Was a separately charged DSL service used only for Internet access taxable during the federal Internet-tax moratorium addressed in PLR 03-2?

Plain-English summary

The taxpayer sold a DSL-based service for a monthly fee. Customers received Internet access, web space, email, newsgroup access, and Internet tools. Although the same copper line could carry ordinary telephone signals, the DSL high-speed channel was separate, customers could use it only for Internet access, and its charges were separate from voice-service charges.

South Carolina generally taxed charges for ways or means of transmitting voice or messages under S.C. Code §§ 12-36-910(B)(3) and 12-36-1310(B)(3). But the federal Internet Tax Freedom Act moratorium barred certain taxes on Internet access, and its extension ran through November 1, 2003.

For October 1, 1998 through November 1, 2003, the Department concluded that the described DSL Internet-access charges were not subject to those South Carolina sales and use taxes.

What this means for you

Internet-service providers

The result depended on a service restricted to Internet access and billed separately from voice communications.

Customers and accountants

This is not current-rate guidance. It answers only the treatment during the stated 1998–2003 moratorium period.

Tax professionals

Separate the Internet-access component from other telecommunications services and apply the law for the transaction's actual period.

Common questions

Q: Was the DSL charge taxable in the ruling?
A: No, during October 1, 1998 through November 1, 2003.

Q: Did the customer also buy voice service through the DSL charge?
A: No. The ruling says the Internet-access charge was separate from voice communications.

Q: Why was the charge untaxed?
A: The Department applied the federal Internet-tax moratorium and its extension.

Q: Does this establish today's tax treatment?
A: No. The conclusion was expressly limited to a historical period.

Citations and references

• S.C. Code § 12-36-910(B)(3) — sales tax on charges for transmitting voice or messages
• S.C. Code § 12-36-1310(B)(3) — corresponding use tax
• Internet Tax Freedom Act and Internet Nondiscrimination Act — moratorium discussed in the ruling
• SC Revenue Informational Bulletin 02-3 and SC Information Letters 99-9 and 98-25 — Department guidance cited in the ruling

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: PLR03-2.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #03-2

SUBJECT:

DSL Internet Access
(Sales and Use Tax)

REFERENCES:

S. C. Code Ann. Section 12-36-910(B)(3) (Supp. 2001)
S. C. Code Ann. Section 12-36-1310(B)(3) (Supp. 2001)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2001)
SC Revenue Procedure #03-1

SCOPE:

A Private Letter Ruling is a written statement issued to a specific
taxpayer by the Department to apply principles of law to a specific set
of facts or a particular tax situation. A Private Letter Ruling is an
advisory opinion; it does not have the force and effect of law and is
not binding on the person who requested it or the public. It is,
however, the Department’s opinion limited to the specific facts set
forth, and is binding on agency personnel only with respect to the
person to whom it was issued and only until superseded or modified by
a change in statute, regulation, court decision, or advisory opinion,
providing the representations made in the request reflect an accurate
statement of the material facts and the transaction was carried out as
proposed.

Question:
Are charges by XYZ, Inc. to its customers for DSL Internet Access Service subject to the sales
and use tax imposed by Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3) during the period
covered by the Internet Tax Freedom Act?
Conclusion:
Charges by XYZ, Inc. to its customers for DSL Internet Access Service (as described in the
Facts) are not subject to the sales and use tax imposed by Code Sections 12-36-910(B)(3) and
12-36-1310(B)(3) during the period of October 1, 1998 through November 1, 2003.
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Facts:
XYZ, Inc. (“XYZ”) offers its customers a DSL-based high-speed Internet access service
(hereinafter referred to as “DSL Internet Access”). XYZ is currently selling DSL Internet Access
under the brand name “A.” By subscribing to this service and paying a monthly fee, customers
receive unlimited Internet access, personal webpage space, e-mail accounts, customized start
page, access to newsgroups and Internet tools. The DSL technology allows both normal
telephone signals (traditionally used for voice and data transmission) and high-speed signals
(used for Internet access and other high-speed applications) to be transmitted over existing
copper-wire telephone lines. The use of the same lines to transmit normal and high-speed signals
is accomplished by transmitting the normal signal at a lower frequency and transmitting the highspeed signals at a higher frequency. Using the frequency differential, the high-speed channel is
separate from the low-speed channel used for normal telephone service. Although the DSL highspeed channel is capable of a variety of uses, customers purchasing XYZ’s DSL Internet Access
are able to utilize the DSL channel only for Internet access.
In order to utilize the DSL technology, the signal from a customer’s home computer must be
converted to a higher frequency by a DSL modem located at the customer’s premises. This highspeed signal is then transmitted to the appropriate XYZ central office where a piece of
equipment called a “splitter” separates the normal and high-speed signals traveling over the line
from the customer’s premises. The low frequency signal is directed to the public switched
telephone network while the high frequency signal is directed to the packet switch and then to
XYZ’s Internet routers.
With DSL Internet Access, the customer is purchasing only Internet access and is not purchasing
voice communication services. Charges for DSL Internet Access are separate from those for
voice communication services.
Discussion:
Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3) impose the sales and use tax upon:
the gross proceeds accruing or proceeding from the charges for the ways or means
for the transmission of the voice or of messages, including the charges for use of
equipment furnished by the seller or supplier of the ways or means for the
transmission of the voice or of messages….
However, on October 21, 1998, Congress enacted the Internet Tax Freedom Act to provide that
no state or political subdivision shall impose from October 1, 1998 to October 21, 2001 any of
the following taxes: (1) taxes on Internet access, unless such tax was generally imposed and
actually enforced (i.e., collected) prior to October 1, 1998, and (2) multiple or discriminatory
taxes on electronic commerce. In November 2001, President Bush signed into law the Internet
Nondiscrimination Act to extend this tax moratorium until November 1, 2003.

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The term “Internet access” is defined in the Act to mean “a service that enables users to access
content, information, electronic mail, or other services offered over the Internet, and may also
include access to proprietary content, information, and other services as part of a package of
services offered to consumers. Such term does not include telecommunications services.”
As a result of this moratorium, the Department announced in SC Revenue Informational Bulletin

02-3 that it will not enforce collection of sales and use taxes during October 1, 1998 to

November 1, 2003, with respect to Internet access. (See also SC Information Letters #99-9 and

98-25.)

Based on the above, charges by XYZ Telecommunications, Inc. to its customers for DSL
Internet Access Service (as described in the Facts) are not subject to the sales and use tax
imposed by Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3) during the period of October
1, 1998, through November 1, 2003.
SOUTH CAROLINA DEPARTMENT OF REVENUE

S/Burnet R. Maybank III
Burnet R. Maybank III, Director

March 10
, 2003
Columbia, South Carolina

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