GTE Sprint Communications Corp. v. Department of Treasury

• Citation: 445 N.W.2d 476,179 Mich.App. 276
• Decision Date: 22 September 1989
• Docket Number: Docket No. 108395
• Parties: GTE SPRINT COMMUNICATIONS CORPORATION, Petitioner-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellee. 179 Mich.App. 276, 445 N.W.2d 476
• Court: Court of Appeal of Michigan (US)

Page 476

445 N.W.2d 476

GTE SPRINT COMMUNICATIONS CORPORATION Petitioner-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellee.

Docket No. 108395.

179 Mich.App. 276, 445 N.W.2d 476

Court of Appeals of Michigan.

Submitted April 17, 1989.

Decided Aug. 8, 1989.

Released for Publication Sept. 22, 1989.

[179 MICHAPP 277] Farhat, Story & Kraus, P.C. by Richard C. Kraus, East Lansing, and Richard N. Wiley, Burlingame, Ca., for petitioner-appellant.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Richard R. Roesch and Ross H. Bishop, Asst. Attys. Gen., for respondent-appellee.

Before SULLIVAN, P.J., and SAWYER and MARILYN J. KELLY, JJ.

SAWYER, Judge.

Petitioner appeals from a judgment of the Tax Tribunal which affirmed as modified an assessment made against petitioner by respondent Michigan Department of Treasury. The modified assessment amounted to $684,338 in use tax and $68,433 in penalties plus accrued interest. On appeal, petitioner argues that it was not subject to the use tax imposed. We reverse in part and remand.

Petitioner is a California-based communications common carrier licensed by the Federal Communications Commission to provide long-distance telephone service. Petitioner does not provide local telephone service and, therefore, must make use of local telephone services in order to provide its service. That is, a long-distance telephone call involves three discrete steps in the transmission from caller to receiver. The originating call begins at the caller's telephone and is carried over transmission and switching facilities to the entry point of a long-distance network. This is known as the originating link. The long-distance carrier then transmits the call over its facilities to the exit [179 MICHAPP 278] point of the network in the area where the call is to be received. This is the intermediate link. Finally, the call is transmitted over the facilities of a local telephone company to the receiving telephone. This is known as the terminating link. Petitioner provides only the intermediate link. Accordingly, petitioner, like other long-distance telephone communications companies, must contract with local telephone companies which provide the originating and terminating links. The use of the facilities and equipment of a local telephone company for these links is known as access services.

At issue in this appeal is whether a use tax is due on the monies paid by petitioner to Michigan Bell for access services purchased by petitioner from Michigan Bell for use with its long-distance telephone service in Michigan. Also at issue is the taxation on charges collected by petitioner from its customers for intrastate long-distance telephone service, that is, where a caller within the State of Michigan places a telephone call to a telephone also located within the State of Michigan. Finally, we should note that Michigan Bell consistently charged petitioner for the use tax due on the access service fees paid by petitioner to Michigan Bell, but petitioner deleted the tax from its remittances to Michigan Bell.

Respondent assessed petitioner for the use taxes it maintained were due for petitioner's activities within Michigan and petitioner challenged the assessment. As noted above, the Tax Tribunal agreed with respondent, with some modifications based upon the testimony of the auditor.

Petitioner first argues that its purchase of access services from Michigan Bell for use in originating and terminating interstate long-distance telephone communications is not subject to use tax under [179 MICHAPP 279] M.C.L. Sec. 205.93a; M.S.A. Sec. 7.555(3a). We agree. M.C.L. Sec. 205.93a; M.S.A. Sec. 7.555(3a) provides in pertinent part as follows:

The use or consumption of the following services shall be taxed under this act in the same manner as tangible personal property is taxed under this act:

(a) Intrastate telephone, telegraph, leased wire and other similar communications, including local telephone exchange and long distance telephone service which both originates and terminates in Michigan, and telegraph, private line and teletypewriter service between places in Michigan, but excluding telephone service by coin-operated installations, switchboards, concentrator-identifiers, interoffice circuitry and their accessories for telephone answering service and directory advertising proceeds.

First, we note that tax statutes are construed in favor of the taxpayer and against the government. See Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct. 53, 54, 62 L.Ed. 211 (1917), wherein the Court commented as follows:

In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen.

The above language from the Gould decision was quoted with approval by our Supreme Court in Metzen v. Dep't of Revenue, 310 Mich. 622, 627, 17 N.W.2d 860 (1945), and Standard Oil Co. v. Michigan, 283 Mich. 85, 88, 276 N.W. 908 (1937). More recently, this Court stated a similar rule in Detroit v. [179 MICHAPP 280] Norman Allan & Co., 107 Mich.App. 186, 191, 309 N.W.2d 198 (1981):

In addition, tax statutes are strictly construed. Topps of Warren, Inc v City of Warren, 27 MichApp 59, 62; 183 NW2d 310 (1970). As the Court stated in In re Dodge Brothers, 241 Mich 665, 669; 217 NW 777 (1928):

"The scope of tax laws may not be extended by implication or forced construction. Such laws may be made plain, and the language thereof, if dubious, is not resolved against the taxpayer."

With these rules in mind, we turn to petitioner's argument that the access services for which petitioner pays Michigan Bell do not come within the provisions of Sec. 3a of the Use Tax Act. First, petitioner argues that access services are not "communications" as that word is used in the Use Tax Act. We agree. Indeed, the Tax Tribunal agreed that access services are not in and of themselves communications, but merely a part of the communication:

No matter that access services are not in themselves "communications." The statute authorizes the taxation of qualifying services provided as a part of communications.

Rather, the tribunal concluded that the statute authorized the taxation of parts of communications and, moreover, concluded that access services are part of "local telephone exchange service," which may be taxed under the act. Thus, we must determine whether the statute authorizes the taxation of parts of a "communication" or service and whether access services are part of local telephone exchange services as used in the act. In both cases, we conclude that the statute does not cover access services.

[179 MICHAPP 281] Although petitioner sets forth separate arguments as to why "access services" do not come within the meaning of either "communications" or "telephone exchange service" as used in the Use Tax Act, we believe our attention can be more fruitfully focused on the meaning of "telephone exchange service" as used in the Use Tax Act. We reach this conclusion since the tribunal has concluded that access services are not "communications," but merely a part of the communication. Additionally, the Use Tax Act refers to telephone, telegraph, leased wire and other similar "communications" as "including local telephone exchange and long distance telephone service." Therefore, we believe that determining whether local telephone exchange service involves an end-to-end communication, or whether it includes parts of communications, will shed light on whether a communication under the act must be a complete, end-to-end communication or whether it can include a part of a communication. ¹ That is, by exploring the meaning of the term "local telephone exchange service" we believe that it can be determined whether the Legislature, in enacting Sec. 3a of the Use Tax Act, intended to place a tax on parts of communication services in addition to complete communications. On the basis of this inquiry, we believe that the Legislature was taxing complete "telephone calls" rather than the constituent parts of those calls.

We begin our analysis by looking to the federal Communications Act of 1934, 47 U.S.C. Sec. 151 et seq. 47 U.S.C. Sec. 153(r) defines "telephone exchange service" as follows:

[179 MICHAPP 282] "Telephone exchange service" means service within a telephone exchange, or within a connected system of telephone exchanges within the same exchange area operated to furnish to subscribers intercommunicating service of the character ordinarily furnished by a single exchange and which is covered by the exchange service charge.

Thus, as referred to under the federal act, a telephone exchange service is a service which provides local, as opposed to long-distance, end-to-end communications provided to a subscriber for a service charge. That is, telephone exchange service is what a residential or commercial customer utilizes when he picks up the telephone receiver, hears a dial tone and places a toll-free call to a local telephone number; ² it is nothing more and, more importantly, it is nothing less. Moreover, decisions of the federal courts acknowledge that the term "telephone exchange service" is a term of art and refers to service within a local exchange system as contrasted with long-distance service. See North Carolina Utilities Comm v. Federal Communications Comm., 552 F.2d 1036, 1045 (CA 4, 1977) ("telephone exchange service" is a statutory term of art and refers to discrete local exchange system service as contrasted to long-distance service), and American Telephone & Telegraph Co. v. Federal Communications Comm., 572 F.2d 17, 20, n. 1 (CA 2, 1978) ("telephone exchange service" is commonly referred to as "local" or "basic" "exchange service" as contrasted with MTS [...