Concentric Network Corp. v. Com.

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

877 A.2d 542

CONCENTRIC NETWORK CORPORATION, (Now merged into and known as XO Communications, Inc.), Petitioner v. COMMONWEALTH of Pennsylvania, Respondent.

Commonwealth Court of Pennsylvania.

Argued April 4, 2005.

Decided June 17, 2005.

Michael A. Gruin, Harrisburg, for petitioner.

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

BEFORE: McGINLEY, J., LEADBETTER, J., and FLAHERTY, Senior Judge. OPINION BY Senior Judge FLAHERTY

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 user's data has been broken down, tagged and addressed by TCP/IP, that end user's 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 the following:

...

(3) Charges for access to the Internet. Access to the Internet does not include any of the following:

...

(B) Telecommunication services purchased by an Internet service provider to deliver access to the Internet to its customers.

Concentric argues that its data transport services do not meet the definition of telecommunications service because no transmission function is included in the purchases being made by Concentric.

As an ISP, Concentric operates a packet-switched network. Computers connected to the Internet do not communicate to each other via a continuous, uninterrupted connection. Instead, communication is accomplished through periodic transmission and receipt of data packets over packet-switched network data paths provided by ISPs. Computers connected to the Internet exchange information by periodically transmitting and receiving packets of data. The role of the ISP is to route the data packets to and from their destination. The data transport services purchased by Concentric serve simply as the pathways over which the data packets travel. The transmission of the data packets occurs at each customer's individual computer. Concentric merely purchases the data transport services for the limited purpose of allowing its customers to send and receive data packets to and from the Internet.

Concentric states that its packet-switching network can be broken down into three segments: (1) downstream access segment —the portion of the network that enables customers to send data back and forth between their homes and Concentric's routers; (2) intermediate segment—the portion of the network that involves transporting customer data between Concentric's multiple router locations and (3) upstream access segment—the portion of the network that enables Concentric to transport its customers data back and forth between its routers and the Internet backbone. Concentric maintains that for the upstream access and intermediate segment, there is an additional fact that places theses service outside the definition of telecommunications service. The upstream and intermediate segment data transport services are in reality Internet access purchased from larger ISPs and the legislature has specifically provided that charges for access to the Internet do not qualify as taxable telecommunications service, Section 201(rr)(3) of the Tax Act, 72 P.S. § 7201(rr)(3).

The Commonwealth argues and we agree that the data transport services meet the definition of telecommunications service inasmuch as Concentric uses the lines to transmit by wire digital signals containing the customer's message or information. The Commonwealth points to 61 Pa.Code § 60.20(b)(6) which defines Internet access as follows:

Service charges associated with the provision of Internet access by an Internet or on-line service provider ... are considered enhanced telecommunication charges and are not subject to sales and use tax. Telecommunication charges incurred by an Internet service provider to deliver Internet access to its subscribers are subject to tax. Local, toll or long distance telephone charges incurred by a subscriber to transmit signals from a computer to the Internet service provider are subject to tax....

(Emphasis added.) Furthermore, 61 Pa.Code § 60.20(a) provides that "enhanced telecommunication services" is defined as:

(i) Services, offered over a telecommunications network, which employ computer processing applications that include one or more of the following:

(A) Acts of the format, content, code, protocol or similar aspects of the purchaser's transmitted information.

(B) Provides the purchaser additional, different or restructured information.

(C) Involves the purchaser's interaction with stored information.

...

(ii) Examples of enhanced telecommunication services include ... Internet access....

Here, the data transport services at issue meet the definition of telecommunications service because Concentric uses the lines to transmit by wire digital signals containing the customer's message or information. The lines represent the vehicle to transport and deliver Internet traffic.

Pennsylvania law specifically excludes from enhanced services the telecommunications services used to deliver Internet access and treats the telecommunications charges differently from Internet access charges. Internet...