Does federal law bar Utah from taxing telecommunications services that a company sells to Internet Service Providers?

Plain-English summary

A company sells telecommunications services to Internet Service Providers (ISPs) — not directly to end-user internet customers. The ISPs then either bundle those services into an internet-access "package" sold to their own customers, or use them to help deliver products or services to customers. The company asked the Utah Tax Commission whether a recent federal law, the Internet Tax Freedom Act Amendments Act (Public Law 110-108, enacted in 2007), meant Utah could no longer impose sales tax or telecommunications gross receipts tax on its sales to ISPs.

The Commission walked through three decades — well, three statutes — of federal internet tax law. The original 1998 Internet Tax Freedom Act placed a moratorium on state/local taxes on "Internet access," but specifically excluded "telecommunications services" from that protected definition. The 2004 Internet Tax Nondiscrimination Act extended the moratorium and broadened "Internet access" to include telecommunications services "to the extent" they're purchased, used, or sold by an internet access provider to provide internet access. The 2007 amendments (Public Law 110-108) refined this further, covering telecommunications purchased/used/sold by an internet access provider either to provide internet access itself, or to otherwise let users reach content and services online — plus certain "incidental" services like a homepage, email, and instant messaging. Notably, none of these federal laws touch E-911 emergency service fees or VoIP taxation, which stay taxable regardless.

Because Utah's own statutes tie sales/use tax and municipal telecommunications tax to what's "not prohibited by federal law," and because these federal acts operate as constitutional preemption under the Supremacy Clause (backed by Congress's Commerce Clause power), the Commission found Utah simply cannot tax whatever the federal moratorium covers, regardless of specific Utah statutory wording. Applying that to the facts: telecommunications services the company sells to an ISP, which the ISP then uses to provide internet access to its own customers, are exempt from state and local sales, gross receipts, and municipal taxes under the federal law. On top of that, the Commission noted a completely separate, Utah-specific exemption — § 59-12-104(32) — exempts telecommunications service purchased "for purposes of providing telecommunications service," which can apply even to services unrelated to internet access, and which independently covers any onward sales the ISPs make of telephone/telecom services to their own customers.

The ruling came with real limits, though. The Commission emphasized it was not ruling that everything the company sells to ISPs is automatically exempt — only the portion that actually meets the federal "used to provide internet access" test. If a service is sold for more than one purpose (partly for internet access, partly for something else), only a partial exemption applies, and it's the seller's burden to prove which portion qualifies. Services sold to an ISP that have nothing to do with internet access fall outside the federal moratorium entirely (though § 59-12-104(32) might still separately exempt them). The Commission also flagged that Utah's 2008 legislative session (H.B. 206) renamed "telephone service" to "telecommunications service" and broadened the definition, effective January 1, 2009 — relevant background, but not the basis for this particular ruling's outcome.

What this means for you

Telecommunications companies selling to ISPs

Track exactly how your ISP customers use what you sell them. Services genuinely used to provide internet access ride the federal exemption; services used for something else don't, even if sold to the same ISP customer. If you can't document the split, expect the Commission to treat the ambiguous portion as taxable — the burden of proof is on you as the seller.

Internet Service Providers

Telecommunications services you buy specifically to deliver internet access to your customers should come to you tax-exempt under federal law. But if your onward sales to your own customers are of telephone/telecom services (not just plain internet access), Utah's own § 59-12-104(32) exemption may cover those regardless of the federal internet-access analysis — worth checking both angles.

Businesses relying on federal preemption arguments generally

This ruling is a useful template for how the Commission analyzes federal preemption: it looks at whether the state statute's own text defers to federal law (as Utah's municipal tax statute explicitly does), and separately recognizes that constitutional preemption applies regardless of specific statutory wording when Congress validly exercises its Commerce Clause power. Both paths can support the same exemption.

Common questions

Q: Does this exemption cover all telecommunications services purchased by an ISP?
A: No — only those used to provide internet access (or certain incidental services like email/messaging bundled with it). Services purchased for unrelated purposes aren't covered by the federal moratorium, though a separate Utah exemption might still apply.

Q: Does this affect E-911 fees or VoIP taxation?
A: No. The ruling specifically notes that neither the E-911 emergency service exclusion nor the taxation of VoIP and similar Internet Protocol voice services is altered by these federal acts.

Q: If services are sold for multiple purposes, how is the exemption applied?
A: Only the portion actually used to provide internet access is exempt; the rest remains taxable. The taxpayer must establish which part of the charge qualifies for the exemption.

Q: Can this ruling be relied on by other telecommunications sellers?
A: No. It's specific to this taxpayer's described sales relationship with ISPs and is explicitly limited to those facts — a different sales or usage pattern could produce a different result.

Citations and references

Utah statutes:

• Utah Code Ann. § 59-12-103(1)(b) (sales/use tax on telecommunications service)
• Utah Code Ann. § 59-12-104(32) (independent Utah exemption for telecom service purchased to provide telecom service)
• Utah Code Ann. § 10-1-403, § 10-1-405(1), § 10-1-410(2) (municipal telecommunications tax, taxable only to the extent not federally prohibited)
• Utah Code Ann. § 69-2-5, § 69-2-5.5, § 69-2-5.6 (E-911, poison control, and statewide 911 fees — unaffected by these federal acts)

Federal law:

• Internet Tax Freedom Act, Pub. L. 105-277, 47 U.S.C. § 151 note (1998 moratorium on Internet access taxation)
• Internet Tax Nondiscrimination Act, Pub. L. 108-435 (2004 extension and expanded "Internet access" definition)
• Internet Tax Freedom Act Amendments Act, Pub. L. 110-108 (2007 further expansion; extended moratorium to November 1, 2014)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/08-005.pdf

Original ruling text

Amended PLR 08-005

      As of June 10, 2009 this Private Letter Ruling supersedes the
                   prior ruling issued for this number.

                        FINAL PRIVATE LETTER RULING

08-005

                                 REQUEST LETTER

June 3, 2008

VIA Facsimile – Response Needed by June 15, 2008

Pam Hendrickson
Chair of State Tax Commission
State Tax Commission
210 North 1950 West
Salt Lake City UT 84134

Re: Sales Tax/Telecommunications Gross Receipts Tax

Dear Ms Hendrickson:

This letter concerns Utah’s sales tax and telecommunications license tax on telecommunications
services purchased by Internet Service Providers (“ISPs”).

Recently, in passing the Internet Tax Freedom Act Amendments Act, Public Law 110-108 (‘the
Act’), the federal government extended its moratorium on the imposition of any sales or use tax
on Internet service through the year 2014. Additionally, effective July 1, 2008, the Act also
expands the definition of “Internet access” to include telecommunications services “to the extent
such services are purchased, used or sold by a provider of Internet access to provide Internet
access.” Therefore, sales and gross receipts taxes of any kind cannot be imposed on
telecommunications services purchased by ISPs for purposes of providing Internet service to
their customers.

New York State, has issued guidance in a formal Department Memorandum on this issue. TSB-
M-08(4)C,(2)S. The memorandum states that telecommunications sales and excise taxes, which
are imposed on ISPs on their purchase of telecommunications service for purposes of providing
Internet Service, will no longer be imposed on such purchases or sales after June 30, 2008, in
accordance with federal law. A copy of this Memorandum is attached for your reference.

We request the State Tax Commission acknowledge this impending change in federal policy and
issue guidance on whether the Department agrees to the provisions outlined in the Act. If no

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formal pronouncement is planned, we are seeking written guidance from the Department
regarding Public law 110-108 and how it will affect the taxation of telecommunications services
purchased by ISPs in Utah from both a sales and telecommunications gross receipts tax
standpoint. Please note that time is of essence, as the federal law takes effect on July 1, 2008.
Thank you for your assistance in this matter.

If you have any questions, please call me at ###.###.####.

Respectfully Submitted,

NAME
Principal

Attachment

                                  RESPONSE LETTER

NAME
ADDRESS

Re: Private Letter Ruling 08-005 Amended
Sales Tax/Telecommunications Gross Receipts Tax on Internet Service Providers

Dear NAME,

This letter is in response to your request for tax guidance. You have asked the Tax Commission
to issue a formal opinion on the applicability of recent changes to the Internet Tax Freedom Act
resulting from Public Law 110-108.

This letter ruling is not intended as a statement of broad Commission policy. It is an
interpretation and application of the tax law as it relates to the facts presented in your request
letter and the assumptions stated in this ruling.

                                  Facts and Assumptions

In your request you specify the application of Public Law 110-108 to Internet Service Providers
(“ISP’s”). More particularly, you reference “the taxation of telecommunications services
purchased by ISPs” (emphasis added). In a subsequent phone conversation you clarified that
your client sells telecommunications services related to Internet access, to ISP’s. To that end, we
will not address the application of the federal law to services or goods provided by ISP’s to its
customers, but rather, only the purchase of telecommunications services by ISP’s from your
client. You have not specifically stated that those services will be resold or that they will be used

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by an ISP to provide Internet access. However, we will make this assumption. It appears, then,
based on that assumption, that these services may be used in one of two ways. First, they may be
incorporated as an enhancement along with basic Internet access to the ISP’s customers, and that
the ISP will sell a “package” to its customers. Second, they may be purchased by the ISP to
assist in delivering products or services directly to its customers.

Before making our ruling, we note that you provided a copy of a Department Memorandum
issued by the State of New York. It appears that this ruling addresses only sales of
telecommunications services by ISP’s to their customers. This appears to be a different fact
situation from your request. Therefore, we do not consider that ruling to be relevant to your
specific request.

                                   Relevant Authority

Internet Tax Freedom Act and Amendments

Internet Tax Freedom Act

Effective October 1, 1998, the Internet Tax Freedom Act (“ITFA” or “Act”), Public Law 105-277
(47 U.S.C. § 151 note) placed a moratorium on any state or local tax on Internet access, defined
under Section 1101(e)(3)(D) (current version at § 1101(d)(3)(D)) of the Act as:

   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.

Internet Nondiscrimination Act

Effective December 3, 2004, the Internet Tax Nondiscrimination Act (“ITNA”), Public Law 108-
435, amended 47 U.S.C. § 151 note to extend the moratorium on tax on Internet access as
provided in the Act and previous amendments. The 2004 legislation also extended the protection
of the Act to include certain telecommunications services. Sec. 1104(5) (current version at §
1105(5)) provides that

   ‘Internet access’ does not include telecommunications services, except to the
   extent such services are purchased, used, or sold by a provider of Internet access
   to provide Internet access. (Emphasis added.)

This act also included a specific exclusion for E-911 services, added to the Act under Sec.
1107(b):

   Nothing in this Act shall prevent the imposition or collection, on a service used
   for access to 911 or E-911 services, of any fee or charge specifically designated or
   presented as dedicated by a State or political subdivision thereof for the support of
   911 or E-911 services if no portion of the revenue derived from such fee or charge


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   is obligated or expended for any purpose other than support of 911 or E-911
   services.

Sec. 1108, added to the Act under ITNA, also clarified taxation of other telecommunication
services, specifically,

   Nothing in this Act shall be construed to affect the imposition of tax on a charge
   for voice or similar service utilizing Internet Protocol or any successor protocol.
   This section shall not apply to any services that are incidental to Internet access,
   such as voice-capable e-mail or instant messaging.

Internet Tax Freedom Act Amendments Act

Subsequently, on October 31, 2007, Public Law 110-108, The Internet Tax Freedom Act
Amendments Act (“ITFAAA”) was enacted, amending 47 U.S.C. § 151 note to further extend
the moratorium to November 1, 2014. The relevant portion of this act amended Section 1105,
which had been redesignated from Section 1104 under ITNA, to provide that:

   `(5) INTERNET ACCESS- The term “Internet access”--

   `(A) means a service that enables users to connect to the Internet to access
   content, information, or other services offered over the Internet;

   `(B) includes the purchase, use or sale of telecommunications by a provider of a
   service described in subparagraph (A) to the extent such telecommunications are
   purchased, used or sold--

   `(i) to provide such service; or

   `(ii) to otherwise enable users to access content, information or other services
   offered over the Internet;

   `(C) includes services that are incidental to the provision of the service described
   in subparagraph (A) when furnished to users as part of such service, such as a
   home page, electronic mail and instant messaging (including voice- and video-
   capable electronic mail and instant messaging), video clips, and personal
   electronic storage capacity;

   `(D) does not include voice, audio or video programming, or other products and
   services (except services described in subparagraph (A), (B), (C), or (E)) that
   utilize Internet protocol or any successor protocol and for which there is a charge,
   regardless of whether such charge is separately stated or aggregated with the
   charge for services described in subparagraph (A), (B), (C), or (E); and

   `(E) includes a homepage, electronic mail and instant messaging (including voice-
   and video-capable electronic mail and instant messaging), video clips, and



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   personal electronic storage capacity, that are provided independently or not
   packaged with Internet access.'

Federal Preemption

The doctrine of preemption arises from the Supremacy Clause under the U.S. Constitution which
gives federal law precedence over a conflicting state law. In addition, the Commerce Clause
gives Congress the right to regulate interstate commerce.

State Sales and Use Tax

Utah Code Ann. §59-12-103(1)(b) provides for sales or use tax on “amounts paid” to a
“telephone service provider” for “telecommunications service . . . that originates and terminates
within the boundaries of this state.”

Municipal Taxes

In addition to state sales and use tax, municipalities have the authority to levy taxes on
telecommunications under Utah Code Ann. §10-1-403.

Utah Code Ann. §10-1-405(1) provides for the Tax Commission to “enforce, and administer any
municipal telecommunications license tax imposed under this part.”

Emergency Telephone Services

Utah Code Ann. §69-2-5 provides for a charge to pay for local 911 emergency telephone
services. Sub-section (3)(d)(i)(D) adopts the definition of “telecommunications service” from
Utah Code Ann. §§ 59-12-102 and 59-12-215, and subsection (3)(i)(i) provides for the Tax
Commission to “enforce, and administer the charge imposed under this Subsection (3).” Utah
Code Ann. §69-2-5.5 provides for a surcharge on each line of service to pay for poison control
services. Utah Code Ann. §69-2-5.6 provides for an additional fee for statewide unified 911
emergency services.

H.B. 206

In the 2008 General Session, the Utah State Legislature passed a comprehensive sales tax bill.
The major impact relevant to telecommunications was 1) change the term “telephone service” to
“telecommunications service,” and 2) to expand the definition of telecommunications service.
These changes will be effective beginning January 1, 2009.

Exemptions from Sales Tax

Utah Code Ann. §59-12-104(32) provides an exemption for “amounts paid for the purchase of
telecommunications service for purposes of providing telecommunications service.”

                                          Analysis



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For each of the taxes at issue, Utah law provides for taxation to the extent not prohibited under
ITFA, ITNA, and now ITFAAA (collectively, the “Acts”). For sales and use tax, the applicable
Utah statutes specifically mention the Internet Tax Freedom Act. The Utah statutes governing
municipal taxes provide for taxation only “to the extent [not] prohibited by federal law.” Utah
Code Ann. § 10-1-410(2). Because all three of these Acts are federal law, Utah will not impose
tax to the extent prohibited by these Acts. We observe that ITFAAA has no effect on the
exclusion of E-911 services or Voice Over Internet Protocol (“VoIP”) provided in the previous
amendment. With regard to the fees for emergency telephone service, for which the statutes at
issue do not specifically look to federal law, the Tax Commission finds that the federal
preemption that prevents taxation of services covered by ITFA as amended are specifically
excluded from the moratorium.

Having concluded that Utah law allows taxation only to the extent allowed by the Acts, the
Commission considers your questions in light of the Act and its amendments. Originally, the Act
generally provided for a moratorium on taxes on Internet access. Although the Act did not allow
taxes on Internet access, it made an exception for “telecommunication services,” which was
excluded from the definition of “Internet access service.” § 1101(d)(3)(D).

The most recent amendment, in 2007 under ITFAAA, further defines Internet access to include
“the purchase, use or sale of telecommunications by a provider of a service . . . to the extent such
telecommunications are purchased, used or sold . . . to provide such service; or . . . to otherwise
enable users to access content, information or other services offered over the Internet.”
§ 1105(5)(B) (emphasis added).

Furthermore Internet access includes telecommunications “services that are incidental to the
provision of the service . . . when furnished to users as part of such service, such as a home page,
electronic mail and instant messaging (including voice- and video-capable electronic mail and
instant messaging), video clips, and personal electronic storage capacity.” § 1105(5)(C).
Additional, similar or identical services include “a homepage, electronic mail and instant
messaging (including voice- and video-capable electronic mail and instant messaging), video
clips, and personal electronic storage capacity, that are provided independently or not packaged
with Internet access.” § 1105(5)(E).

The new provisions allow telecommunications services to be included under Internet access only
“to the extent” they enable “users to connect to the Internet to access content, information, or
other services offered over the Internet . . .” § 1105(5)(A). We do not believe this to be a
significant expansion of the earlier provision which excluded telecommunications from the
definition of Internet access “except to the extent such services are purchased, used, or sold by a
provider of Internet access to provide Internet access.” § 1105(5) (as provided under ITNA).

                                          Ruling

Before ruling, we will clarify a critical point. While we intend, for reasons explained below, to
comply with the provisions of PL 110-108, we note that they may not be entirely relevant to your
fact situation. As we understand, and so stated, your client sells telecommunications to ISP’s.
To the extent those ISP’s are themselves selling telephone or telecommunications services to

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their customers, such sales are already exempt under §59-12-104(32). Therefore, regardless of
whether such sales constitute Internet access or not, they would already be exempt.

The Commission finds that the specific items relating to Internet access, as identified in the
previous paragraphs, are not subject to state or local sales, gross receipts, or municipal fees under
ITFAAA. An ISP that purchases such services, and then uses them to provide Internet access to
its customers, is exempt. We find that the Acts, including PL 110-108 are applicable to your fact
situation. Such services may also be exempt under §59-12-104(32), if they are purchased by the
ISP’s for the purpose of providing telecommunications service, even if that service is unrelated
to Internet access.

The Acts appear to be a valid exercise of Congress’ constitutional power to regulate interstate
commerce. Accordingly, regardless of any specific statutory wording in the Utah statutes, the
State’s taxing power is preempted in the specific areas defined by the Acts under the Supremacy
Clause of the U.S. Constitution.

We note that, the current act does nothing to alter the provision enacted under ITNA regarding
the taxation of voice or similar service utilizing Internet Protocol, such as VoIP, nor does it alter
the exclusion of E-911 services.

We must emphasize that we are only indicating our intent to comply with the provisions of
ITFAAA, PL 110-108. We are not ruling that any of the specific services your client sells to
ISP’s will be exempt, other than to the extent such services meet the criteria set forth in ITFAAA.
That is, should your client sell services to an ISP that are not used in conjunction with the
provision of Internet access, they would not be covered under PL 110-108, and accordingly
would not be exempt unless otherwise provided.

In addition, while PL 110-108 protects certain services that are packaged with Internet access,
those same services may be subject to tax if they are de minimis or incidental to the primary
transaction of providing Internet access. Accordingly, we read both amendments to the original
Act to provide a condition that the federal preemption only applies “to the extent such
telecommunications are purchased, used or sold . . . to provide such service; or . . . to otherwise
enable users to access . . . the Internet.” § 1105(5)(B). We believe that this condition may result
in a partial exemption for telecommunications services if they are sold for more than one
purpose. In such circumstances, we believe the burden would be on the provider to establish
what part of the service was exempt under federal law. We reiterate that such a condition does
not appear to be present under the conditions you have described.

In conclusion, the Tax Commission provides this opinion on the basis of the information you
provided as well as any assumptions we have made. Our ruling is applicable only to the fact
situation described in this letter, and should not be relied upon for other purposes.

For the Commission,

Marc B. Johnson

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Commissioner

08-005

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