Ruling 2002-5, Sales and Use Taxes / Computer and Data Processing Services / Telecommunications Services
FACTS:
A telecommunications company (the “Company”) purchases telecommunications services from a local provider to render its X.25 Service and Frame Relay Service, both of which transmit data between its customers’ locations.
The X.25 Service is used to transmit data in such a manner that accuracy of the transmission is ensured. The X.25 Service, which operates on a shared network without a predetermined route, segments data to be transmitted into small packets and converts it to the X.25 protocol (which consists of rules to uniformly format data for transmission through the X.25 Service). The data packets are the same size and each has a header, with the network address of the sender and recipient, and a trailer, with a “check sum” to verify that the packet has been transmitted and received error-free. Each X.25 network switch that the data passes through uses a computer processing application to verify the data. If it detects inaccurate data, a new packet is automatically re-sent through the network to replace the corrupted packet.
The Frame Relay Service is primarily used for the transmission of data, although the service is capable of supporting video and, at a lower level of quality, voice transmissions. The Frame Relay Service, which operates on a frame relay network with a predetermined route, segments data to be transmitted into slides, each of which has a header, a data section and a trailer. The header has a “flag” showing the beginning of a frame and addresses for routing the slide, and the trailer has a frame check that is used to detect errors in the address field, and an ending flag showing the end of a frame. Although the Frame Relay Service requires data to be converted into the frame relay protocol, the slides need not be of the same size and are not constantly checked for accuracy, unlike the X.25 Service.
ISSUE:
Whether the X.25 Service and the Frame Relay Service are telecommunications services enumerated in Conn. Gen. Stat. §12-407(2)(k) or computer and data processing services enumerated in Conn. Gen. Stat. §12-407(2)(i)(A).
RULING:
The Company’s X.25 Service is a computer and data processing service. The Company must charge the applicable rate of tax for computer and data processing services (currently 1%) on its sale of the X.25 Service and must pay 6% tax on the telecommunications services it purchases to render this service. Resale treatment is not available for the Company’s purchases of telecommunications services to render its X.25 Service under either Conn. Gen. Stat. §12-410(5), because telecommunications services are not enumerated in Conn. Gen. Stat. §12-407(2)(i), or Conn. Gen. Stat. §12-407(26)(a)(4), because resale treatment under that section applies only when both services involved are telecommunications services.
The Company’s Frame Relay Service is a telecommunications service (taxable at 6%), and the telecommunications services that the Company buys in order to render the Frame Relay Service may be purchased on resale under Conn. Gen. Stat. §12-407(26)(a)(4).
DISCUSSION:
The Federal Communications Commission (“FCC”) has distinguished between “basic services” and “enhanced services” since 1980. Second Computer Inquiry, 77 FCC 384 (1980). It did so to ensure that telecommunications consumers would receive the benefits of competition by continuing to regulate telecommunications carriers’ provision of basic services while leaving enhanced services unregulated. This would allow companies providing new technologies, such as Internet service providers, that are unaffiliated with telecommunications carriers to acquire telecommunications services fairly and competitively with competitors that are affiliated with telecommunications carriers.
The FCC defined “basic transmission services” as “the common carrier offering of transmission capacity for the movement of information between two or more points. . . . [A] basic service is the offering of a ‘transmission pipeline’ in contrast to the myriad services that are dependent upon, but different in kind, from the pipeline service.” In the Matter of Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), 84 F.C.C.2d 50 at ¶10 (Dec. 31, 1980).
The FCC defined “enhanced service” as:
services, offered over common carrier transmission facilities used in interstate communications, which employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber’s transmitted information; provide the subscriber additional, different, or restructured information; or involve subscriber interaction with stored information.
47 C.F.R. §64.702(a).
There appears to have been at least a partial shift in terminology since then, due to The Telecommunications Act of 1996, 47 U.S.C. §151 et seq. (the “1996 Act”), so that what had been known as “enhanced services” has been recognized by the FCC to be “information services” under the 1996 Act. Non-Accounting Safeguards Order, 11 F.C.C.R. at 21955-56, ¶102. The FCC also sought comment regarding its proposal to deem “basic services” to be the same as “telecommunications services” under the 1996 Act. Computer III Further Remand Proceedings: Bell Operating Company Provision of Enhanced Services; 1998 Biennial Regulatory Review – Review of Computer III and ONA Safeguards and Requirements, Further Notice of Proposed Rulemaking, 13 FCC Rcd 6040 (1998).
The 1996 Act defined “information services” as
the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and includes electronic publishing, but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.
47 U.S.C. §153(20).
The 1996 Act defined “telecommunications” as
the transmission, between or among points specified by the user, of information of the user’s choosing, without change in the form or content of the information as sent and received.
47 U.S.C. §153(43).
Conn. Gen. Stat. §12-407(26)(a) defines “telecommunications services” as
Telecommunications service" does not include (1) non-voice services in which computer processing applications are used to act on the information to be transmitted . . . and (4) access or interconnection service purchased by a provider of telecommunications service from another provider of such service for purposes of rendering such service . . . .
It appears that the distinction made between services that are within the definition of “telecommunications services” in Conn. Gen. Stat. §12-407(26) and those that were set outside of the definition was based on the FCC distinction between “basic” and “enhanced” services, and that the exclusion in Conn. Gen. Stat. §12-407(26) for “nonvoice services in which computer processing applications are used” came from the FCC definition of “enhanced service.” Therefore, an FCC determination that a service is an “enhanced service” (or an “information service”) should be a factor in determining whether the service is excluded from Connecticut’s definition of “telecommunications services.” Similarly, where the FCC defines a service to be a “basic service,” that determination is persuasive that the service comes under Connecticut’s definition of “telecommunications services.”
Note that, while the Department will refer to FCC determinations that a particular service is a basic or an enhanced service, the Department will not be bound by the FCC rulings. Although the Conn. Gen. Stat. §12-407(26) definition of “telecommunications” appears to have been drawn from the FCC interpretations, it now stands on its own and therefore controls.
Frame Relay Services are deemed to be basic services by the FCC. In the Matter of Independent Data Communications Manufacturers Assoc., Inc. Petition for Declaratory Ruling that AT&T’s InterSpan Frame Relay Service is a Basic Service, DA 95-2190 (October 18, 1995). As such, the Company’s Frame Relay Service is taxable as telecommunications services at the rate of 6%, and the telecommunications services that the Company buys in order to render the Frame Relay Service may be purchased without tax under Conn. Gen. Stat. §12-407(26)(a)(4).
However, because the Company’s X.25 Service is an enhanced service under the definition in 47 C.F.R. §64.702(a), in that the service manipulates the data being transmitted by the Company’s customers, it falls under the exclusion for “nonvoice services” in the definition of telecommunications services in Conn. Gen. Stat. §12-407(26). Because the true object of the X.25 Service is not only to transmit the data, but to reformat it and check the transmission for accuracy using computerized equipment, it is a computer and data processing service. (See Ruling Nos. 96-1 and 96-7.) Therefore, the Company must charge the applicable rate of tax for computer and data processing services on its sale of the X.25 Service and must pay tax on the telecommunications services it purchases from the local provider to render this service. Resale treatment is not available for the Company’s purchases of telecommunications services to render its X.25 Service under either Conn. Gen. Stat. §12-410(5), because telecommunications services are not enumerated in Conn. Gen. Stat. §12-407(2)(i), or Conn. Gen. Stat. §12-407(26)(a)(4), because resale treatment under that section applies only when both services involved are telecommunications services.
LEGAL DIVISION
December 17, 2002