Is VoIP a Telecommunications Service or an Information Service?
While the sales and use tax world waits with baited breath for a decision by the US Supreme Court in the Wayfield case on whether the nexus standard of physical presence (Quill) will be overturned or modified in some way (see Quill: Background and Outline for more context), in the telecommunications tax and regulation world, there is a Minnesota case now on appeal to the Eighth Circuit of Appeals that should be drawing similar attention. The name of the case is Charter Advanced Services (MN), LLC, and Charter Advanced Services VIII (MN), LLC, v. Minnesota Public Utilities Commission (MPUC). The lower court held that Minnesota may not regulate VoIP-provider Charter because it is an information service, not a telecommunications service. [https://www.gpo.gov/fdsys/pkg/USCOURTS-mnd-0_15-cv-03935/pdf/USCOURTS-mnd-0_15-cv-03935-0.pdf]
The case is providing yet another stage for the latest round in the battle between the federal and state governments over the legal character of VoIP as a telecommunications service or an information service, which has far-reaching consequences for all states on both the taxation and regulation of VoIP. Minnesota’s MPUC has appealed the case, and recent amicus briefs in support of the decision [https://apps.fcc.gov/edocs_public/attachmatch/DOC-347483A1.pdf] and opposed to the decision [http://nasuca.org/nwp/wp-content/uploads/2013/11/Joint-NARUC-NASUCA-Amicus-Brief-VOIP-8th-Cir-9-5-2017.pdf] are shedding more light on the issues.
Whether or not the case is affirmed or reversed, the challenges of staying compliant with both federal and state tax and regulatory rules on VoIP remain not only for companies, but the consultants who advise them and offer accounting and technological solutions for getting and remaining compliant.
The Business Background
This issue is hardly new and that is perhaps what is baffling many practitioners: why the FCC has not yet settled the now-decades-old issue and therein lies the tale [ http://www.ibtimes.com/fcc-will-help-telecoms-dodge-state-regulations-voip-services-2612277]. Stated broadly, if VoIP is a telecommunications service, it gets taxed and regulated in the same way as “traditional” telecommunication services by both the federal and state authorities, but if it is an information service, it may not be subject to state regulation at all.
Against the background of the now well-recognized need of states for new sources of revenue, as well as the complaints from some traditional telecommunication companies of unfair competitive advantage in favor of VoIP firms like Vonage for example, the pressure to treat ever-changing transformational technologies like VoIP as a telecommunication service is great. The VoIP provider, on the other hand, want to be considered an information service and therefore, either not regulated or taxed at all or at least much less than a telecommunications service.
The Technical Background in Brief
Charter Communications, Inc. (“Charter”), is a national communications company that provides services to residential and business customers—such as cable video, broadband internet access, and voice communications. One of the features it offers its customers is real-time, two-way voice calling, which it currently markets as “Spectrum Voice” by using Voice over Internet Protocol (“VoIP”) technology, which transmits voice signals via a broadband internet connection as Internet Protocol (“IP”) data packets.
In contrast, “traditional” telephone networks (commonly known as the “public switched telephone network” or “PSTN”) provide voice telephony services using “circuit switching” technology, in which a dedicated pathway is established over the line for the duration of a call. To route multiple calls over the same PSTN, traditional telephone providers use a technique known as Time Division Multiplexing (“TDM).
For Charter to effect transmission of voice signals as IP data packets, it provides its Spectrum Voice subscribers with a device known as an embedded Multimedia Terminal Adapter (“eMTA”). The eMTA is housed in the same device as the cable modem that provides access generally to Charter’s broadband internet service. The eMTA alters the format of voice calls between an analog electrical signal—as transmitted by the customer’s handset—and the IP data packets transmitted over Charter’s cable network.
When a Charter customer calls or receives a call from a subscriber of a traditional telecommunications carrier, the call must be converted between IP and TDM—a process commonly referred to as “protocol conversion.” Because it offers this capability to interact seamlessly with PSTN networks, Spectrum Voice is an “interconnected” VoIP service. Although not all Spectrum Voice calls involve protocol conversion, most of Charter’s voice traffic in Minnesota currently does so. In addition to providing voice transmission, Spectrum Voice has the capability to provide customers with several additional communications features, such as allowing customers to access voicemails as digital audio files, converting voicemails to text, and forwarding them via email.
The Legal Background
Prior to March 2013, Charter offered VoIP services in Minnesota through two affiliates (“Charter Fiberlink”). In March 2013, Charter Fiberlink assigned its retail voice customers to the newly-established Charter Advanced. The frank purpose behind the assignment was to limit the reach of state regulation, thereby enhancing Charter’s market competitiveness. The Minnesota Department of Commerce (“MDOC”) responded to Charter’s realignment by filing a complaint with the Minnesota Public Utilities Commission (MPUC). The complaint raised fifteen separate allegations, including that Charter was in violation of several Minnesota statutes. Charter responded, in part, by arguing that state regulation of Spectrum Voice is preempted by federal law. Minnesota rejected that argument and ordered Charter to comply with applicable Minnesota rules and regulations. Charter responded to the MPUC’s decision by instituting the present action.
District Court Holds in Favor of Charter—VoIP is an Information Service
When the Federal Government acts within the authority that it has under the Constitution, it is empowered to pre-empt state laws to the extent it is believed that such action is necessary to achieve its purposes, and there is in this case, “simply no doubt” that the F.C.C. has this general authority.
The source of regulatory authority in this matter is the Telecommunications Act of 1996 (amending the Communications Act of 1934) [https://transition.fcc.gov/Reports/1934new.pdf]. The Act broadly divides communication services into two main categories: “telecommunications services,” and “information services”.
Under the statutory structure, a telecommunications service is the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used.”
An information service, by contrast, is the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.
The Court concluded that Charter’s Spectrum Voice offering is an “information service,” because inherent in its operation is the ability to engage in protocol conversion—thereby “transforming” the customer’s information for purposes of the Telecommunications Act of 1996. Accordingly, state regulation of Spectrum Voice is preempted and impermissible. Now we will wait to see if the Eighth Circuit Court of Appeals agrees with the district court.
State Taxation of VoIP
The table below provides a high-level flavor of some of the differing approaches among the states currently for taxing VoIP. Each of the differences must be accounted for and applied to a tax solution in much greater detail. And of course, these rules will continue to evolve almost constantly, not only as a result of this Court’s, as well as future court and administrative decisions, but also as a result of constant technological change.
|State||General VoIP Rules (as of 4/1/2018)|
|Alabama||Voice over Internet Protocol (VoIP) and any other form of telephony and similar services that utilize Internet protocol are not subject to sales and use tax. However, these types of telephony and telecommunications services are subject to the Alabama utility telecommunications services tax. (What’s New, Alabama Department of Revenue, http://www.revenue.alabama.gov/salestax/whatsnew.html)|
|California||An emergency telephone users surcharge (911 surcharge) is imposed on amounts paid for intrastate telephone communication services or Voice over Internet Protocol (VoIP) services. The surcharge is collected by service suppliers from their customers. (Sec. 41020, Rev. & Tax. Code). The surcharge rate is set annually by the California Department of Technology, subject to a minimum of 0.5% and a maximum of 0.75% of charges imposed for intrastate telephone communication services or VoIP services. (Sec. 41030, Rev. & Tax. Code)|
|Delaware||Prior to the latest amendment of the Act, all “telecommunications services” were excluded from the definition of exempt “Internet access.” Several states imposed taxes on digital subscriber line (DSL) service under this exception. The Act was amended to expand the definition of exempt “Internet access” to include telecommunications services to the extent the telecommunications services are purchased, used, or sold by a provider of Internet access to provide Internet access. After November 1, 2005, DSL service is exempt for the duration of the general moratorium. The Government Accountability Office (GAO) has taken the position that the expansion of the moratorium to certain telecommunications services (i.e. DSL service) does not bar state and local taxes on services, such as high-speed communications capacity over fiber, acquired by Internet service providers and used to deliver Internet access. Some states and service providers disagree with the GAO’s interpretation and take the position that state and local governments are barred from taxing the purchase of the underlying telecommunications services by Internet access providers used to provide Internet access. The Act does not affect the taxation of charges for voice or similar service using Voice Over Internet Protocol (VOIP). This exception for the taxation of VOIP services does not apply to services that are incidental to Internet access, such as voice-capable e-mail or instant messaging.|
|Florida||Communication services means the transmission, conveyance or routing of information or signals including video services, to or between points by any medium. The term also includes such transmission, conveyance, or routing in which computer processing applications are used to act on the form, code, or protocol of the content without regard to whether such service is referred to as voice-over-Internet-protocol (VOIP) services or is classified by the Federal Communications Commission as enhanced or value-added|
|Georgia||As discussed under “Streamlined Sales and Use Tax Agreement conforming provisions,” the definition of “telecommunications service” under O.C.G.A. Sec. 48-8-2 applies regardless of whether a service is known as a Voice over Internet Protocol (VoIP) service. The Georgia Department of Revenue has found that because VoIP service is not local exchange telephone service as contemplated under the “retail sale” definition in O.C.G.A. Sec. 48-8-2(31), it is not subject to sales and use tax. (See Letter Ruling SUT No. 2013-09-16-01 (LR SUT-2013-16), Georgia Department of Revenue, September 16, 2013)|
|Hawaii||Voice over Internet Protocol (VoIP) services are subject to general excise tax at the retail rate on the access fees charged to Hawaii customers for the right to use their VoIP. (Haw Rev Stat Sec. 237-13(6).|
|Iowa||Same as Delaware|
|Illinois||Telecommunications service means the electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point, or between or among points, including: transmission, conveyance, or routing in which computer processing applications are used to act on the form, code or protocol of the content for purposes of transmission; and conveyance or routing regardless of whether the service is referred to as voice over internet protocol services (VOIP) or is classified by the Federal Communications Commission as enhanced or value added. (35 ILCS 5/304(a)(3) (B-5))|
|Indiana||A person furnishing or selling an intrastate telecommunication service in a retail transaction may purchase tangible personal property exempt from tax, provided that the property is used to furnish video services, Internet access services, or VOIP services. (IC 6-2.5-5-13; Information Bulletin #51T, Indiana Department of Revenue).|
|Kansas||A voice over Internet Protocol (VoIP) service is subject to sales tax as a “telecommunications service,” as that term is defined under Sec. 79-3602(aaa), K.S.A. (Sec. 79-3603(b), K.S.A.) In addition, VoIP services are excluded from definition of exempt “Internet access service” (the federal Internet Tax Freedom Act of 1998 (ITFA)). (See Notice 08-03, Kansas Department of Revenue, June 26, 2008). The Kansas Corporation Commission also requires, to the extent not prohibited by federal law, all interconnected Voice over Internet Protocol (VoIP) service providers to contribute to the KUSF on an equitable basis, and effective July 1, 2016, based on the provider’s intrastate telecommunications services net retail revenues. An “interconnected VoIP service” is defined as a service that enables real-time, two-way voice communications, requires a broadband connection from the user’s location, requires Internet protocol-compatible customer premises equipment (CPE), and generally allows users to receive calls originating on a public switched telephone network and to terminate calls to such a network. (See Sec. 66-2008(a), K.S.A.) Interconnected VoIP service providers contributing to the KUSF can also collect from their customers all or part of the contribution as a surcharge that is subject to Kansas retailers’ sales tax, or they can pay the surcharge themselves. (Sec. 66-2008(a), K.S.A.; Private Letter Ruling No. P-1999-130, Kansas Department of Revenue, June 8, 1999 ).|
|Massachusetts||A “telecommunication service” means the electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point, or between or among points. (Reg. 830 CMR 63.38.11(3)) The term covers a broad range of services. Effective July 31, 2008, a flat 911 surcharge is imposed for Massachusetts communication services. The surcharge, which is not subject to sales or use tax, is 75¢ per month for wireline, wireless, voice over internet protocol (VoIP), IP-enabled, prepaid wireless, and other services. Prior to July 31, 2008, the surcharge was 99¢ per month for land lines and 30¢ per month for cell phones. (Sec. 18H, Ch. 6A, G.L.).|
|Maryland||Same as Delaware.|
|Maine||“Telecommunications services” are defined as the electronic transmission, routing, or conveyance of voice, data, audio, video, or any other information or signals to one point or between or among points. The term includes transmission, routing, or conveyance when computer processing applications are used on the content’s form, code, or protocol to transmit, route, or convey, if the service is known as “Voice over Internet Protocol” (VoIP) services, or classified by the Federal Communications Commission as valued-added or enhanced. Expressly excluded from “telecommunications services” are Internet access service, radio and television audio and video programming services, billing and collection services provided to third parties, advertising, tangible personal property, installation or maintenance of wiring or equipment on a customer’s premises, ancillary services, electronically delivered digital products, and data processing and information services. (36 M.R.S.A. Sec. 2551(20-A) ).|
|Minnesota||Voice over Internet Protocol (VoIP) services: Voice over Internet Protocol (VoIP) services are subject to sales and use tax as a telecommunications service. A VoIP service does not qualify as an exempt information service because it uses computer processing applications solely for the management, control, or operation of a telecommunications system or the management of a telecommunications service. (Modification of Revenue Notice No. 05-03, Minnesota Department of Revenue, April 13, 2009). Some states dispute the assertion that taxes they impose on telecommunications service purchased by Internet service providers to connect their customers to the Internet (so-called “backbone” services) were prohibited by Congress in the 2004 renewal of the moratorium. The 2007 amendment and the revised definition of “Internet access” (discussed above) are intended to resolve this issue and end state and local taxation of Internet “backbone” service. According to the Congressional Budget Office, as many as eight states (Alabama, Florida, Illinois, Minnesota, Missouri, New Hampshire, Pennsylvania, and Washington) and several local governments in those states were collecting such taxes in 2007.|
|Missouri||Voice over Internet protocol (VoIP) telecommunications services are subject to tax. (Sec. 144.020(1)(4), RSMo.; 12 CSR 10-3.188) (Letter Ruling No. 3220)|
|Mississippi||Mississippi county boards may levy an emergency telephone service charge in an amount not to exceed $1.00 per residential telephone subscriber line per month, $1.00 per Voice over Internet Protocol (VoIP) subscriber account per month, and $2.00 per commercial telephone subscriber line per month for exchange telephone service. Districts already in existence as of 1993 are subject to a separate levy structure. (Miss Code Ann Sec. 19-5-313(1)). No service charges may be imposed upon more 25 exchange access facilities or VoIP lines per person per location.|
|North Carolina||Same as Delaware|
|New Jersey||VOIP services. — Voice over Internet protocol (VoIP) services are subject to sales tax for services sourced to New Jersey. In addition, each periodic bill for VoIP service must include the 90¢ 911 System and Emergency Response Assessment fee. (New Jersey State Tax News, Vol. 37, No. 1, Spring 2008; Notice, New Jersey Division of Taxation, February 23, 2005)|
|New Mexico||Since New Mexico generally taxes all receipts derived from performing services in New Mexico, unless the services are specifically exempt or deductible, voice over Internet protocol (VoIP) services are subject to tax. (126.96.36.199(A) NMAC) Interstate VoIP services, including wireless VoIP, are subject to the interstate telecommunications gross receipts tax. Receipts from intrastate VoIP, including wireless VoIP, services are subject to New Mexico gross receipts tax, as that tax is imposed on receipts from services performed in New Mexico. (NM Stat Ann Sec. 7-9C-2; NM Stat Ann Sec. 7-9C-3; NM Stat Ann Sec. 7-9-4; 188.8.131.52(A) NMAC) NM Stat Ann Sec. 7-9-55(C)|
|New York||Any form for telephony (i.e. private telecommunications networks), including Voice over Internet Protocol (VOIP), network services and data transmission services, other than telecommunications services used by an Internet Service Provider (ISP) to connect customers to the Internet, are not included under the federal moratorium. Accordingly, these forms of telephony continue to be subject to New York state and local sales taxes. (TSB-M-08(4) C, (2) S ).|
|Ohio||Equipment used to provide Internet access. — The provision of Internet service is separate from the provision of other services such as cable television service, telecommunications service (including Voice over Internet Protocol, or VoIP), mobile telecommunications service, satellite broadcasting service, and electric service. Therefore, the exemption found in Sec. 5739.02(B) (34) does not apply to purchases of equipment used primarily to provide Internet services.|
|Oklahoma||Telecommunications services subject to sales tax are defined as the electronic transmission, conveyance, or routing of audio, data, video, voice, or any other signals or information to a point, or between or among points. “Telecommunications services” includes transmissions, conveyances, or routing that entail computer processing applications used to act on the form, code, or protocol of the content for purposes of transmission, conveyance, or routing, regardless of whether the service is referred to as a voice-over Internet protocol (VoIP) service, or that are classified by the Federal Communications Commission (FCC) as enhanced or value-added. (68 O.S. Sec. 1354(A)(4)(a); Rule 710:65-19-330(c)).|
|Oregon||Oregon imposes two different taxes on emergency communication services. A tax is imposed on each consumer or paying retail subscriber who has telecommunications service or interconnected Voice over Internet Protocol (VOIP) service with access to the emergency communications system at the rate of: (1) $0.75 per month; or (2) for prepaid wireless telecommunications service, $0.75 per retail transaction.|
|Pennsylvania||Voice Over Internet Protocol (VOIP) is a telecommunications service subject to Pennsylvania state and local sales tax. “VOIP” is defined as real-time audio or data transmitted and/or received in a digital format through the use of Internet protocol data packet transmission, or any similar or successor protocol transmission. Calls may be made between users of the same VOIP service, between VOIP users, and those with landline or mobile telephone service. However, some VOIP services work only over a computer or special VOIP telephone, and others allow use of a traditional telephone with an adapter. As such, VOIP falls within the statutory definition of “telecommunications service.” (Sales Tax Bulletin 2005-02). VOIP does not come within the enhanced telecommunications service exclusion from sales and use tax since VOIP uses computer-processing applications solely for the management, control, or operation of a telecommunications system or the management of a telecommunications service. Although VOIP uses Internet protocol that allows the transmission of packeted data across a network or across multiple networks, it does not interact with the information it transmits but merely serves to address and route the information. (Sales Tax Bulletin 2005-02). The federal Internet Tax Freedom Act (ITFA), which bars state and local governments from imposing multiple or discriminatory taxes on electronic commerce and taxes on Internet access for a specified period (see below for more information), specifically excludes VOIP. Additionally, the Federal Communications Commission (FCC) has ruled, according to the Pennsylvania Department of Revenue, that digital voice is not subject to state public utility regulation, although the FCC has expressed no opinion on state taxation of VOIP service. (Sales Tax Bulletin 2005-02 ).|
|South Carolina||Sales tax applies to gross proceeds accruing from charges for the ways or means for voice or message transmission, including charges for use of equipment furnished by the seller or supplier, and charges for telephone service, including voice over internet protocol (VOIP). (Reg. Sec. 117.329.4; Sec. 12-36-910(B)(3), S.C. Code; Sec. 12-36-1310(B)(3), S.C. Code) However, any portion of the charge that is attributable to the statutory cost of a governmental license or permit is excluded. (Sec. 12-36-90(2), S.C. Code) Gross proceeds include all charges for local service, including charges for equipment furnished by the seller or supplier of such service and all receipts for local calls made from coin-operated telephones. (Reg. Sec. 117-329 ).|
|Texas||The term “telecommunications services,” is defined as the electronic or electrical transmission, conveyance, routing, or reception of sounds, signals, data, or information utilizing wires, cable, radio waves, microwaves, satellites, fiber optics, Voice over Internet Protocol (VoIP), or any other method now in existence or that may be devised, including long-distance telephone service. The term also includes mobile telecommunications services and prepaid telecommunications services. (Sec. 151.0103, Tax Code; 34 TAC Sec. 3.344(a) (13)) The term does not include (1) the storage of data or information for subsequent retrieval or the processing, or reception and processing, of data or information intended to change its form or content; (2) the sale or use of a telephone prepaid calling card; (3) Internet access service; or (4) a pay telephone coin sent-paid telephone call.|
|Utah||In Utah, tax applies to sales of telecommunications services that originate and terminate within Utah, including Voice over Internet Protocol (VoIP) and enhanced or value-added services. (Sec. 59-12-103(1)(b), Utah Code Ann.; Sec. 59-12-102(113) (a), Utah Code Ann.; Publication 62, Utah State Tax Commission).|
|Virginia||Voice over Internet protocol (VoIP) services are subject to the communications sales and use tax. (Ruling of Commissioner, P.D. 06-138 ).|
|Vermont||Voice over Internet Protocol (VoIP) services are taxable. (32 V.S.A. Sec. 9701(19); 32 V.S.A. Sec. 9771(5) ).|
|Washington||Both VoIP and FoIP services are telecommunications services subject to sales tax. If a VoIP or FoIP service is sold on a call-by-call basis, the sale is sourced to either: the taxing jurisdiction where a call both originates and terminates; or if it does not originate and terminate in the same taxing jurisdiction, then the taxing jurisdiction where the call either originates or terminates, and in which the service address is also located. If the service is sold on another than call-by-call basis, the sale is sourced to the place of primary use. (ETA 3159.2013 Washington Department of Revenue, November 27, 2013). An excise tax advisory provides examples applying sourcing rules to the sale of VoIP and FoIP services provided on a fixed and nomadic basis. (ETA 3159.2013 Washington Department of Revenue, November 27, 2013 ).|
|West Virginia||In West Virginia, tax applies generally to all services. Exemptions are provided only for certain specified services and for professional and personal services. (W.Va. Code Sec. 11-15-8; Reg. Sec. 110-15-8(1)) The term “telecommunications services” is defined as the electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point or between or among points. The term includes such transmissions, conveyances, or routing in which computer processing applications are used to act on the form, code, or protocol of the content for purposes of transmission, conveyance, or routing, without regard to whether the service is referred to as Voice over Internet Protocol (VoIP) services or is classified by the Federal Communications Commission as enhanced or value added. (W.Va. Code Sec. 11-15B-2b(b)(1))|
|Wisconsin||Voice over Internet Protocol (VoIP) services that originate or terminate in Wisconsin and are charged to a service address in Wisconsin are subject to sales and use tax as telecommunications services. (Sec. 77.52(2)(a)(5), Wis. Stats.) The tax applies to both flat-rate charges and per-minute charges. If a VoIP provider does not know where a VoIP service originates or terminates, the provider should charge tax on the basis of the location of the customer’s place of primary use. Customers are liable for use tax on VoIP service charges if the VoIP provider does not have sufficient nexus with Wisconsin to require the provider to report the tax. Charges to customers for the purchase or lease of an adapter that is needed to use a VoIP service are taxable, and the provider may purchase the adapters tax-free for resale. (Tax Releases, released in Tax Bulletin No. 141, Wisconsin Department of Revenue, January 2005)|
|New York City||The monthly 911 surcharge of $1 per telephone access line, or equivalent, is imposed on Voice over Internet Protocol (VoIP) service. The surcharge must be added to bills by September 5, 2010. (Sec. 11-2323, N.Y.C. Adm. Code ).|
What Does All This Mean for Companies and Their Advisors
We all know that the telecommunications industry is regulated and tax differently from other industries and is among the most heavily taxed industries in the US. And regulatory issues can change everything. Therefore, the outcome of the case will undoubtedly set a precedent for VoIP regulation and taxation in other states. If the case is affirmed and states may not regulate VoIP, each state will have to review its current rules on VoIP and make adjustments as needed. However, whether the case is affirmed or reversed, the challenges of staying compliant with both federal and state tax and regulatory rules on VoIP remain not only for companies, but the consultants who advise them and offer accounting and technological solutions for getting and remaining compliant. Visit www.SureTax.com to learn how to protect and grow your business in this dynamic marketplace.