New York Administrative Law Judge Holds ITFA Preempts Taxation of Gross Receipts From ADSL and Fiber Broadband Sales | Pillsbury – SeeSalt Blog

An administrative law judge at the New York State Division of Tax Appeals found that the federal Internet Tax Freedom Act (ITFA) precludes the imposition of New York’s franchise tax and a metropolitan transportation business tax (MTA) surcharge on gross receipts from sales of asymmetric digital subscriber line (ADSL) and fiber broadband aggregation and access services (fibre broadband).

Enacted as a temporary measure in 1998 and made permanent in 2015, ITFA is a federal law that, among other things, prohibits state and local governments from levying taxes on Internet access. The term “Internet access” is defined as a service that enables users to connect to the Internet to access content, information or other services over the Internet, and it includes the purchase, use or sale of telecommunications that again used to provide internet access. The term “Internet access tax” is broadly defined as a tax on Internet access, regardless of whether it is levied on the provider or purchaser, and regardless of how the tax is described, but it excludes net income, capital stock, net worth. , or property taxes.

The taxpayer provided local telephone services, ADSL and fiber broadband. The taxpayer sold ADSL and fiber broadband to Internet Service Providers (ISPs), who in turn used said services to sell Internet access services to end users. As a corporation primarily engaged in the operation of a local telephone business, the taxpayer’s gross earnings were subject to an additional franchise tax under NY Tax Law § 184 and an additional MTA surcharge under NY Tax Law § 184-a. The taxpayer excluded its gross receipts from sales of ADSL and fiber broadband from its tax base on the grounds that (i) said services were interstate telecommunications services sold for ultimate consumption and were therefore entitled to a 100 percent deduction under NY Tax Law § 184( 1), and (ii) ITFA has prepaid tax on the receipts of said services.

The ALJ held that the 100 percent deduction under NY Tax Law § 184(1) did not apply because the taxpayer did not sell the services in question – ADSL and Fiber Broadband – for ultimate consumption (ie to end users). However, the ALJ found that ITFA preempted the franchise tax imposed under NY Tax Law § 184 and the MTA surcharge under NY Tax Law § 184-a because ADSL and Fiber Broadband were internet access services within the meaning of ITFA. The services, the ALJ found, were part of an interconnected network that provided consumers with access to the Internet, without which consumers would not be able to access the Internet. The ALJ rejected the state’s argument that ITFA only protected retail sales of Internet access services, explaining that the state’s argument would defeat the congressional intent behind ITFA and fail to account for “the ever-changing technological innovations that make it possible [i]internet access.”

The case is Matter of Verizon New York Inc., DTA No. 829240 (May 4, 2023). The ALJ determination is available here.

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