After the 1984 AT&T divestiture, when New York Telephone charges long-distance carriers an 'access charge' to originate or terminate their calls, are those access-charge receipts subject to New York's Section 186-a utility gross income tax?

Plain-English summary

Before the 1984 breakup of AT&T, New York Telephone ("NY Tel") itself carried both intrastate and (jointly with AT&T, sharing "division of revenues") interstate long-distance calls, and included its entire share of the revenue in its Section 186-a utility gross-income tax base. After divestiture, NY Tel no longer functions as a long-distance carrier -- it now provides only local "access service," originating or terminating calls on behalf of whichever long-distance carrier the customer selects, and charges that carrier a regulated "access charge" (approved by the PSC for intrastate access, and by the FCC for interstate access). The carrier then bills its own customer directly for the whole long-distance call and keeps 100% of that charge -- it isn't shared with NY Tel the way pre-divestiture revenues were.

NY Tel asked the Department to exclude these access-charge receipts from its Section 186-a tax base entirely, arguing the access service is really resold by the long-distance carrier to its own customer, so NY Tel's receipts are a "sale for resale" rather than a sale "for ultimate consumption" -- and Section 186-a taxes only receipts from sales/services rendered for ultimate consumption.

The Department agreed, working through several layers of analysis:

• The exclusion applies to both the intrastate and interstate/foreign bases. Although a 1983 amendment adding the interstate/foreign base to Section 186-a was ambiguous about whether the resale exclusion carried over, the Department read the statute as "a conceptual whole" -- and noted that NOT applying the same exclusion to interstate receipts would create a serious Commerce Clause problem (taxing interstate resale receipts while exempting economically identical intrastate resale receipts), citing Boston Stock Exchange and Armco v. Hardesty. A 1985 statutory amendment later confirmed this reading explicitly.
• The access service is genuinely resold, not consumed, by the carrier. Drawing on Burger King v. State Tax Commission (where packaging materials were treated as purchased "for resale" because they were a critical element of the final product sold to customers), the Department found NY Tel's access service is likewise a critical, inseparable component of the long-distance service the carrier sells to its own customer -- so the carrier, not NY Tel, makes the sale to the ultimate consumer.
• Result: access charges NY Tel bills to intrastate carriers (PSC tariff), and to interstate carriers (whether under the pre-1984 ENFIA tariff, AT&T's interim agreement, or the later generally applicable FCC tariff), are all excluded from NY Tel's Section 186-a base starting with the January 1, 1984 divestiture date. As a consequence, it's the long-distance carrier's ENTIRE receipt from its own customer -- without deducting NY Tel's access charge -- that becomes taxable to the carrier under Section 186-a.

The Department candidly noted this shifts (and somewhat reduces) Section 186-a revenue as a direct consequence of the AT&T breakup's changed telephone-system structure, not any legislative design choice, and expressed hope the ruling would support rate reductions and possibly refunds for the intervening period.

What this means for you

Telephone and telecommunications carriers

If your company sells wholesale access, interconnection, or similar "critical component" services to a downstream carrier that resells the finished product to the ultimate customer, this ruling's resale-exclusion reasoning may extend to your receipts under Section 186-a -- but the analysis depends heavily on regulatory structure (whose tariff governs, who bills the ultimate consumer) and the specific post-divestiture facts described here.

Long-distance/interexchange carriers

If you're the one billing the ultimate consumer for the full long-distance call, expect your ENTIRE receipt -- without any deduction for access charges paid to the local exchange carrier -- to be includable in your own Section 186-a base (apportioned for interstate/foreign calls).

Accountants and tax professionals analyzing utility gross-income tax

This ruling is a detailed illustration of how the Section 186-a "sale for ultimate consumption" test tracks the sales-tax resale-for-component-part doctrine (citing 20 NYCRR 526.6(c)(1) and Burger King), and how Commerce Clause discrimination concerns can drive statutory interpretation even where the legislative text is ambiguous.

Common questions

Q: Does NY Tel collect Section 186-a tax on its access charges to long-distance carriers?
A: No. Those charges are excluded as sales for resale -- the long-distance carrier resells the access service to its own customer as part of the overall long-distance call.

Q: Who pays the Section 186-a tax on a long-distance call after divestiture?
A: The long-distance carrier does, on its ENTIRE receipt from its own customer (apportioned for interstate/foreign calls), without deducting the access charge it paid NY Tel.

Q: Does this exclusion apply only to intrastate access charges?
A: No -- the Department applied the same sale-for-resale exclusion to interstate and foreign access charges too, partly to avoid a Commerce Clause problem that would arise from taxing interstate resale receipts differently than intrastate ones.

Q: Can another telephone company rely on this Opinion?
A: No. It binds the Department only as to NY Tel's own facts and cannot be relied upon by another carrier, even with a similar access-service arrangement.

Citations and references

Statutes, regulations, and cases:

• Tax Law § 186-a, § 186-a(2), § 186-a(2-a)
• 20 NYCRR 501.9(a); 20 NYCRR 526.6(c)(1)
• Chapter 29 of the Laws of 1985
• Boston Stock Exchange v. State Tax Commission, 429 U.S. 318 (1977)
• Armco v. Hardesty, 104 S. Ct. 2620 (1984)
• Burger King v. State Tax Commission, 51 N.Y.2d 614 (1980)
• U.S. v. AT&T, 552 F. Supp. 131 (1982)

Date note: The document header and sign-off line both read "September 20, 1985" -- no discrepancy here.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a85_16c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (16) C
Corporation Tax
September 20, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C840627B

On June 27, 1984, a Petition for Advisory Opinion was received from New York Telephone
Company, 1095 Avenue of the Americas, New York, New York 10036.
The issue raised is whether the receipts of New York Telephone Company (hereinafter "NY
Tel") from providing access service in New York State to long distance (interexchange) telephone
carriers are subject to the tax imposed by section 186-a of the Tax Law. The issue raised is a direct
consequence of the divestiture of the American Telephone and Telegraph Corporation (hereinafter
"A T & T"). As more fully described herein, the access service performed by NY Tel consists of
originating or terminating telephone calls on behalf of long distance telephone carriers.
In the context of the postdivestiture environment, NY Tel argues that the access service now
provided by it to the long distance carrier is, in turn, resold by the long distance carrier as part of the
overall long distance service the long distance carrier provides to its customer, the person placing
the long distance call. Accordingly, it is contended that receipts from access services provided to the
long distance carrier, in connection with both intrastate and interstate (and foreign)
telecommunications, are exempt from the section 186-a tax because NY Tel asserts that both the
intrastate and interstate bases of the tax do not include these receipts. This is so, NY Tel asserts,
because such bases contain only receipts derived from sales made to the ultimate consumer, and not
those from sales for resale.
Accordingly, it must be decided (1) if both the intrastate base and interstate base for receipts
from the sale of telephone service under section 186-a require that such receipts be only those
derived from sales for ultimate consumption and, if so, (2) if the access service rendered by NY Tel
is ultimately consumed by the customer of the long distance carrier within the intendment of section
186-a.
Section 186-a
Section 186-a imposes a tax on the furnishing of utility services including the selling of
telephone service. In the case of a utility subject to supervision by this State, as is NY Tel, the tax
is 3% of its gross income. Gross income is defined as "receipts received in or by reason of any
sale...made or service rendered for ultimate consumption or use by the purchaser in this state .... "
The tax, as added in 1937, was imposed only on receipts from intrastate activities and, as shown by
the foregoing quotation, only on receipts from sales wherein the purchaser was the consumer.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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September 20, 1985

From the language of the statute it is clear that if, in fact, the ultimate consumer of access
services provided in connection with intrastate telecommunications is the customer of the long
distance carrier, rather than the long distance carrier itself, receipts from such services would be
excluded from NY Tel's intrastate base under section 186-a.
In 1983 the Legislature amended section 186-a by adding a new subdivision 2-a. The new
subdivision added apportioned receipts from interstate and foreign telecommunications to the base
of the tax. The relevant portion of such provision reads as follows:
"...a telephone or telegraph corporation shall include in its determination of gross income or
gross operating income, in addition to receipts and profits described in subdivision two of this
section, that portion of revenue from interstate and foreign transmissions service attributable to this
state pursuant to provisions of paragraph (d) of subdivision four of section one hundred eighty-four
of this article."
Accordingly, beginning in 1983 the section 186-a base consisted of an intrastate base of wholly New
York telecommunications services and a new base of apportioned receipts from interstate and foreign
telecommunications services.
While the new subdivision added a totally new base, it did not until 1985 specifically provide
for an exclusion of receipts from sales to other than the ultimate consumer. In addition, the reference
to section 184 in subdivision 2-a. is ambiguous. NY Tel argues that the Legislature intended that
the rule excluding receipts from sales other than for ultimate consumption is to be applied to the
formulation of the interstate base. As stated, there is no question that such rule applies to the
formulation of the intrastate base.
As to the question of whether the sale for resale exclusion applies to the interstate base, it is
determined that section 186-a was intended to be a conceptual whole and that, therefore, the
exclusion is applicable. An examination of the legislative history of subdivision 2-a is ambiguous
as to the formulation of the interstate base and, consequently, the application of the sale for ultimate
consumption rule. However, it appears quite clear that, if such a rule were not applied to the
interstate base, a serious constitutional question would arise -- receipts from services rendered for
resale in connection with intrastate telecommunications services would be exempt whereas the
receipts from the same services rendered for resale as part of interstate telecommunications services
would be taxable. Such a divergent treatment would appear to violate the Commerce Clause
prohibition that "No State, consistent with the commerce clause, may 'impose a tax which
discriminates against interstate commerce'". Boston Stock Exchange v State Tax Commission, 429
US 318, 329 (1977).

1

Chapter 29 of the Laws of 1985 amended subd. 2-a of section 186-a by adding, "The requirement
contained in subdivision two of this section regarding the inclusion of only those receipts which are
received in or by reason of sales made or services rendered for ultimate consumption or use by the
purchaser shall apply to this subdivision". Approved April 8, 1985, effective Jan. 1, 1985.

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Corporation Tax
September 20, 1985

The fact that the overall level of taxation of the receipts from the interstate call is no greater
than that of the receipts from the intrastate call does not appear to erase the Commerce Clause
concern. The taxation of NY Tel's access receipts alone must be separately examined. In this
instance, the Commerce Clause examination would focus on the taxation of NY Tel in its intrastate
connected activities as compared to the taxation of NY Tel with respect to equivalent interstate
connected activities. Armco v Hardesty, 104 S. Ct. 2620, 52 LW 4787 (1984), Boston Stock
Exchange, supra.
It is therefore determined that in order to avoid a construction of section 186-a which would
pose serious constitutional concerns, the sale for resale exclusion is viewed as applicable to the
interstate base. Such exclusion is likewise applicable to receipts from foreign telecommunications
since there is no indication that the Legislature intended different principles to apply to those
receipts. With respect to both the intrastate base and interstate (and foreign) base, it now must be
decided whether the access services are ultimately consumed by the long distance carrier or by its
customer.
Telecommunications Before and
After the Divestiture of AT&T
An understanding of the issue presented herein requires a brief description of the structure
and operation of the telecommunications network before and after the divestiture of AT&T.
Predivestiture
Before divestiture, the effectuation of an intrastate long distance call, e.g., Albany to Buffalo,
was accomplished solely by NY Tel which was then a wholly owned subsidiary of AT&T. NY Tel
carried the call from the caller's residence in Albany to its terminus in Buffalo. Since its
telecommunications activity with respect to the call was totally intrastate, NY Tel included 100%
of the receipt from the call in its section 186-a intrastate base.
With respect to interstate telecommunications effectuated by the Bell system in pre­
divestiture times, NY Tel and AT&T participated Jointly in the provision of interstate service, and
they were both compensated pursuant to a business arrangement know as "division of revenues." The
long distance call was billed and collected by NY Tel, and all revenues collected by NY Tel from
interstate service were pooled. AT&T and NY Tel then shared such revenues, pro rata, based upon
a formula contained in the division of revenues agreement between the two carriers. An interstate
call from Albany to Chicago over the Bell system was effectuated as follows: first, the call was
carried by NY Tel to its interface with the Long Lines system of AT&T in New York. Then AT&T
carried the call from the New York interface to its interface with the local Bell company serving
Chicago. The local company then took the call to the terminus. All three carriers divided the
revenues pro rata, and NY Tel states that all three shared in the risk of nonpayment.

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Corporation Tax
September 20, 1985

A further insight into the construction of section 186-a as applied to the pre-divestiture era
is seen from the particulars of the way the base of section 186-a was constituted in pre-divestiture
times. Under the division of revenues arrangement, approximately 100% of the share of the revenue
received by NY Tel for its service in effectuating an interstate call was included in its interstate base
under section 186-a since its activity with respect to such call took place solely in New York State.
AT&T, the parent, long distance carrier, was required to include, on an apportioned basis, its share
of the revenue it received from the call in its interstate base under section 186-a; if, for example, its
allocation percentage was 10%, AT&T would have included 10% of its share of the division of
revenue from the call in its section 186-a base.
Postdivestiture
The method of doing business changed as a result of divestiture. NY Tel became part of an
independent entity; the manner of doing business with AT&T pursuant to the division of revenues
arrangement ended, and NY Tel was required to offer any and all long distance carriers equal access
to its lines on a tariff basis. See U.S. v AT&T, 552 F. Supp. 131 (1982). Accordingly, all long
distance carriers would now pay NY Tel an access charge -- an independently approved charge for
the provision of NY Tel's service in originating and/or terminating long distance
telecommunications, whether intrastate or interstate, on behalf of the long distance carrier. The
access charge is calculated on the long distance carrier's actual use of NY Tel's lines.
Coupled with the independence of NY Tel, all telephone users were given the opportunity,
in both intrastate and interstate telecommunications, to select the long distance carrier that is to carry
the call, and such long distance carrier bills directly, on behalf of itself, for the total charge of the
long distance call. The charge received by the long distance carrier is not shared with NY Tel. NY
Tel charges the long distance carrier an access charge which is a part of the long distance carrier's
overall cost in the provision of the long distance call.
With respect to effectuating intrastate long distance telecommunications, NY Tel no longer
functions as the long distance carrier. Its telecommunications service is now limited to service which
is local in scope. The Albany to Buffalo call is now carried by NY Tel to its interface with the long
distance carrier which then takes the call to Buffalo, and there the call is carried to its terminus by
NY Tel. NY Tel charges an origination-associated access service and termination-associated access
service to the long distance carrier. The access charge is subject to the terms and conditions of tariffs
authorized by the New York State Public Service Commission.
Concerning the particulars of the formulation of the section 186-a intrastate base after
divestiture, even if it is found that the access service provided by NY Tel is resold by the intrastate
carrier, the intrastate base would not appear greatly affected. Since the service the long distance
carrier is providing is, generally, still 100% in New York, the long distance carrier would include
100% of its total receipt in its intrastate base. The carrier would include 100% of its charges to
customers without deducting the cost of the access service provided by NY Tel.

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September 20, 1985

Concerning the particulars of the interstate base, if NY Tel's argument is adopted, in the post­
divestiture era the entire amount received by the long distance carrier for the interstate call would
be taxed on an allocated basis. As a result, the amount representing NY Tel's share, which was
formerly included by NY Tel at 100%, would now be included in the section 186-a base of the
interstate carrier, but on an apportioned basis. Therefore, while not influenced by the manner in
which the section 186-a base will be constituted, this decision will have an impact on the section
186-a interstate base in the post-divestiture era.
It should also be noted that, with respect to interstate telecommunications, the activity that
NY Tel now performs in relation to the long distance carrier is generally the same activity that it
performed pre-divestiture. The activity is the same; however, it is clear that the business arrangement
under which the activity is performed is different. We will now discuss the application of the law
to the facts herein.
The Application of the Law
The economic philosophy of section 186-a in taxing only receipts from sales for ultimate
consumption is congruent with that of the sales and compensating use tax (Tax Law, § 1105).
Specifically, the regulations under section 186-a state that "Receipts from sales or services for
ultimate consumption or use by the purchaser in this State are taxable, but receipts from sales for
resale, as distinguished from sales for consumption, are not taxable" [20 NYCRR 501.9(a)]. As a
result, it is appropriate to obtain guidance in reaching a decision herein by examining court decisions
concerned with sales for resale for purposes of the sales tax.

1

For example, let's examine the tax revenue from a call from Albany to Chicago. The charge is $5.00
both before and after divestiture. Before divestiture the call was divided by a division of revenues
agreement as follows: $1.00 to NY Tel, $3.00 to the long distance carrier and $1.00 to Ill. Bell. The
section 186-a base pre-divestiture would have picked up 100% (wholly New York activity) of NY
Tel's $1.00 and the apportioned part of the interstate carrier's receipt, which for the purposes of this
example will be 30¢ ($3.00 x a hypothetical 10% New York allocation), total - $1.30. After
divestiture, if NY Tel prevails, the $5.00 receipt of the interstate carrier is subjected to tax, and the
total § 186-a base would, accordingly, be 50¢ ($5.00 x 10%). In effect 10% of NY Tel's receipt is
picked up (10¢) and, in addition, 10% of the amount going to Ill. Bell is also picked up (10¢). It
should be noted that by taxing the entire charge made by the interstate carrier, and thereby including
the amount representing Ill. Bell's receipt, the total diminution of the section 186-a base in this
illustration is actually something less than 90%. Based upon the actual NY allocation of the
particular interstate carrier, the revenue impact would increase or decrease as compared to this
illustration.

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TSB-A-85 (16) C
Corporation Tax
September 20, 1985

In Burger King v. State Tax Commission, 51NY2d 614 (1980), the court held that materials
used to package food sold by the fast food chain, including wrappers for hamburgers, cups for
beverages and sleeves for french fries, were purchased by Burger King for resale because that
packaging "is such a critical element of the final product sold to customers" Id., at 622. It must be
asked whether this same characterization can be applied to the access service supplied to the long
distance carrier.
It is clear that after the divestiture the origination or termination service afforded by NY Tel
to AT&T is sold to AT&T. It is also clear that the long distance carrier then resells, on behalf of
itself, such service as a component of the long distance service afforded by AT&T to its customer.
The access service provided by NY Tel does not appear to be consumed by the long distance carrier.
The PSC now regulates the intrastate-associated access charges made by NY Tel to the
intrastate long distance carrier. On the interstate level, the charges to interstate long distance carriers
are under the supervision of the Federal Communications Commission (FCC). Up to June, 1984,
charges to interstate long distance carriers, other then AT&T, were pursuant to the ENFIA (Exchange
Network Facilities for Interstate Access) tariff; AT&T and its subsidiaries, pending tariff approval
by the FCC, paid an access charge set out in an interim agreement with NY Tel. From June 1984 to
present, a generally applicable FCC tariff governs access charges to all interstate carriers.
In conclusion, it appears that the long distance carrier's sale to its customer is of a service
which includes the local access service provided to it by NY Tel . As such, the access service
provided to the long distance carrier constitutes a "critical element of the final product sold to
customers." Granted, the sale of the access service by NY Tel is not a sale for resale as such, but a
resale as a component part of the service sold by the long distance carrier. This is a transaction of
a type envisaged by the sales tax regulation which states that the (sales tax) resale exclusion is
applicable "where a person, in the course of his business operations, purchases. . .services which he
intends to sell . . . as a component part of other. . .services " [20 NYCRR 526.6(c) (1) ].
Accordingly, it is decided that commencing with the divestiture of AT&T, January 1, 1984,
(1) access charges made by NY Tel to intrastate long distance carriers pursuant to PSC tariffs in
connection with their provision of intrastate long distance service to their customers (2) up to and
including May 1984, access charges made by NY Tel to interstate long distance carriers, other than
AT&T, pursuant to the ENFIA tariff in connection with their provision of interstate long distance
service to their customers (3) up to and including May 1984, access charges made by NY Tel to
AT&T pursuant to interim agreement in connection with AT&T's provision of interstate long
distance service to its customers and (4) subsequent to May 1984, access charges made by NY Tel
to interstate long distance carriers pursuant to generally applicable FCC tariffs in connection with
their provision of interstate long distance service to their customers are not included in NY Tel's base
under section 186-a of the Tax Law.

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September 20, 1985

As a concomitant of this decision, it is seen that the long distance carriers are making a sale
of a long distance service which includes local components, and that such sale is made to the
ultimate consumer so that its entire receipt from its customers for the long distance call, without
deduction of NY Tel's access charge, is subject to tax under section 186-a.
The result reached herein, and its consequential revenue effect, is one which flows not
directly from legislative design but rather directly from the divestiture of AT&T; the tax result is
different after divestiture because of the different structure of the telephone system resulting
therefrom.
This opinion deals with only the access service described herein which NY Tel provides to
long distance carriers for resale by such carriers. Moreover, it in no way deals with access services
to telephone users. It is hoped that, in spite of the adverse effects on section 186-a revenues that may
flow from divestiture, one effect of this opinion will be a prospective rate reduction of intrastate­
associated and interstate-associated access charges made by NY Tel to long distance carriers and that
such rate reduction will find its way to the consumer. With respect to the period that has intervened
since divestiture, it is hoped that this decision will serve as a foundation for a refund to consumers
of the section 186-a tax liability which is the subject of this opinion where such tax liability was used
by NY Tel to support current rates.

DATED: September 20, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.