On May 4, Administrative Law Judge Donna Gardiner issued a determination in favor of Verizon New York Inc., concluding that the Internet Tax Freedom Act (ITFA) preempts New York’s gross receipts tax on transportation and transmission corporations1 from applying to asymmetric digital subscriber line (ADSL) and fiber broadband services (jointly referred to as "the services”).2 Although not precedential, the case should be of interest to taxpayers in the technology and communications industries. The case marks, arguably, New York’s most expansive application of the ITFA.
This determination also sets the stage for the potential use of the appeal rights recently granted to the New York State Department of Taxation and Finance. On May 3, 2023¸Governor Hochul signed legislation granting the Department the authority to appeal certain adverse decisions issued by the Tax Authority Tribunal.3 This new appeal right will undeniably change the nature of the tax appeals process in New York.
ITFA preemption and the definition of internet access services
Verizon provided the services to internet service providers, which, in turn, sold Internet services to their customers. The services transmit information through the use of wires and fiber optics, which are part of the interconnected network that provides end consumers with access to the Internet. The Department assessed gross receipts tax on receipts from Verizon's services. Verizon appealed the assessment, asserting that (i) the services were “telecommunication services” entitled to a 100 percent deduction, and (ii) the ITFA preempted the imposition of tax on the services.
The determination concludes that receipts from the services were not entitled to the telecommunications services deduction because they were not sold for ultimate consumption. However, the determination also concludes that imposition of the tax is nonetheless preempted by the ITFA.
The ITFA prohibits state and local governments from imposing taxes on Internet access and multiple or discriminatory taxes on electronic commerce.4 “Internet access” is defined as a service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users.5 As of November 1, 2003, “Internet access” also includes telecommunication services “to the extent such services are purchased, used or sold by a provider of Internet access to provide Internet access."6
The determination notes that Congress originally intended for the ITFA to be “a broad, sweeping prohibition to tax any portion, form of or access to the Internet.” It also holds that the relevant definition of “Internet access” is the definition found in the ITFA, and not the definition found in the Tax Law. Based on this, the determination rejected the Department’s attempt to narrowly construe Internet access services as including only services provided to end-user consumers. In relying on such, Judge Gardiner stated that the Department’s attempt to narrowly interpret the definition of Internet access failed to account for constantly evolving technology.
This represents a big win for taxpayers. It is arguably the broadest application of the ITFA that we have seen out of the New York Division of Tax Appeals, and explicitly recognizes the intent of the ITFA’s broad interpretation in order to apply to every changing, evolving and advancing means of providing Internet access.
The Department has until June 3, 2023, to file an appeal of the determination to the Tribunal.7