New York Administrative Law Judge Holds ITFA Preempts Taxation of Gross Receipts from ADSL and Fiber Broadband Sales

An administrative law judge with the New York State Division of Tax Appeals held that the federal Internet Tax Freedom Act (ITFA) preempted the imposition of New York 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 (Fiber 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 imposing 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 are in turn used to provide internet access. The term “tax on internet access” is broadly defined as a tax on internet access, regardless of whether it is imposed on the provider or buyer, 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 principally engaged in the conduct of a local telephone business, the taxpayer’s gross earnings were subject to an additional franchise tax under N.Y. Tax Law § 184 and an additional MTA surcharge under N.Y. Tax Law § 184-a. The taxpayer excluded from its tax base its gross receipts from sales of ADSL and Fiber Broadband on the grounds that (i) said services were interstate telecommunications services sold for ultimate consumption and were thus entitled to a 100 percent deduction under N.Y. Tax Law § 184(1), and (ii) ITFA preempted taxation of the receipts from said services.

The ALJ held that the 100 percent deduction under N.Y. Tax Law § 184(1) did not apply because the taxpayer did not sell the services at issue—ADSL and Fiber Broadband—for ultimate consumption (i.e., to end-users). However, the ALJ held that ITFA preempted the franchise tax imposed under N.Y. Tax Law § 184 and the MTA surcharge under N.Y. 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 access to the internet, and without them consumers would be unable to access the internet. The ALJ rejected the state’s argument that ITFA only protects the retail sale of internet access services, explaining that the state’s argument would frustrate congressional intent behind ITFA and fail to account for “the ever-changing technological innovations that allow [i]nternet access.”

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