generally within the scope of the telecommunications sales tax. But New York's sales tax on telephony specifically excludes interstate service. Since transmissions here always either start in New York and end in New Jersey, or the reverse — and never travel between two New York points — the Department found the whole service is interstate in nature.

The more interesting holding is about how to treat the carrier's itemized, separately-stated billing. Sales tax is a transaction tax, and the "transaction" here is Corporation X's purchase of frame relay service between New York and New Jersey — not three separate purchases. Even though the carrier bills each segment separately (and one segment technically sits entirely within New York), the segments aren't separately usable on their own; no one piece does anything by itself. The Department treated the itemized billing as merely a cost breakdown of one integrated interstate transaction, not three distinct sales — so the whole thing escapes New York tax, and the carrier is over-collecting by taxing the local-loop segment separately. The Department flagged that the answer would flip if the service did let Corporation X move data between two New York locations, or if a New York-to-New York transmission could be routed through the New Jersey data center.

What this means for you

Companies buying dedicated data circuits or leased lines that cross state lines

If your data service connects an in-state location to an out-of-state location, and can't be used to move data purely within your state, it's likely untaxed interstate telecommunication service — even if your carrier's invoice breaks the charge into segments and taxes one of them. Don't assume a carrier's itemized billing reflects the correct tax treatment; verify whether the overall service is genuinely interstate.

Telecommunications carriers billing multi-segment circuits

Separately stating and taxing a single segment of an otherwise-interstate circuit (because that segment happens to sit entirely within one state) can be the wrong call if the segments aren't independently usable — the Department looks at the whole integrated transaction, not each billed line item.

Accountants and tax professionals

The controlling test is origination-and-termination points, not whether any physical segment of the transmission path happens to sit within the state (Matter of Southern Pacific Communications Co.) — and the "one integrated transaction" reasoning (citing Matter of Penfold) is worth flagging whenever a client's telecom bill itemizes what's really one continuous interstate service.

Common questions

Q: Is a leased data line or frame relay circuit connecting my New York office to an out-of-state facility subject to New York sales tax?
A: Generally no, if the service can only be used to move data between New York and the out-of-state point (not between two New York locations) — that's interstate telecommunication service, exempt from New York's telephony sales tax.

Q: My carrier's bill lists a separate charge for the "local" portion of the connection and taxes it — is that correct?
A: Not necessarily. If that segment isn't separately usable and is just one piece of an otherwise-interstate transmission, the Department treats the itemized billing as a cost breakdown, not a separate taxable sale — meaning the segment shouldn't be taxed on its own.

Q: Would the answer change if the service also let me connect two of my own in-state offices?
A: Yes — the opinion specifically cautions that the result would be different if the service enabled transmission between two or more New York locations, or if New York-to-New York traffic could be routed through the out-of-state facility.

Q: Does this ruling apply to my telecom purchase?
A: Not automatically. This is an Advisory Opinion binding only on the petitioner and only as to the facts it described. The specific routing capabilities of your service matter a great deal here, and your facts may differ.

Citations and references

Statutes and regulations:

• Tax Law §1105(b)(1)(B) (tax on telephony/telegraph service, with an interstate/international exclusion)
• Sales and Use Tax Regulation §527.2(a)(2) ("of whatever nature" broadly construed)
• Sales and Use Tax Regulation §527.2(d)(1)-(2) (defining intrastate telephony and telegraphy)

Prior opinions and cases referenced:

• Western Union Telegraph Co., TSB-H-83(57)S (origination/termination test for interstate vs. intrastate service)
• Matter of Southern Pacific Communications Co., Tax Appeals Tribunal, May 15, 1991
• Matter of Penfold v. State Tax Comm'n, 114 A.D.2d 696 (3d Dept. 1985) (integrated-transaction treatment)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_56s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-08(56)S
Sales Tax
September 17, 2008

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S070713A

A petition dated July 9, 2007 requests an advisory opinion about whether Corporation X’s purchase of
frame relay service is subject to New York State and local sales taxes. We conclude that the frame relay services
described in the petition are interstate telecommunication services that are not subject to New York State and local
sales tax.
Corporation X purchases frame relay services from a telecommunications carrier. Frame relay service is
packet-switched data transmission service that simulates a dedicated high-speed connection between two points. In
Corporation X’s case, the carrier provides multiple dedicated connections, each of which links one of Corporation
X’s New York offices to Corporation X’s New Jersey data center. Corporation X is a financial services company,
and its data center provides off-site storage for financial transaction records. Data can be transmitted over each of
the circuits in either direction. The frame relay service does not allow communication between or among
Corporation X’s multiple New York offices. Data cannot be transmitted from one New York office to another by
routing it through the New Jersey data center.
The frame relay circuit includes three main components. The first component is a local loop between one
of Corporation X’s office locations to the carrier’s point of presence (POP) in New York. The second component is
a permanent virtual circuit (PVC) between the carrier’s POP in New York and its POP in New Jersey. A PVC is a
fixed path between two sites that is specifically defined in frame relay routing logic; transmissions between these
sites always follow the same path to ensure that the frames will arrive in sequence. The final component is a local
loop between the carrier’s POP in New Jersey and Corporation X’s New Jersey database. All three components are
necessary to complete a transmission between Corporation X’s office location and its New Jersey database.
The carrier bills separately for each of Corporation X’s New York locations and separately states the
charges for each component of the frame relay service. The carrier charges a fixed monthly fee for the local loop
components. The carrier offers a choice between metered or fixed charges for the PVC component. The carrier
collects New York State and local sales tax on the first component of the frame relay service (i.e., the charge for the
connection between Company X’s location and the carrier’s POP in New York).
The frame relay service described in the petition is “telephony and telegraphy . . . of whatever nature” for
purposes of sales tax. As relevant here, Tax Law section 1105(b)(1)(B) imposes sales tax on receipts from every
sale, other than sales for resale, of “telephony and telegraphy and telephone and telegraph service of whatever
nature” except interstate and international telephone service. “The words ‘of whatever nature’ indicate a broad
construction is to be given to the terms describing the items taxed.” Sales and Use Tax Regulation §527.2(a)(2).
Tax Law section 1105(b) imposes tax on receipts from “intrastate communication by means of devices employing
the principles of telephony and telegraphy.” Sales and Use Tax Regulation §527.2(d)(1). The terms “telephony
and telegraphy” include the “use or operation of any apparatus for transmission of sound, sound reproduction or
coded or other signals.” Sales and Use Tax Regulation §527.2(d)(2). Frame relay service is “telephony and

TSB-A-08(56)S
Sales Tax
September 17, 2008

-2-

telegraphy” for purposes of sales tax because it enables the transmission of data between two points. The use of
packet switching or other digital routing protocols for all or part of the transmission does not change this result.
Nevertheless, the service described in the petition is interstate telecommunication service and is therefore
not subject to New York State and local sales tax. In determining whether a service is intrastate or interstate, we
consider the origination and termination points of the transmission. See Western Union Telegraph Co., TSB-H­
83(57)S. The fact that a segment of the transmission may occur within the state does not render the entire
transmission intrastate in nature. See Matter of Southern Pacific Communications Co., (Tax Appeals Tribunal,
May 15, 1991). In Corporation X’s case, transmissions either originate at one of its New York offices and
terminate at its New Jersey data center, or the reverse. The frame relay service provided to Corporation X does not
allow transmission to occur between New York locations. Thus we conclude that the frame relay services
described in the petition are interstate in nature. Moreover, sales tax is a transaction tax. The transaction at issue
here is Corporation X’s purchase of frame relay service between each of its New York offices and its New Jersey
data center. Although the carrier separately states the various segments of the service, one of which occurs between
points in New York, the segments are not separately available, and no one segment is useful in isolation. Rather,
the frame relay service here is properly viewed as an integrated transaction that enables interstate data transmission.
See Matter of Penfold v. State Tax Comm’n, 114 AD2d 696 (3d Dep’t 1985). The separate statement of segments
of the transmission by the carrier is merely a breakdown of its cost components to provide the overall service.
Accordingly, the frame relay service described in the petition is not subject to New York State and local sales taxes.
We caution that the result would be different if the frame relay service enabled transmission between two or more
locations in New York, or if transmissions between two New York locations could be routed through the New
Jersey data center.

DATED: September 17, 2008

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts
set forth therein and is binding on the Department only with respect to the person or entity
to whom it is issued and only if the person or entity fully and accurately describes all
relevant facts. An Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific time period at issue
in the Opinion.