Are the flat monthly fees an internet service provider charges customers for internet access subject to New York state and local sales tax?

Plain-English summary

Hometown Online, Inc., an internet service provider affiliated with the Warwick Valley Telephone Company, serves customers across parts of New York, New Jersey and Pennsylvania, charging flat monthly fees (either unlimited service at $19.95/month or five hours at $8.95/month) that include internet access, connection/navigation software, e-mail, news headlines, and access to certain non-public home pages and banners. Customers pay no separate telecommunications transport charge. Hometown asked whether these flat monthly fees are subject to New York state and local sales tax.

The Department's answer depends on the date. Effective February 1, 1997, the Department adopted a new Internet policy (announced in TSB-M-97(1)S) treating internet access charges as an "unenumerated service" not subject to New York sales and use tax -- and items bundled into a flat internet access fee, like navigation software, e-mail, and news headlines, are treated as incidental to the access service and don't make the whole charge taxable. So beginning February 1, 1997, Hometown's flat monthly fees for internet access and the bundled amenities were not taxable. Before that date, however, the same fees charged to Hometown's New York customers WERE subject to sales tax, since the new policy hadn't taken effect yet.

What this means for you

Internet service providers

Flat monthly internet access fees are not New York sales-taxable, and you don't need to break out and separately tax bundled items like connection software, e-mail, or news feeds as long as they're part of a combined access charge rather than sold separately. This treatment applies from February 1, 1997 forward; charges before that date were taxable under the law then in effect.

ISPs bundling extra services (home pages, banner ads)

This opinion doesn't address separately charged services like the "home page and/or banner services" Hometown also sold to some business and government customers -- those weren't at issue here and may be analyzed differently depending on their own facts.

Accountants and tax professionals

The substantive rule comes from TSB-M-97(1)S (the Department's own January 1997 memorandum implementing the state's new Internet policy, following its 1997 report on Improving New York State's Telecommunications Taxes), not from this opinion itself -- this ruling simply confirms how that memo applies to Hometown's specific flat-fee, multi-state internet access service.

Common questions

Q: Does it matter that some of Hometown's customers are located outside New York State?
A: No -- the opinion states the new policy applies "whether the customers are located within or outside of this State."

Q: Are separately charged home page or banner services taxable?
A: Not addressed by this opinion -- Hometown's petition specifically excluded those services from the request.

Q: Were internet access fees taxable before February 1, 1997?
A: Yes, for New York customers, under the law and policy in effect before the new Internet policy took effect.

Q: Can another ISP with a different fee structure rely on this ruling?
A: No. It binds the Department only for Hometown's own facts; the general treatment of internet access itself comes from TSB-M-97(1)S, but ISPs with different bundled charges should confirm their own tax treatment.

Citations and references

Statutes and Department guidance:

• Tax Law § 1105(b) (tax on telephony, telegraphy and telephone/telegraph services)
• TSB-M-97(1)S, Internet Access Charges Not Subject to Sales Tax and Telecommunications Excise Tax, January 24, 1997 (new Internet policy effective February 1, 1997)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_30s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(30)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S960826C

On August 26, 1996, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Hometown Online, Inc., P.O. Box 592, Warwick,
New York 10990.
Petitioner, Hometown Online, Inc., provided additional
information pertaining to the Petition on October 29, 1996.
The issue raised by Petitioner is whether the flat monthly fees that
Petitioner charges its customers for access to the Internet are subject to New
York State and local sales taxes.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner provides access to the Internet for customers who are located
in and outside of the service area of its parent company, the Warwick Valley
Telephone Company. Petitioner’s parent company services Southeastern New York
(Orange County) and adjacent areas in New Jersey. Petitioner has expanded its
service beyond these boundaries into neighboring areas in both states and also
into nearby areas in Eastern Pennsylvania. Telephone facilities are leased in
these neighboring areas, allowing Petitioner to establish local telephone numbers
that customers may reach free of toll charges. All of Petitioner’s customers,
including customers in Pennsylvania, are served by Internet hub equipment located
in appropriate locations in New York and New Jersey.
Petitioner charges its customers flat fees on a monthly basis for providing
the recurring service of Internet access. Most customers subscribe to either
unlimited service at $19.95 per month or five hours of service per month at
$8.95. Customers pay no telecommunication transport charges on their Internet
access.
(Some of Petitioner’s customers, primarily business and government
entities, also purchase Petitioner’s home page and/or banner services at
additional charges; however, these services are not at issue in this Opinion.)
When customers subscribe to Petitioner’s Internet access service, they must
have software that will allow their equipment (e.g., personal computers) to
communicate with Petitioner’s equipment and that will also allow the customers
to navigate throughout the Internet.
This software may be obtained from
Petitioner or from others. If obtained from Petitioner, the customers receive
the software on diskettes and may receive support from Petitioner if needed.
Petitioner does not charge its customers a separate fee for this software or
assistance. It is considered part of the initial monthly charges. Petitioner
is under a licensing agreement with a third party to pay a one-time charge for
each customer who receives a diskette from Petitioner.
(It is noted that
Petitioner has not inquired regarding the taxability of these or any other
purchases and the taxability of Petitioner’s purchases is not addressed in this
Opinion.)

-2­
TSB-A-97(30)S
Sales Tax

As part of the flat fees for Internet access, Petitioner’s customers’ also
receive E-mail privileges (both Internet and non-Internet communications), news
headlines and access to home pages and banners created by Petitioner that are not
published on the Internet. No other services are offered as part of the flat
monthly fees.
Opinion
With certain exceptions, Section 1105(b) of the Tax Law imposes sales tax
upon receipts from the sales of telephony and telegraphy and telephone and
telegraph services.
A recent Technical Services Bureau Memorandum, Internet
Access Charges Not Subject to Sales Tax and Telecommunications Excise Tax,
January 24, 1997, TSB-M-97(1)S provides in part:
Effective on or after February 1, 1997 the Department is
implementing the new Internet policy recommended in its January 1997
report on Improving New York State’s Telecommunications Taxes.
Internet access charges are considered an unenumerated service not
subject to the New York state and local sales tax....
Internet
access
charges
may
also
include
items
such
as
communications/navigation
software,
E-mail
privileges,
news
headlines, and certain website services. When these services are
furnished as part of a combined Internet access charge, they are
deemed incidental to the provision of Internet access and the charge
is not subject to sales tax....
Under the new Internet policy implemented February 1, 1997, the Internet
access service that is provided by Petitioner to its customers (whether the
customers are located within or outside of this State) is not included among the
enumerated services that are subject to New York State and local sales and
compensating use taxes.
Furthermore, the communication/navigation software,
E-mail privileges, news headlines and access to certain home pages and banners
that are included as part of Petitioner’s flat monthly fees are incident to the
Internet access service and do not make the service taxable.
Accordingly,
beginning February 1, 1997, the flat monthly fees that Petitioner charges its
customers for access to the Internet and related amenities are not subject to
tax.
Prior to February 1, 1997, the fees charged to Petitioner’s New York
customers for Internet access service and related amenities were subject to sales
tax.

DATED:

May 28, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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