AT & T Communications of Mountain States, Inc. v. State, Dept. of Revenue, 87SA253

• Decision Date: 24 July 1989
• Docket Number: No. 87SA253,87SA253
• Parties: AT & T COMMUNICATIONS OF THE MOUNTAIN STATES, INC., Plaintiff-Appellee, v. STATE of Colorado, DEPARTMENT OF REVENUE, and Alan N. Charnes, as Executive Director of the Department of Revenue, Defendants-Appellants.
• Court: Colorado Supreme Court

Page 677

778 P.2d 677

AT & T COMMUNICATIONS OF THE MOUNTAIN STATES, INC., Plaintiff-Appellee, v. STATE of Colorado, DEPARTMENT OF REVENUE, and Alan N Charnes, as Executive Director of the Department of Revenue, Defendants-Appellants.

No. 87SA253.

Supreme Court of Colorado,

En Banc.

July 24, 1989.

Rehearing Denied Sept. 18, 1989.

Nancy J. Gegenheimer and R. Bruce Johnson, Holme Roberts & Owen, Denver, and James P. Kratochvill and J. Elaine Bialczak, Basking Ridge, N.J., for plaintiff-appellee.

Duane Woodard, Atty. Gen., Charles B. Howe, Chief Deputy Atty. Gen., Richard H. Forman, Sol. Gen., and Anthony S. Trumbly, Asst. Atty. Gen., Denver, for defendants-appellants.

Geoffrey T. Wilson, Denver, for amicus curiae Colorado Municipal League.

MULLARKEY, Justice.

In this appeal, we must decide whether the sale of local telephone network access services used in connection with interstate telephone calls is subject to state sales tax under section 39-26-104(1)(c), 16B C.R.S. (1982). We hold that it is taxable. We reverse the district court judgment and remand the case to that court to determine the amount of sales tax owed by AT & T Communications of the Mountain States, Inc. to the state of Colorado.

I.

The telecommunications industry has undergone major changes since American Telephone & Telegraph Company was ordered to divest its telephone subsidiaries effective January 1, 1984, in the Modified Final Judgment (MFJ) of United States v. American Telephone and Telegraph Company, 552 F.Supp. 131 (D.D.C.1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983). In compliance with the MFJ, the United States was divided into 161 "local access and transport areas" (LATAs) which are geographic zones drawn around major metropolitan areas for the provision and administration of telecommunication services. Colorado consists of two separate LATAs, the Denver LATA and the Colorado Springs LATA. See generally GTE Sprint Communications Corp. v. Public Util. Comm'n, 753 P.2d 212 (Colo.1988) (description of Colorado intraLATA telephone service markets).

Under the MFJ, a single company can no longer provide telephone services both within LATAs and between LATAs. See United States Transmission Sys. v. Board of Assessment Appeals, 715 P.2d 1249 1254 (Colo.1986). Mountain States Telephone and Telegraph Company (Mountain Bell) ¹ is a local exchange carrier which is restricted to providing telephone service only within each LATA. Mountain Bell is responsible for connecting individual customers to the local exchange system by means of a physical link between the customers' premises and a switch at a nearby Mountain Bell central office. The central office then can connect calls from the local exchange to an interexchange network. Connecting calls from the local exchange to the interLATA or interstate network is known as "access." See generally Kahn & Shew, Current Issues in Telecommunications Regulation: Pricing, 4 Yale J. on Reg. 191, 200-01 (1987). Local exchange access services (access services) are the originating or terminating links on either end of the intermediate communication link provided by interexchange carriers such as AT & T Communications and MCI. All of the access services provided by Mountain Bell which are at issue in this case are performed solely within the state of Colorado.

AT & T Communications (ATTCOM), acting through its subsidiary, AT & T Communications of the Mountain States, Inc., is one of several long distance or interexchange carriers which are limited to providing telephone services between LATAs as well as between states. Since Mountain Bell controls the telephone networks within each of the two Colorado LATAs, ATTCOM and other interexchange carriers must purchase access to the local exchange network from Mountain Bell in order to originate or complete their customers' interstate and interLATA calls. ² The access services were set up under the MFJ, and the divestiture order requires Mountain Bell to offer local exchange access to all carriers in a non-discriminatory manner so as to open up the long distance telephone services market to other competitors besides ATTCOM. See United States v. AT & T, 552 F.Supp. at 232-233.

In a typical interstate call facilitated by ATTCOM, the end-user or customer originates the call by sending the signal over the local exchange on equipment owned by Mountain Bell. Mountain Bell routes the call to a switching center operated by the customer's long distance carrier which, in this case, is ATTCOM. The signal is then routed over long distance lines and equipment owned by ATTCOM to a switching center in the destination state. Finally the signal is switched over to the local exchange network where it is sent over equipment owned by the local exchange carrier to the premises of the end-user receiving the call. See National Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d 1095, 1104 (D.C.Cir.1984) (description of processing of long distance telephone call), cert. denied, 469 U.S. 1227, 105 S.Ct. 1225, 84 L.Ed.2d 364 (1985); GTE Sprint, 753 P.2d at 214 n. 2 (same). Prior to divestiture the entire processing of an interstate call occurred on equipment owned by American Telephone & Telegraph Company, but because the MFJ prohibits a single company from providing both local and long distance telephone service, ATTCOM and the other interexchange carriers must pay a carrier access charge to Mountain Bell for their use of the local exchange network. The sales taxation of these access charges forms the subject of this dispute.

Since 1935, Colorado law has authorized the imposition of a sales tax on intrastate telephone service:

There is levied and there shall be collected and paid a tax ... upon telephone and telegraph services, whether furnished by public or private corporations or enterprises for all intrastate telephone and telegraph service.

§ 39-26-104(1)(c), 16B C.R.S. (1982) (emphasis added). The tax currently is imposed at the rate of three percent of the amount of the sale. § 39-26-106(1), 16B C.R.S. (1982).

In anticipation of the January 1, 1984 breakup of American Telephone & Telegraph Company, the Department of Revenue (the department) issued Revenue Bulletin No. 83-7 in October of 1983 (available on WESTLAW and LEXIS) which stated that the department interpreted the sales tax provision of section 39-26-104(1)(c) to apply to interexchange carriers' purchase of access services from Mountain Bell. The bulletin stated, "It is the Department's position that the services being provided for which 'carrier access charges' and 'customer access line charges' are assessed constitute 'intrastate telephone service' and are therefore taxable."

Accordingly, from January 1, 1984, the effective date of the MFJ, until July 31, 1984, ATTCOM paid sales taxes on its purchases of access services from Mountain Bell. These taxes included state sales tax, Regional Transportation District tax, and county and city sales tax totalling approximately $8.9 million. This amount was collected from ATTCOM by Mountain Bell as the statutory collecting agent for the Colorado Department of Revenue (the department). See § 39-26-105, 16B C.R.S. (1982) (vendor liable for collecting and remitting sales tax on sales made by vendor).

On November 20, 1984, ATTCOM filed a claim for refund with the department for the entire $8.9 million of taxes paid on telephone access services. Apparently without a hearing, the department agreed to refund the portion of sales tax in dispute which related to access charges for intrastate interLATA calls. The parties agreed that access services for such calls already were taxed as part of the tax on intrastate telephone calls. Thus, the immediate dispute involves taxation of carrier access services for only interstate calls. ³ In its final decision issued August 19, 1985, the department denied ATTCOM's request for a refund of the remaining taxes paid on access services for interstate calls, approximately $7.4 million. ⁴ ATTCOM appealed the department's decision to the district court pursuant to section 39-21-105(2)(b), 16B C.R.S. (1982), and the district court tried the case de novo.

Before the district court, ATTCOM advanced three theories why its purchases of access services for interstate calls were not taxable under the statute which allows taxation of "intrastate telephone and telegraph services," section 39-26-104(1)(c). ATTCOM claimed that the purchases were not taxable because (1) they were access services, not telephone services; (2) they were interstate, not intrastate telephone services; (3) they were a wholesale, not retail purchase. The district court agreed with the second argument and found that the access services "constitute interstate commerce" and were "an integral part of an interstate call." As such, the trial court concluded that access services fell outside the reach of the statute which taxes only intrastate calls. The district court ordered the department to refund the $7.4 million to ATTCOM plus interest. The next month, on October 31, 1986, the district court granted ATTCOM's request for an injunction against the department to enjoin further collection of the tax on access charges for interstate calls.

The department appealed and the case was certified from the court of appeals to this court pursuant to section 13-4-109(3), 6A C.R.S. (1987).

II.

The issue before this court is whether the sale of local telephone exchange network access services used in connection with interstate telephone calls is subject to sales tax under section 39-26-104(1)(c), 16B C.R.S. (1982), which taxes "all intrastate telephone and telegraph service." ATTCOM as the party requesting a tax refund has the burden of proving that the sales or services in question are not subject to taxation. §§ 39-21-105(2)(b) & 39-26-114(4), 16B C.R.S. (1982).

The trial court gave two reasons for its holding that access services were...