A judge for the New York State Department of Tax Appeals denied a Time Warner subsidiary’s appeal of an audit ruling related to sales tax not collected on Federal fees charged to customers on bundles of interstate and in-state Voice over internet protocol (VoIP) services. Telecommunications providers are required to contribute to the Federal Universal Service Fund based on their revenues from interstate sales but can pass the expense of this on to their customers.
The company was assessed in an audit for over six million dollars of additional sales and use tax on the portion of the bills to their customers that passed on their Federal Universal Service Fund expenses. In the audit, the New York Division of Taxation examined the company’s invoices to their customers, which noted that a set percentage between 25.97% and 26.3% of charges are assumed to be interstate or international for the purposes of sales tax calculation. The plans sold during the audit period included multiple bundled services, including international and interstate VoIP, which were allocated to the company’s general ledger separately as interstate and intrastate based on a traffic study, and that the fees in question were only associated with the interstate services.
In New York, the sales tax applies to the receipts of telecommunication services, excluding interstate and international service. The company argued that the FUSF fees fell under the exemption for receipts of interstate and international telephone service, but the state argued that the fee was part of the total receipts of the bundle, and therefore partially attributable to the taxable intrastate service as well.
The court agreed with the state’s argument that the fee itself was an expense of the business passed on to the customer, and clarifying that, in New York, expenses of the business passed on to the customer cannot be separately deducted from the taxable portion of the charge to the end customer. The court also denied the company’s argument that they had relied on a technical services bulletin on the grounds that it did not contradict the department’s assessment and was published after the audit period. An argument based on a prior case was also denied, as in the prior case the fee was only charged to customers who specifically made interstate calls and wasn’t charged to customers who only made calls within the state of New York.
When dealing with bundled services, clarifying which charges are associated with which services can be tricky. Beyond knowing what services are and are not subject to tax on their own, knowing the exact reason those services are exempt is also vital to understanding how bundling rules apply. The line between distinct services sold in a bundle and expenses of the business included in the selling price can be hard to determine, and each state may have different standards for exactly where it’s drawn. (In The Matter of Time Warner Cable Information Services (NY) LLC, 830442, New York State Division of Tax Appeals, Determination 830442, 1/4/2024)