An Internet service provider doesn't charge its own customers sales tax on Internet access (which is correct under Utah law) — but is it legal for the ISP's own upstream vendor to charge the ISP state tax, local tax, and federal tax on the telephone/connectivity service the ISP purchases to deliver that access?

Plain-English summary

The Vice President of a Salt Lake City Internet service provider wrote to the Tax Commission with a specific billing dispute. His company correctly did not collect sales tax from its own dial-up Internet access customers, consistent with guidance the company had received from the Commission (multiple times) since incorporating in January 1996 — a policy other similar ISPs were also following. But the ISP itself purchased its own upstream Internet connectivity from a Vancouver, WA-based vendor over a dedicated physical cable, paying a flat monthly fee — and that vendor was charging combined state tax (4.875%), local tax (7.250%, a mix of county sales tax and city franchise tax), and federal tax (3.000%), totaling 15.125%, the same taxes the vendor charged on telephone service it sold. The ISP argued this seemed inconsistent: if there's no Utah or Salt Lake City tax on Internet access, why was its own vendor charging these taxes on what the ISP viewed as Internet access, when Internet access and telephone service are "separate and distinct services"?

The Commission's answer drew a distinction the ISP had missed: the taxes in question were being charged for telephone service that the vendor was providing and selling TO the ISP — not for Internet access. As a telephone company/telephone service provider, the vendor was required to collect sales tax on its telephone service charges, so its billing to the ISP was appropriate. Separately, the Commission reconfirmed that the ISP's own resale of on-line access to its customers remained correctly untaxed, since the Commission had (at that time) declined to impose sales tax on on-line service charges pending the outcome of a legislative study — while cautioning the ISP to watch for future legislative action that could change that.

What this means for you

Internet service providers purchasing upstream connectivity or telephone-line services

Don't assume that because your OWN resale of Internet access to customers is untaxed, your PURCHASES of the underlying telephone/connectivity inputs you buy from an upstream vendor are automatically untaxed too — this ruling confirms a vendor properly charging tax on telephone service it sells to you is a separate transaction from your own (at the time, untaxed) resale of internet access downstream.

Businesses questioning a vendor's tax charges on a bundled or adjacent service

This ruling is a useful illustration of how to analyze a billing dispute: identify precisely what's being sold in the specific transaction you're questioning (here, telephone service sold BY the vendor TO the ISP) rather than assuming the tax treatment of a related but distinct downstream transaction (Internet access resold BY the ISP TO its own customers) carries over.

Anyone researching Utah's historical Internet-access sales tax policy

This is one of several mid-1990s rulings (alongside PLR 95-031 and PLR 95-065) confirming Utah did not tax Internet/on-line access charges during this period, pending a legislative study — but that untaxed treatment specifically covered the ACCESS service itself, not every service or input involved in delivering it.

Common questions

Q: If Internet access isn't taxable in Utah, why is my upstream telephone/connectivity vendor charging me tax?
A: Per this ruling, because your vendor may be selling you telephone service (a distinct, taxable service) rather than reselling internet access to you — the untaxed treatment applies to internet/on-line access specifically, not to every telecommunications input used to deliver it.

Q: Does this ruling suggest Utah's Internet-access tax exemption might change?
A: Yes — the Commission explicitly flagged that its non-taxation of on-line access charges was in place "pending the outcome of a study commissioned by the state legislature" and advised the taxpayer to watch for legislative action that could affect the policy going forward.

Citations and references

No specific Utah Code or Administrative Rule sections were cited in this ruling's text; the Commission's answer rested on then-current Utah sales tax treatment of telephone service versus internet/on-line access, with the latter's non-taxation described as provisional pending a legislative study.

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-141.htm

Original ruling text

96-141

Response September 30, 1996

Request

September 10, 1996

XXXXX

Utah State Tax Commission

210 North 1950 West

Salt Lake City, UT 84134

Dear XXXXX,

I am writing to you to request an advisory opinion regarding taxation of Internet access by XXXXX.

My name is XXXXX, and I am Vice President of XXXXX, an Internet service provider based in Salt Lake City. We sell dial-up Internet access to customers from Provo to Ogden. When we incorporated in January of 1996, we were informed by the Utah State Tax Commission that we were not to collect sales tax on Internet access purchased by our customers as there was no such tax at the time. Just to be sure, I have inquired two times since then and have been told the same thing. I have also checked with other Internet service providers similar to XXXXX and have found that they are also not charging sales tax in Utah.

XXXXX purchases its Internet access from a company called XXXXX, based in Vancouver, WA. Our connection is made via a physical cable originating at our location at XXXXX in Salt Lake and terminating at XXXXX location in Salt Lake City at the XXXXX. For this service we pay $$$$$ per month. However, XXXXX has collected taxes on this Internet access as follows:

State Tax: 4.875%

Local Tax: 7.250%

This is a combination of a county sales tax and city franchise tax

Federal Tax : 3.000%

Total: 15.125%

These are the same taxes that they collect on telephone service that they sell as well. It seems that if there is not a Utah State nor Salt Lake City local tax on Internet access, these taxes should not be collected from XXXXX. Internet access and telephone service are separate and distinct services. Is the collection of such taxes on Internet access legal and justified?

If you have questions regarding my request for an advisory opinion, please contact me at XXXXX. I have also enclosed a copy of a recent bill from XXXXX. Thank you for your assistance.

Sincerely yours,

XXXXX

Attachments are being stored in the hard file.

XXXXX

Advisory Opinion - Sales tax on purchases by an internet server.

Dear XXXXX

We have received your request concerning sales tax charged to your company

for telephone service provided by XXXXX. As a telephone company or telephone service provider, XXXXX is required to collect sales tax on charges for telephone service. Therefore, XXXXX's billings are appropriate.

You have correctly noted that your company's sales of on-line access, is not taxable. We want to alert you that the Tax Commission has declined to impose sales tax on charges for on- line services pending the outcome of a study commissioned by the state legislature. Please watch for legislative action that may impact your business in the future.

Please let us know if you have additional questions.

For the Commission,

Alice Shearer,

Commissioner