Is a digital-microwave-network company that leases dedicated data/voice circuits to businesses a taxable 'transmission corporation' under Article 9 sections 183 and 184, even though it isn't a licensed common carrier and can't connect directly to the public phone network?

Plain-English summary

Interactive Media Services, Inc., incorporated in New York in June 1988, operates a digital microwave network under FCC Part 94 licenses. Its core service is leasing dedicated circuits so business customers can connect their equipment between multiple facilities, and in some cases connect that equipment to the public switched telephone network -- but only through access the customer separately arranges with a telephone company, since Interactive Media has no FCC authorization (Part 21) to connect directly to the public network itself, and can't resell telephone company services or serve common carriers who resell to the public. The company elected S corporation status for both federal and New York purposes for its short 1988 tax year, in which it had zero gross receipts from leasing dedicated circuits, but expected circuit-leasing receipts to exceed 50% of total receipts by 1989.

The Department found Interactive Media is providing a telephone business, regardless of its FCC classification. Looking past the corporate purpose to the actual activity (citing Matter of McAllister Bros. v Bates), the Department held that operating dedicated voice/data circuits that connect to the public telephone network puts Interactive Media "in competition with a telephone company" and constitutes a telephone business -- even though it isn't itself a common carrier and isn't regulated by the Public Service Commission as a telephone company. Whether Interactive Media is actually subject to the Article 9 sections 183/184 transmission-corporation tax (instead of Article 9-A) turns on the standard "principally engaged" test: more than 50% of its receipts must come from that telephone service, a fact determined year by year and not resolvable in advance in an advisory opinion.

The S election is tied directly to that classification, and can flip on and off. Because Interactive Media had no circuit-leasing receipts in the 1988 short year, its shareholders were eligible to elect New York S status for that year. But the moment a later year's receipts show it's principally engaged in the telephone business (properly taxable under sections 183/184), the S election terminates automatically for that year -- and if a future year's activities shift back to qualifying as an Article 9-A taxpayer, the shareholders would have to make a fresh section 660 election, meeting all requirements again.

One tax applies no matter how the classification question comes out. Separately from the Article 9 vs. 9-A question, the Department noted that because Interactive Media is furnishing telephone service, it is also subject to the section 186-a tax -- 3% of gross operating income from furnishing telephone service (once over $500) -- regardless of whether it ends up classified as a transmission corporation, a general Article 9-A business corporation, or has an active S election.

What this means for you

Telecom and data-network companies operating outside traditional common-carrier regulation

Providing "telephone-like" services (dedicated voice/data circuits connecting to the public network) can make you a taxable telephone business under sections 183/184, even without an FCC common-carrier license or Public Service Commission regulation -- the Department looks at the substance of the service, not the regulatory label.

Businesses with an active or planned New York S election

If your revenue mix shifts so that telephone-type receipts exceed 50% of the total, your S election terminates automatically that year without any separate notice -- track your circuit-leasing (or equivalent telephone-service) receipts as a percentage of total receipts each year to know your S status going in.

Accountants and tax professionals

Note the layered structure here: the Article 9 vs. 9-A classification depends on the "principally engaged" 50%-of-receipts test, but the section 186-a telephone tax applies regardless of that classification, purely because the company furnishes telephone service at all.

Common questions

Q: Does not being an FCC-licensed common carrier exempt a data-network company from telephone-business taxation?
A: No. The Department looks at the actual service provided (dedicated circuits connecting to the public network), not the regulatory classification, when deciding if a company is providing a "telephone business."

Q: What happens to an S election if a company's business mix changes to become principally telephone-related?
A: The S election terminates automatically for the taxable year in which the company becomes principally engaged in the telephone business; a later return to non-telephone status requires a fresh section 660 election.

Q: Does classification as Article 9 vs. Article 9-A affect the section 186-a telephone tax?
A: No. Section 186-a's 3% tax on telephone-service gross operating income applies regardless of whether the company is taxed under sections 183/184, Article 9-A, or has an S election.

Citations and references

Statutes:

• Tax Law section 209.1, 209.4 (Article 9-A tax; exclusion for Article 9 taxpayers)
• Tax Law section 183, 184 (transmission-corporation franchise tax)
• Tax Law section 186-a (telephone-service furnishing tax)
• Tax Law section 660 (New York S corporation election)

Cases and prior opinions cited:

• Matter of McAllister Bros., Inc. v Bates, 272 App Div 511, 517 (3d Dept 1947)
• Joseph Bucciero Contracting Inc., Adv Op St Tax Comm, July 23, 1981, TSB-A-81(5)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_22c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(22)C
Corporation Tax
October 12, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C900419C

On April 19, 1990, a Petition for Advisory Opinion was received from Interactive Media
Services, Inc., 560 Broad Hollow Road, Suite 203, Melville, New York 11747.
The issue raised by Petitioner, Interactive Media Services, Inc., is whether it is a transmission
corporation under sections 183 and 184 of the Tax Law.
Petitioner was incorporated in New York State on June 7, 1988 under section 402 of the
Business Corporation Law. Petitioner operates a digital microwave network. The Petitioner's
primary service is to lease dedicated circuits to businesses to connect the customer's equipment
between multiple facilities and, in some instances, to connect their customers' equipment to the
public switched telephone network. Petitioner is not allowed to resell telephone company services
and only operates its dedicated circuits between the public switched telephone network and the
customer's equipment when the customer provides access to the public switched telephone network
via a circuit that the customer contracts with the telephone company to provide.
Petitioner holds Federal Communications Commission (hereinafter "FCC") licenses to
operate its service under Part 94 of the Code of Federal Regulations of the FCC (hereinafter "FCC
regulations" (47 CFR 94).
Pursuant to such Part 94, Petitioner provides dedicated circuits for voice and data
telecommunications to business customers. However, its services can only be sold to specific
businesses as allowed under such Part 94 and not to the general public. In addition, Petitioner is not
allowed to provide services to common carrier service providers who are able to resell services to
the general public.
Petitioner is unable due to lack of FCC authorization to connect directly to the public
switched telephone network. The FCC authorization for telephone companies to provide service
facilities through the use of microwave communications is under Part 21 of the FCC regulations, and
the Petitioner holds no licenses to provide this type of service.
Petitioner elected S corporation status for both Federal and New York State tax purposes
effective for the tax year beginning June 7, 1988 and ending December 31, 1988. Petitioner had no
gross receipts from leasing dedicated circuits in 1988. An S corporation return (Form CT-3S) was
filed for that year. Petitioner expects its gross receipts from the leasing of dedicated circuits to
exceed 50 percent of total receipts in 1989.
Section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax on domestic
or foreign corporations for the privilege of exercising a corporate franchise, doing business,
TP-9 (9/88)

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Corporation Tax
October 12, 1990

employing capital, owning or leasing property in a corporate or organized capacity, or maintaining
an office, in New York State. Section 209.4 of the Tax Law, provides that corporations liable to tax
under sections 183 and 184 of Article 9 of the Tax Law are not subject to tax under Article 9-A.
Sections 183 and 184 of Article 9 of the Tax Law impose franchise taxes, on a domestic or
foreign corporation formed for or principally engaged in the conduct of a telephone business, for the
privilege of exercising its corporate franchise, doing business, employing capital, owning or leasing
property in a corporate or organized capacity or maintaining an office, in New York State.
To determine the classification and proper taxability of a corporation under either Article 9
or Article 9-A, an examination of the nature of the corporation's activities is necessary, regardless
of the purposes for which the corporation was organized. See Matter of McAllister Bros., Inc. v
Bates, 272 App Div 511, 517 (3d Dept. 1947). Ordinarily, a corporation is deemed to be principally
engaged in the activity from which more than 50 percent of its receipts are derived. See, e.g. Joseph
Bucciero Contracting Inc., Adv Op St Tax Comm, July 23, 1981, TSB-A-81(5)C.
Herein, Petitioner operates a digital microwave network. It holds FCC licenses to operate
its services under Part 94 of the FCC regulations, which prescribes the manner in which operational
fixed radio facilities may be licensed and operated. Petitioner provides dedicated circuits for voice
and data telecommunications to business customers, and operates its dedicated circuits between a
public switched telephone network and the customer's equipment.
Through these activities, Petitioner is providing a telephone service and is in competition
with a telephone company even though Petitioner, itself, is not a common carrier of telephone
service. It is immaterial that Petitioner is not regulated by the New York State Public Service
Commission as a telephone company or that it is unable to connect directly to the public switched
telephone network. Petitioner's telephone service constitutes a telephone business and Petitioner is
subject to the franchise taxes imposed under section 183 and 184 of the Tax Law if Petitioner is
principally engaged in such telephone business, that is, if more than 50 percent of Petitioner's
receipts are derived from providing such telephone service.
The determination of whether Petitioner is principally engaged in a telephone business is a
question of fact not susceptible of determination in an Advisory Opinion. An Advisory Opinion sets
for the applicability of pertinent statutory and regulatory provisions to "a specified set of facts" Tax
Law, §171, subd twenty-fourth; 20 NYCRR 901.1(a).
Since Petitioner did not have any gross receipts from the leasing of dedicated circuits in 1988,
Petitioner's shareholders were eligible to make the election, pursuant to section 660 of the Tax Law,
to be treated as a New York S corporation for taxable year ended December 31, 1988. If in a
subsequent taxable year it is determined that Petitioner is principally engaged in a telephone business
that is properly taxable under section 183 and 184 of Article 9 of the Tax Law, Petitioner

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Corporation Tax
October 12, 1990

will cease to meet the requirements to be eligible to make such election pursuant to section 660 of
the Tax Law. In such event, the election is terminated for such taxable year. If Petitioner's
shareholders election is terminated, and in the future Petitioner's activities change so that Petitioner
is, again, properly classified as an Article 9-A taxpayer, Petitioner's shareholders must make another
election pursuant to such section 660 of the Tax Law in order to be treated as a New York S
corporation, if all of the other requirements of section 660 are met.
It should be noted, that since it is determined that Petitioner is providing a telephone service,
Petitioner may also be subject to the tax on the furnishing of utility services under section 186-a of
the Tax Law. Section 186-a of the Tax Law imposes a tax equal to three percent of a corporation's
gross operating income from the furnishing of telephone service for the year ending December thirty­
first if such gross operating income is in excess of five hundred dollars. This tax is imposed
regardless of whether a corporation is properly classified as a transmission corporation subject to tax
under sections 183 and 184 of the Tax Law or a general business corporation subject to tax under
Article 9-A of the Tax Law and regardless of whether Petitioner has made the election under section
660 of the Tax Law to be treated as a New York S corporation.

DATED: October 12, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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