877 A.2d 542 (Pa.Cmwlth. 2005), Concentric Network Corp. v. Commonwealth

Citation:877 A.2d 542
Party Name:CONCENTRIC NETWORK CORPORATION, (Now merged into and known as XO Communications, Inc.), Petitioner v. COMMONWEALTH of Pennsylvania, Respondent.
Case Date:June 17, 2005
Court:Commonwealth Court of Pennsylvania

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877 A.2d 542 (Pa.Cmwlth. 2005)

CONCENTRIC NETWORK CORPORATION, (Now merged into and known as XO Communications, Inc.), Petitioner


COMMONWEALTH of Pennsylvania, Respondent.

Commonwealth Court of Pennsylvania

June 17, 2005

Argued April 4, 2005.

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Michael A. Gruin, Harrisburg, for petitioner.

Karen M. Gard, Sr. Deputy Attorney General, Harrisburg, for respondent.


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FLAHERTY, Senior Judge.

Concentric Network Corporation (Concentric) appeals from an order of the Board of Finance and Revenue (Board of F&R) which affirmed the decision of the Department of Revenue Board of Appeals (BOA) denying Concentric's petition for refund of sales and use tax. We affirm.

Concentric is an internet service provider (ISP) engaged in the business of selling Internet access to residential and business customers in the Commonwealth. The Internet is a vast global computer network that allows computers all over the world to communicate with each other.

On April 1, 2002 Concentric filed a petition with the BOA seeking a refund of sales and use tax paid on the purchase of ISDN-PRI, T-1, ATM and Frame Relay Services (collectively, data transport services or data lines). Concentric purchased the data transport services from telecommunication carriers to form a network that it interconnected with the Internet backbone for purposes of providing its customers with Internet access. Concentric also purchased routers, servers, and modems to furnish Internet access to its customers.

On September 16, 2002, the BOA in its decision denied Concentric's claim for refund of sales tax paid for the above mentioned items. Concentric filed an appeal with the Board of F&R, which sustained the decision of the BOA. This appeal followed for which the parties have entered into a stipulation of facts. 1

The stipulation of facts provides that an ISP, such as Concentric, can provide access to the Internet via a dial-up basis or through a dedicated data line. If accessed on a dial-up basis, the customer uses a telephone line (plain old telephone service or POTS) purchased by the customer from the local telephone company to access Internet service. If a customer is accessing the Internet using an ordinary local telephone exchange access line, the customer must use a modem to convert his digital signals into analog signals to travel over the analog POTS line. Then in order to travel over the ISP's digital transport network of T-1's, ISDN-PRI's ATM and Frame Relay lines, the customer's information must be converted back to digital format. The reconversion is performed by modems located at the telecommunication carrier's central office or the ISP's point of presence (PoP), i.e., the location of the ISP's equipment necessary to provide Internet access.

As an alternative to dial-up service, a customer can purchase a dedicated data transport service which provides the customer with full time Internet access at a higher rate of speed than that which is permitted using a dial-up access line.

In order for computers to communicate with each other over the Internet, protocols known as Transmission Control Protocol/Internet Protocols (TCP/IP) must be employed. Protocols are a specific set of rules or procedures that allows computers to understand each other. Each computer that is equipped to operate on the Internet uses the TCP which breaks the information being sent into tiny data packets and tags each packet with instructions for how to assemble the information in a coherent form. Each computer's IP then tags each data packet with a destination IP address and a return IP address to allow the information to reach its intended destination and to be responded to. After an end

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user's data has been broken down, tagged and addressed by TCP/IP, that end computer transmits the data to the ISP, which reroutes it for delivery to the ultimate destination.

The data transport services utilized by Concentric included routers which were used to route customers' data to its intended destination and to analyze incoming data traffic. Servers were used for authentication of user status, e-mail and web browsing. IDNS-PRI and T-1 lines were used in transmitting customers' data between the telecommunications carrier's central office PoP and between Concentric's PoP.

The first issue before this court is whether the data transport services (ISDN-PRI, T-1, ATM and Frame Relay Services) are excluded from sales tax because such services do not meet the definition of "telecommunications service."

Section 202 of the Tax Reform Code of 1971 (Tax Code), Act of March 4, 1971, P.L. 6, as amended, 72 P.S. § 7202, subjects purchases of tangible personal property to sales and use tax. Tangible personal property includes telecommunications service, Section 201(m) of the Tax Code, 72 P.S. § 7201(m). Thus, we must determine whether the data transport services meet the definition of telecommunications service so as to constitute taxable tangible property. Section 201(rr) of the Tax Code, 72 P.S. § 7201(rr), defines telecommunications service as:

Any one-way transmission or any two-way, interactive transmission of sounds, signals, or other intelligence converted to like form, which effects or is intended to effect meaningful communications by electronic or electromagnetic means via wire, cable, satellite, light waves, microwaves, radio waves, or other transmission media. The terms include all types of telecommunication transmissions, such as local, toll, wide-area or any other type of telephone service.... The term does not include any of...

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