Is a wireless broadband data connectivity service taxed as telephone service in Utah, and if so, how are its subscriber fees, connection fees, and per-megabyte charges sourced?

Plain-English summary

A Texas-based startup ("Company X") planned to sell wireless, high-speed data connectivity to business travelers -- letting laptop and palmtop users at hotels, convention centers, and office complexes connect back to their own company LAN and Internet provider at speeds resembling a desktop connection. Customers would pay for (1) a physical transmitter card, (2) a monthly subscriber fee, (3) a per-connection access fee, and (4) a per-megabyte usage charge above a set monthly threshold. Before launching in Utah, the company's tax consultant asked the Commission six detailed questions, since the service didn't fit neatly into existing telecom, internet, or other service categories.

Question 1 -- Is this a taxable telephone service? Yes. The Commission characterized Company X not as a LAN or Internet provider, but as a telephone corporation: it doesn't give clients a LAN or internet server directly, it gives them the equipment, radio frequencies, and phone lines to connect back to their own office network. That fits Utah Admin. Code R865-19S-90 § 5's broad definition of "telephone service" -- transmission for hire of data by wire, cable, radio waves, fiber optics, or any other method -- so charges for it are taxable telephone service under Utah Code Ann. § 59-12-103, except for interstate long-distance-style transmissions, which aren't taxed. Breaking down the three fee types:

• Monthly subscriber fees -- always taxable if billed to access an entity located in Utah, regardless of the entity's billing address (not tied to a specific transmission, so no intrastate/interstate distinction applies).
• Per-connection access fees -- taxable only if the transmission is intrastate (originates and terminates in Utah); not taxable if interstate.
• Per-megabyte usage charges -- same rule as access fees: taxable only for intrastate transmissions.

Question 2 -- Does the federal Goldberg v. Sweet sourcing standard apply? No. That U.S. Supreme Court case sources long-distance telephone charges by looking at origination, termination, and billing address, taxing when two of the three line up in a state. The Commission held Utah's rule is narrower: billing address is never a factor in whether a transmission is taxable -- only whether the call is intrastate (both ends in Utah) matters.

Question 3 -- What about a three-state transaction (service originates in one state, terminates in another, billed from a third)? Same answer: billing address stays irrelevant to the interstate/intrastate distinction, no matter how many states are involved.

Question 4 -- Do 911 and other telecom excise fees apply, and can Company X avoid them? The Tax Commission doesn't have jurisdiction over those fees -- they're administered separately by the Utah Public Service Commission, which the taxpayer was directed to contact.

Question 5 -- Should everything be sourced to the billing address for administrative ease? No. Sourcing instead follows the client's office (where the client's own LAN/Internet provider sits), with the billing address used only as a fallback if it "fairly represents" that office location:

• Subscriber fees: sourced to the client's office if both office and billing address are in Utah (billing address usable only if it fairly represents the office); if only one of the two is in Utah, sourced to whichever one is.
• Transmission fees: taxable only if intrastate (the transmission must originate or terminate at the client's office); sourced to the client's office unless the billing address fairly represents it.

Question 6 -- Do rates vary by location? Yes -- Utah's sales tax rate varies depending on the tax situs determined under the Question 5 sourcing rules.

What this means for you

Wireless data, broadband, and emerging telecom service providers

A new or unconventional data service can still land inside Utah's existing "telephone service" definition if you're effectively providing the transmission medium (equipment, radio frequencies, phone lines) rather than the content/network destination itself. Don't assume a novel technology automatically escapes telecom sales tax classification.

Multistate telecom and connectivity businesses

Utah's sourcing rule is narrower than the federal Goldberg v. Sweet standard -- billing address never determines taxability here, only whether both ends of a transmission are in Utah. If you're used to applying a two-of-three-factor test from other states, don't assume it transfers to Utah.

Businesses concerned about 911 fees and telecom surcharges

The Utah Tax Commission doesn't administer 911 and similar telecom excise charges -- that's the Public Service Commission's jurisdiction. Direct those specific questions there rather than to the Tax Commission.

Common questions

Q: Is a wireless data connectivity service taxed the same as internet access in Utah?
A: Not necessarily. If the company is really providing the connection medium (equipment/radio/phone lines) rather than direct internet/LAN access itself, the Commission may classify it as taxable telephone service instead.

Q: Does the customer's billing address determine whether a transmission is taxed in Utah?
A: No. Only whether the transmission is intrastate (originates and terminates in Utah) matters -- billing address is never the deciding factor, unlike the federal Goldberg v. Sweet standard.

Q: Who regulates 911 fees and other telecom surcharges in Utah?
A: The Public Service Commission, not the Tax Commission.

Q: Does this ruling apply to my telecom or data service business?
A: No. It binds the Commission only for the requesting company and the facts described. Another taxpayer can't rely on it as binding, though it may carry some persuasive weight in a dispute with closely similar facts.

Citations and references

Statutes and rules:

• § 59-12-103 (sales tax on intrastate telephone service)
• Utah Admin. Code R865-19S-90 (definition of "telephone service" and "intrastate")

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/98-059.htm

Original ruling text

98-059

Response
February 9, 1999

REQUEST
LETTER

July 29, 1998

Re: Company
X

Dear Mr. Jones:

Below COMPANY
has been retained by Company X to determine the tax consequences of the
following fact pattern. Company X will
provide a unique service that may be considered a telecommunication service, an
Internet service or some other taxable service in your state. Because of the unique nature of the services
Company X will provide, the statues, regulations and case law do not adequately
address the tax consequences of these services. Therefore, we respectfully request you review the following fact
pattern and notify us in writing your opinion as to the tax obligations of
Company X in your state. It is Company X's
intent to fully comply with your opinion prior to initiating operations in your
state.

Facts

Company X is in the process of beginning operations
in the next few months. Company X will

be based in Texas.
The majority of the services will be
provided using resources located
in

Texas.
Company X's principal business will be to provide low-cost, high-speed
wireless broadband date communications to business travelers. Specifically, Company X will provide
local-are network (LAN) and Internet connectivity to laptop and palmtop
computer users from remote locations at speeds approximating a desktop LAN
connection. In essence, Company X will
allow customers remote user access to exactly the same date, programs and other
network services, at similar speeds provided by a local terminal in the
customer's office.

Company X will market its services to its clients in
a manner similar to cellular phone services.
Most customers will purchase bundled services. Company X will initially market its services to hotels,
convention centers, conference facilities and office complexes (public access
sites). These service are described in
more detail below. However, Company X
will only provide access to transmit and receive data. Company X does not anticipate providing voice
communications at this time. All date
transmission will occur using radio frequencies and high-speed telephones lines
that coverage to the customer's LANs or other destinations selected by the
user.

There are four separate charges that will be
invoices to Company's customers. These
include:

1) Company X's customers will purchase a transmitter
card and insert it into a laptop computer's PCMICIA slot;

2) A monthly subscriber fee;

3) An access fee for every time a connection is
made; and

4) A charge for every megabyte above a predetermined
monthly level.

It is assumed that Company X will have sufficient
physical presence for sales/use and income/franchise tax nexus. Company X anticipates that it will provide
information of some of the systems at various customer locations. In addition, Company X may own a small
amount of physical property in your state via radio transmitters. Company X intends to charge sales tax on
sales of item 1 above and use tax for transmitter given for free as part of a
bundled service agreement incorporating items 2-4.

ISSUES

Company X specifically request guidance on items 204
above. Issues that concern Company X
are the following:

1) IN general, how should items 204 be taxed? Are these items considered a
telecommunications service, an Internet service or some other taxable service?

2) Company X anticipates that most bills will be
sent to a customer's headquarters.
However, by definition, the customer will have employees use Company X's
service when they are away form the corporate office. How should these services be sourced? In Goldberg v. Sweet, the U.S. Supreme Court outlined how long
distance telephone service should be sourced, In essence, the Court stated that
long distance charges are sourced by looking at where the call originated,
where the call originated, where the call terminated and where the billing
address is located. The long distance
service is then sourced to the location where two of the three activities
occurred. Should the principals
discussed in that case be applicable here?

3) What if three different states are involved in a
transaction in item 2 above? (Service
originates in one state, terminates in another state and is billed in a third
state.)

4) Company X is providing only data services. Therefore, even if the state holds that
Company X should be taxed as a telecommunication service, Company X believes
that only the standard rate of telecommunication tax should apply. Company X should not be obligated to collect
911 and other miscellaneous telecommunications excise taxes and charges since
Company X nor its customers would be included in the class intended by the legislature
to collect and remit such taxes. In
addition, Company X and its customers do not stand to benefit from these
services and ti impose such fees would violated Due Process.

5. Due to
   the mobility of the origination and termination of service, should all services
   be sourced to the billing address for administrative ease to both the State and
   Company X?

6. Would
   your state impose different tax rates for the various services offered above?

I appreciate your attention to this matter. As you can see, Company X will provide a
unique service that does not clearly fit the current state statutes,
regulations and case law. I look
forward to your response. If you have
any questions, please contact me at (214) 969-7007.

Yours very truly,

NAME

COMPANY

February
9, 1999

NAME

COMPANY

RE: Advisory
Opinion - Sales Tax on Communication Services

Dear NAME,

We
have received your request for an advisory opinion concerning the services
provided by your client, Company X. As
indicated in your letter, Company X will install equipment at various sites in Utah. Company X�s subscriber clients will connect laptop and palmtop
computers to Company X�s equipment at these sites and, through Company X�s
radio frequencies and telephone lines, be able to connect to the clients� own
various local-area networks (�LANs�) and Internet providers. Clients will be charged various fees to
transmit and receive data using Company X�s equipment, radio frequencies, and
phone lines. You specifically ask six
questions concerning Company X�s charges to provide this service. Let us address these questions separately.

QUESTION
1. Utah Code Ann. �59-12-103
imposes a sales tax on charges for intrastate telephone service, which is
defined in Utah Admin. Code R865-19S-90 (copy enclosed). Section 5 of that rule defines �telephone
service� as the transmission for hire of data by wire, cable, radio waves,
fiber optics or any other method.
Company X does not provide its clients a LAN or access to an Internet
server. What is does provide is the means
for its clients to connect to their own offices through Company X�s equipment,
telephone lines, and radio waves. Once
clients connect to their own offices, they have access to their own LANs and
Internet providers. Company X acts not
as a provider of LANs and Internet services, but instead as a telephone
corporation providing equipment and telephone lines for its clients� use. Accordingly, Company X provides telephone
services for purposes of Utah�s Sales and Use Tax Act, and charges associated
with these services are subject to sales and use tax.

Among
the charges subject to sales tax are subscriber fees and charges for intrastate
telephone service. However, interstate
long distance charges are not subject to sales tax. Thus, all three of the charges you ask about would be subject to
sales tax except when the charge is for an interstate transmission. Let us discuss the three charges
individually.

a) Monthly Subscriber Fees. These charges are not for a specific transmission,
so there is no need to differentiate between intrastate and interstate
service. Thus, any subscriber fee
billed to access an entity located in Utah is subject to sales tax whether or
not that entity�s billing address is in Utah.

b) Access Fee for Each Connection. If this charge is associated with an
intrastate transmission, which is defined in Rule R865-19S-90 as a transmission
that both originates and terminates in Utah, sales tax is applicable. If this charge is associated with an
interstate transmission, which is any transmission other than an intrastate
one, then sales tax is not applicable.

c) Charge for Megabyte Usage. Each data transmission can be measured in
terms of megabytes. Certain charges
will be imposed based on the number of megabytes transmitted through Company
X�s system. As in b) above, each of
these charges will be subject to sales tax if the associated transmission is an
intrastate one. Should the charge
instead be for an interstate transmission, then the charge is not subject to
sales tax.

QUESTION
2. As explained above, Rule
R865-19S-90 only imposes sales tax on a transmission that is intrastate (both
originating and terminating in Utah).
As the billing address never determines whether a transmission charge is
taxable, Utah�s approach to determining taxability is less inclusive than the Goldberg
v. Sweet standard you refer to in your question.

QUESTION
3. Again, billing address is not a
factor in determining whether a specific transmission charge is taxable or not. It is irrelevant in differentiating
between an interstate and an intrastate
transmission.

QUESTION
4. This is your only question that
does not concern the application of sales tax on charges for your telephone
services. Instead, it concerns other fees
that are often added to telephone service charges, and the Tax Commission does
not have jurisdiction over these fees.
They are administered by the Public Service Commission. We suggest you contact them to ascertain
what collections duties actually exist for you. The telephone number is (801)530-6716, and the address is 160
East 300 South, Salt Lake City, Utah 84111.

QUESTION
5. No. The client�s billing address may be located somewhere other than
the client�s office. The client�s
office is that location at which the client�s own LAN and Internet provider are
located and to which he or she connects using Company X�s services. Subject to these distinctions, charges for
subscriber fees and separate transmissions should be sourced for purposes of
sales tax situs as follows:

a) Subscriber Fees. If the billing address and the client�s office are both located
in Utah, then taxes on this fee should be sourced to the client�s office;
however, the billing address may be used if it fairly represents the location
of the client�s office. If only one of
these locations is in Utah, then the fee is sourced to the one location that is
in Utah.

b) Transmission Fees. For this fee to be taxable, there must exist an intrastate
transmission. The transmission must
either originate or terminate at the client�s office, where the LAN or Internet
provider is located. In either case,
taxes on this fee should always be sourced to the client�s office, unless the
billing address fairly represents the location of the client�s office.

QUESTION
6. The sales and use tax varies in
Utah depending upon location. The
appropriate sales tax to apply for a specific charge is dependent upon the tax
situs, as explained in Question 5 above.

For
the Commission,

Joe B. Pacheco, CPA

Commissioner

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