Wednesday, October 16, 2013

Dateline ABC-Nashville: Metro Council Approves New Tax on Sales in Central Business District

This is not the behind-the-scenes work of Lamar Wyatt of the ABC hit Nashville despite the fact that it does have the appearance of a deal that he would love.

That aside, last night at the actual Nashville Metro Council meeting the city council enacted Legislation to tax sales of services and tangible personal property sold at retail within the central business district. Revenue from the new tax (labeled a "fee") will be used to promote the new Music City Center.

The new tax will be .25% of the sales price of the taxable items and will be collected by the Tennessee Department of Revenue in the same manner as state sales tax is collected. Sales of professional services, lodging, concerts, sporting events, newspapers, long-term parking, and liquor are not subject to the new tax.

The boundaries of the district are roughly the Cumberland River to the east,  Lafayette Street to the south, 8th Avenue to the West and Charlotte avenue to the North.

Further background on the the tax/fee can be found in this link to the Tennessean Article.

For tax professionals, the legislation is light on details regarding when a sale is considered to be in the district and the exemptions are similarly vague. What about computer software... Don't get me started.

Because the tax is so low it is hard to imagine much push back when enforcement begins in January 2014, especially when considering it only adds 1cent to a $4 beer according to sponsors. We will see. 

Wednesday, October 2, 2013

Tennessee Court of Appeals Holds that Dial-up and Broadband Internet Access Services Are Not Taxable Telecommunications Services

The Tennessee Court of Appeals held on September 20, 2013 that dial-up and broadband Internet access services sold to Internet Service Providers that in turn provide these services to end-users were nontaxable “enhanced” services rather than “basic” services and that the true object of the services was not telecommunications.  Level 3 Communications, LLC v. Roberts, No. M2012-01085-COA-R3-CV (Tenn. Ct. App. Sept. 20, 2013).

Level 3 provides two internet services known as (3)Connect Modem and (3)Crossroads, which provide dial-up and broadband access to the internet, respectively. Level 3’s customers – retail or consumer Internet Service Providers such as Earthlink Communications and America Online – purchase the Level 3 services to enable their end-users to access the Internet. Level 3 would also sell these products to large corporations that used the service for remote access to corporate networks.  As part of the dial-up service, Level 3 provided local numbers so customers could access the local dial network, but Level 3 did not provide a local dial network infrastructure, which was instead provided directly by the local exchange carrier.

In January 2004, Tennessee published Sales and Use Tax Notice #04-03, which indicated that “Internet access is no longer considered a taxable ‘telecommunications service’ under Tennessee law.”  This Notice was issued following the Tennessee Court of Appeals ruling in Prodigy Serv. Corp., Inc. v. Johnson, 125 S.W.3d 415 (Tenn. Ct. App. 2003) and established a refund procedure for taxpayers to seek refunds of Tennessee sales and use tax collected and remitted on Internet access.  Level 3 filed a claim for refund, seeking a refund of Tennessee sales and use tax on its Internet access services.  The State denied the refund, maintaining that the Level 3 services were telecommunications services.

The Trial Court held that, under Prodigy’s analysis, Level 3’s wholesale internet access business was not taxable.  [Cite to Tennessee Court Says Wholesale Internet Access is Not Subject to Sales Tax, April 27, 2012.]

On appeal, the Tennessee Court of Appeals affirmed the Trial Court, concluding that “[r]egardless of whether an end-user used a dial-up modem ((3)Connect Modem) or broadband ((3)Crossroads) to connect with the internet, Level 3 converted the end-user’s information into IP packets and, using its routers and other hardware, enabled the end-user to access the Internet.”  In so holding, the Court of Appeals recognized that the Prodigy decision had identified “Internet access” as an example of an enhanced service that did not qualify as telecommunications. Prodigy, 125 S.W.3d at 419.

The Court of Appeals also concluded that the “true object” or “primary purpose” of the Level 3 services was to provide access to the Internet and not to provide telecommunications.

The State will have 60 days to decide whether to seek discretionary review by the Tennessee Supreme Court.