Reed Smith Client Alerts

Authors: Frank J. Gallo Kim M. Watterson

In a unanimous decision, the Pennsylvania Commonwealth Court held that Level 3’s wholesale Internet access services were not subject to Pennsylvania sales and use tax.1 Reed Smith state tax lawyers argued the case for Level 3.

At issue in the case was whether Level 3’s dial-up modem service was Internet access (which is not taxable)2 or basic telecommunications (which is taxable).3 The focus of the dispute was whether the manner in which one particular Level 3 customer (AOL) used the service changed its taxability.

It took Judge Kevin Brobson less than a month to pen the decision finding that the AOL/Sprint case4 was not controlling, and that Level 3’s dial-up service was exempt Internet access. The decision turned on the fact that an end-user’s connection to the Internet began at Level 3’s Point of Presence (PoP) facility.

The State Tax team explained to the panel that Level 3’s facilities were a PoP and, since all the dial-up Internet traffic traveled through Level 3’s PoP before traveling over the Internet to AOL’s datacenter, the dial-up service was exempt Internet access. Moreover, the exemption for Internet access could not legally be predicated upon the manner in which a customer used the service after it travelled through the PoP.

Pennsylvania’s lawyers argued that Level 3’s dial-up modem services served the same function and purpose as the services at issue in the AOL/Sprint case, which the Commonwealth Court had determined were taxable basic telecommunications. Specifically, they took the position that AOL required its users to visit as soon as they logged in, thereby converting the dial-up modem service into a taxable basic telecommunications service. They also argued that the fact that the traffic traveled through a Level 3 PoP was irrelevant.

The court found that there were material technological differences between Level 3’s services and those at issue in AOL/Sprint. Unlike the AOL/Sprint services, Level 3’s dial-up service provided access to a PoP, which was dispositive because a PoP “is where the end-user’s connection to the internet begins.” The panel dismissed the Commonwealth’s argument that AOL’s requirement that users visit converts an otherwise exempt Internet access service into a basic telecommunications service. The court observed that “delivering an end-user to is no different than delivering an end-user to or”

This decision broadens the Department’s historically narrow view of what constitutes Internet access. For more information on the Level 3 case and the application of Pennsylvania’s sales and use tax to telecommunications and related services, contact the author of this alert, or the Reed Smith attorneys with whom you regularly work.

  1. Level 3 Communications, LLC v. Commonwealth, 166 F.R. 2007 (Commw. Ct. Oct. 15, 2015).
  2. 61 Pa. Code § 60.20(a).
  3. 72 P.S. § 7201(m), (rr).
  4. America Online, Inc. v. Commonwealth, 932 A.2d 322 (Pa. Cmwlth. 2007), aff'd, 963 A.2d 903 (Pa. 2008).


Client Alert 2015-296