Are electronic voice-messaging and telephone-answering services a taxable telephone/telegraph service, and how are they sourced and rated?

Plain-English summary

G.T.E. Telemessager Incorporated runs a computerized voice-messaging network (called "VMX") and an electronic telephone-answering service. Subscribers get a mailbox in the system and can store, retrieve, reply to, redirect, and broadcast recorded voice messages; they reach the system over public telephone lines or over WATS lines that Telemessager leases from a long-distance carrier. Telemessager asked whether these services are taxable, and at what rate.

The Department held they are taxable telephone/telegraph services under Tax Law § 1105(b).

• The essence of the service is electronic communication. The heart of what subscribers buy is the ability to communicate electronically with one another — the "transmission of intelligence to a distant point by means of electricity." Every element is performed by electronic means.
• It's not like cable TV, and not like a human answering service. Sales tax can't be imposed on cable TV just because it contains an element of telephony (there, the essence is entertainment). Here the opposite is true: telephony is the essence, not an incident. And unlike a conventional answering service where a person actually writes down messages, this is entirely electronic (citing Tigon Corporation, TSB-A-89(25)S).
• Resale of the underlying telecom. Because Telemessager is selling a taxable telephone service, it may purchase for resale the local-exchange and WATS-line services it uses to provide it.
• Rate and interstate exemption. The proper rate is the rate in the locality where the customer's exchange is located. Messages that are interstate or international are exempt from New York sales tax (§ 1105(b) excludes interstate and international telephone/telegraph service).

What this means for you

Electronic messaging services can be taxable telecommunications

If the core of your service is letting customers send and receive communications electronically, New York can treat it as a taxable telephone or telegraph service under § 1105(b) — even if you're not a regulated phone company and own no lines. The label ("voice messaging," "answering service") doesn't control; the essential object of the service does.

Buy your underlying lines for resale

A provider selling a taxable telephone service is reselling the local-exchange and long-distance/WATS capacity it consumes to deliver that service, so it can buy those inputs for resale rather than paying tax on them and being taxed again on the resale.

Source to the customer's exchange, and carve out interstate

The tax rate follows the locality of the customer's exchange, not where your computers sit. Interstate and international messages are outside the § 1105(b) tax, so keep records that let you separate intrastate from interstate/international usage.

Common questions

Q: We're not a phone company and we own no lines — can our messaging service still be taxable?
A: Yes. What matters is that the essence of the service is electronic communication; that makes it a taxable telephone/telegraph service under § 1105(b) regardless of regulation status or facilities ownership.

Q: Do we pay tax on the phone and WATS lines we use?
A: No — you're reselling a taxable telephone service, so you may buy the local-exchange and WATS-line services for resale.

Q: What rate do we charge, and is interstate traffic taxed?
A: Charge the rate for the locality where the customer's exchange is located. Interstate and international messages are exempt from the tax.

Citations and references

Statutes and regulations:

• Tax Law § 1105(b) — tax on telephony, telegraphy, and telephone/telegraph service; interstate and international service excepted
• 20 NYCRR § 527.2 — telephony and telegraphy; broad construction of the "consumer's utility tax"
• 20 NYCRR § 527.2(d)(2) — "telephony and telegraphy" includes use or operation of apparatus for transmission of sound or signals

Cited authority:

• Tigon Corporation, Adv Op Comm T & F, July 28, 1989, TSB-A-89(25)S — electronic messaging is a taxable telephone/telegraph service
• New York State Cable Television Association v. State Tax Commission, 88 Misc 2d 601, aff'd 59 AD2d 81 — cable TV's essence is entertainment, telephony only incidental
• Quotron Systems v. Gallman, 39 NY2d 428 — purveyor as a "mere conduit" transmitting others' messages
• New York Quotation Co. v. Bragalini, 7 AD2d — taxability doesn't turn on whether sender or receiver buys the service

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_45s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (45)S
Sales Tax
November 20, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890808C

On August 8, 1989, a Petition for Advisory Opinion was received from G.T.E Telemessager
Incorporated, G.T.E Place W. Airfield Drive, D/FW Airport, TX 75261-9810.
The issue raised is whether voice messaging services, telephone answering services, and
certain long-distance WATS line services provided by Petitioner, G.T.E. Telemessager Incorporated,
are subject to sales tax; and if so, what is the proper rate of tax to collect.
The principal service offered by Petitioner is providing voice massaging services to its
subscribers. Upon subscribing to Petitioner's voice massaging service, a subscriber is issued an
identification number and a mailbox number (i.e. an electronic "address" within the Petitioner's
computer system "VMX"). The voice messaging services offered by Petitioner allow one subscriber
attempting to contact another subscriber to store a message for that second subscriber in the
Petitioner's system. Subscribers using Petitioner's Voice messaging service are not able to engage
in simultaneous two-way communication with other subscribers. To access the Petitioner's system,
the subscriber makes a telephone call either over public telephone lines or over a wats line supplied
by the Petitioner. The Petitioner's system then requests an identification number and, once given,
validates that the caller is a subscriber. The subscriber is then told whether he has any messages and
is asked to press a number to receive them. After retrieving his messages, a subscriber is then given
the option of replying to the messages, or redirecting the messages, or leaving a new message for
another subscriber or for multiple subscribers.
If a subscriber wishes to redirect a message to a third subscriber, a voice message is stored
in the third subscriber's mailbox which will alert that subscriber to pick up the redirected message
when the subscriber calls in to check his messages. The original redirected message is not duplicated,
it stays on the original computer disk on which it was originally stored. A subscriber wishing to leave
a message for multiple subscribers (i.e., broadcast the message) stores the message on Petitioner's
voice messaging system and then instructs the system as to which subscribers should be given access
to the message. As with a redirected message which is left to a single subscriber, a broadcast
message is stored only once on the computer disk memory. Upon calling into the system, each
subscriber to whom the message was addressed will then be alerted that he has a message waiting
and will be asked to retrieve the message.
The VMX does not generate any information or data for the subscriber. The VMX only stores
and provides for retrieval of the sender's voice message, per the sender's instructions. The receiver
obtains the sender's message by calling in and listening to the message. No tangible record of the
message is created or distributed. Once the message has been received by the receiver the message
is erased, unless the VMX is instructed otherwise by the receiver.
TP-9 (9/88)

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November 20, 1989
Petitioner currently bills the subscriber a flat rate each month for the voice messaging service.
The rate is constant regardless of the number of messages sent or received. A subscriber may have
numerous extensions hooked up to the system. These extensions may be located all over the country
or may be located in the same building. All extensions for a subscriber will normally be connected
to a single VMX.
The telephone answering service allows a person attempting to contact a subscriber using
Petitioner's service to store a message for that subscriber in Petitioner's system. In order to utilize the
telephone answering aspect of Petitioner's services, a subscriber must request, from the local public
telephone company, call forwarding service to an additional local phone number which ties into
Petitioner's messaging system. The subscriber is billed directly by the public telephone company for
the call forwarding service. The normal state sales tax is imposed by the public telephone company,
upon the basic telephone service and the call forwarding service. If a person attempts to call a
subscriber who is away from his telephone and who has forwarded his calls to Petitioner's voice
message system, Petitioner's system will play back a recorded message from the subscriber asking
the caller to leave a message. Any message left by the caller is stored in the Petitioner's system for
later retrieval by the subscriber.
A few subscribers have an integrated service in which calls automatically roll over to
Petitioner's message system after a pre-set number of rings. All subscribers must follow the same
procedures outlined above to retrieve a reply to a message or to retrieve a redirected or broadcast
message. Subscribers using Petitioner's telephone answering service are not able to engage in
simultaneous two-way communication with other subscribers.
It is the Petitioner's subscribers, not Petitioner itself, which utilize a telecommunications
system to access the service provided by Petitioner. Petitioner is not a regulated provider of
telephone services. In addition, Petitioner has no local or long distance facilities. Petitioner is
charged by the local public telephone company for basic local exchange service. Since local
exchange service is a taxable telecommunications service, the telephone company collects sales tax
from Petitioner and remits it to the State. All local calls to Petitioner's system are made by
subscribers over public telephone company networks. The subscribers pay the public telephone
company for the telecommunication services used to access Petitioner's system. Payment is made
by coins or credit card if the telephone call originates from a pay phone, or payment is made when
the subscriber pays his monthly phone bill.
Long distance phone calls to Petitioner's system are made by subscribers using either a long
distance carrier (e.g., Sprint, MCI, AT&T) or by using a wats line provided by Petitioner. The
subscribers which use a long distance carrier for the telecommunication services needed to access
Petitioner's system are billed directly by the long distance carrier.
The subscribers which use a wats line provided by Petitioner are billed by the Petitioner for
the telecommunication services needed to access Petitioner's system based on usage. Petitioner leases
wats lines from a long distance carrier (US Sprint). Each wats line terminates at one of Petitioners
Voice Messaging Computer systems (VMX) located across the country. One of the computer
systems is located in New York City. The VMX located in New York City services subscribers

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located in several states. Therefore, the wats line terminating at the New York City VMX carries
both intrastate and interstate calls.
Petitioner receives an invoice each month from US Sprint for the calls made by Petitioner's
subscribers on the New York VMX wats line. US Sprint's invoice includes all applicable state &
local sales taxes for the intrastate portion of the bill. Petitioner pays US Sprint for the wats line usage
including any state and local taxes for the intrastate calls made.
Petitioner then passes on to its subscribers the same unit rate, charged to Petitioner by US
Sprint, with a mark-up to cover Petitioner's administrative costs incurred in billing its subscribers
for the wats line usage.
Section 1105(b) of the Tax Law imposes a sales tax upon: "The 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 telephony and telegraphy and telephone and
telegraph service."
The Sales and Use Tax Regulations define the term "telephony and telegraphy" to include
"use or operation of any apparatus for transmission of sound, sound reproduction or coded or other
signals." 20 NYCRR 527.(2)(d)(2). The term does not apply to a service which is essentially
something other than telephony and telegraphy, although telephony and telegraphy may figure as an
incidental element of the service. 20 NYCRR 527.(2)(d)(4). The tax on the sale of telephony and
telegraphy is thus not applicable to the receipts of cable television companies, because, while as an
incident to the service provided there may be telegraphic or telephonic transmission of a signal, the
essential object of the service is to provide "entertainment or enjoyment." New York State Cable
Television Association v. State Tax Commission, 88 Misc 2d 601, aff'd 59 AD2d 81. (It is to be
noted that in the discussion of cable television in 20 NYCRR 527.2(2)(d)(3), the reference to the
exempt distribution of cable television programs is a reference to distribution to the ultimate
consumer.
As suggested by the regulation provision cited above, the essence of telephony and telegraphy
is the transmission of "intelligence to a distant point by means of electricity." 74 AM Jur 2d,
Telecommunications §1. Also critical to the concept is the role of the purveyor of telephony and
telegraphy as "a mere conduit, transmitting to third-party recipients messages given it by various
originators." Quotron Systems v. Gallman, 39 NY2d 428; Technical Services Bureau Memorandum,
TSB-M-80(18)S. Further, it makes no difference to the question whether the sender or receiver of
the transmission purchases the service. New York Quotation Co. v Bragalini, 7 AD2d.
Section 527.2(a)(2) of the sales tax regulation state:
"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 continous supply while the vendor-vendee relationship
exists." (Emphasis supplied)

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November 20, 1989
Section 527.2(d)(2) provides, in part, as follows:
"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 switchingservices, transmitted to a computer are over lines
leased from a communication carrier are telegraph services subject to
the tax imposed under section 1105(b) of the Tax Law.

Petitioner is providing, inter alia, a network upon which its customers can communicate by
computer or electronically with one another by entering and retrieving messages. Petitioner does not
provide any additional information to its customers nor does it manipulate or otherwise process it's
customers information into another form; rather, Petitioner stores its customer's information so that
its customer or someone designated by the customer may later retrieve the same information.
Sales tax could not be imposed upon "Cable TV" subscriptions merely because the charge
for such contained an element of telephony or telegraphy. Here, the opposite is true. The essential
element of petitioner's service is for its customers to electronically communicate with each other.
"Transmission of intelligence to a distant point by means of electricity." Unlike a conventional
telephone answering service where a person actually writes down messages for the person
purchasing the service, every element of petitioner's service is performed by electronic means.
Therefore, Petitioner is providing a "telephone or telegraph service the receipts from which are
subject to the tax imposed under section 1105(b) of the Tax Law. Re Tigon Corporation Advisory
Op Comn of T & F, July 28, 1989, TSB-A-89(25)5. Since Petitioner is selling a telephone service,
it may purchase for resale, service such as local exchange services and WATS line services. The
proper rate of tax to collect, is the rate in effect in the locality in which Petitioner's customer's
exchange is located. Those messages that are interstate or international are exempt from sales tax.

DATED: November 20, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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