Florida Rethinks Internet Access  
The Florida Department of Revenue held a rule development workshop on December 4, 2002, the notice for which identified the subject as “whether digital subscriber line services are subject to the communications services tax provided in Chapter 202, F.S.” The meeting revealed an interest on the Department’s part in collecting Florida communications services tax (CST) on any “transport” or “transmission” charges associated with the provision of Internet access.

The workshop was prompted by requests the Department has been receiving for rulings on the question of the scope of the exclusions from the definition of taxable “communications services” for “Internet access service, electronic mail service, electronic bulletin board service, or similar on-line services.” Fla. Stat. § 202.11(3)(a) and (h). One ISP asked for a declaratory statement from the Department saying that its “purchase” of “unbundled network elements” (DSL loops) from the local telephone company solely for the purpose of giving the ISP’s customers Internet access was nontaxable. In re Petition of Electronet Intermedia Consulting, Inc. The lines in question were first stripped of loading coils so that they could not be used for voice transmissions but only for high-speed Internet access. ElectroNet had similar arrangements with Comcast for high-speed Internet access via cable modems. The Department declined to issue any declaratory statement, saying that the request was not taxpayer specific but sought a policy statement that the Department would have to respond to through rulemaking under the Florida Administrative Procedures Act. ElectroNet has asked the First District Court of Appeal to direct the Department to issue a declaratory statement.

The Department also declined a BellSouth request for a binding ruling concerning the taxability of a customer charges for a DSL Internet access package. That request dealt with BellSouth’s charge to customers for Internet access via high-speed DSL lines. It asserted that the State was precluded from taxing those charges by reason of the Internet Tax Freedom Act moratorium and further because the charges in question were for Internet access services or information services, not “communications services” as defined in Chapter 202. A splitter is used at the customer’s premises to separate the frequencies carrying voice transmission from those carrying Internet data transmissions and BellSouth apparently makes a separate charge for the telephone voice transmissions which it regards as “communications services.”

Florida first excluded “Internet access service, electronic mail service, electronic bulletin board service, or similar on-line computer service” from the definition of “telecommunication service” in 1997. Ch. 97-283 §1. eff. May 31, 1997. The Internet Tax Freedom Act, 47 U.S.C. § 151, was enacted October 21, 1998 and created a three-year moratorium (later extended) on state and local “taxes on Internet access, unless such tax was generally imposed and actually enforced prior to October 1, 1998” and on “multiple or discriminatory taxes on electronic commerce.” (Section 1100(a)). The powers of state and local taxation were otherwise specifically reserved in Section 1100(b) of the Act. The definition of “Internet access service” in the ITFA excludes “telecommunication services.” The latter is defined in Section 3 of the Communications Act of 1934. 47 U.S.C. § 153.

At the workshop, one of the Department attorneys described the ITFA as leaving taxable by the State of Florida anything not excluded from tax prior to October 1, 1998. At the time, customers often purchased Internet access from one party (nontaxable charges) and used a dial-up service to connect–i.e., made the connection through the local telephone company. That last charge would be for “telecommunication services” under the law in effect then and, unless exempt, subject to gross receipts taxes and sales taxes. It appears that the Department’s current concern stems principally from the use of equipment that might otherwise be providing a taxable service under the old regime (telephone service or cable television service) to secure Internet access. The thought seems to be that when a telephone company charges for high-speed Internet access over a DSL line, for example, that it is selling both Internet access (nontaxable) and some taxable “communications service” since it regards the provision of a DSL line, on a stand-alone basis, as the sale of “communications service.” That ignores the fact that the equipment is used only for Internet access. One can understand the Department’s concern about loss of tax revenues, however, if the telephone companies have been charging ISPs tax on the provision of DSL lines used only for Internet access. The Department implies that it would derive the taxable part of a “bundled” charge for both Internet access and communications services by resort to the provider’s books and records. The ILEC representatives in attendance indicated that such an approach was not workable for them since costs were not segregated in that fashion

In the final analysis, though, any charge which entitles the user only to Internet access service or one of the other services excluded from the definition of “communication service” should be nontaxable. For the Department to assert tax with respect to any part of such a charge arguably violates both the Florida prohibition and the ITFA moratorium. The Department appears poised to proceed with rulemaking to this end immediately. It has invited comments until January 6, 2003. They should be directed to Jennifer Silvey at silveyj@dor.state.fl.us.

Posted: 2002-12-05 00:00:00.0

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