Level 3 Commc'ns, LLC v. Commonwealth
| Decision Date | 15 October 2015 |
| Citation | 125 A.3d 832 |
| Parties | LEVEL 3 COMMUNICATIONS, LLC, Petitioner v. COMMONWEALTH of Pennsylvania, Respondent. |
| Court | Pennsylvania Commonwealth Court |
Daniel M. Dixon, Philadelphia, and Kim M. Watterson, Pittsburgh, for petitioner.
Karen M. Gard, Deputy Attorney General, Harrisburg, for respondent.
Level 3 Communications, LLC (Level 3), petitions this Court for review of an order of the Board of Finance and Revenue (the Board). For the reasons set forth below, we reverse.
Level 3 is an international Internet1 Service Provider (ISP) operating a Tier 1 network.2 Level 3 sells various services, including (3)ConnectModem (3CM). 3CM is a service that provides the infrastructure, including the local dial network, telephone numbers, and modems, for ISPs desiring to outsource the remote access to their network or the internet. America Online, Inc. (AOL) and other retail ISPs3 purchased Level 3's 3CM service to provide internet access to their dial-up end-users. In other words, AOL sold internet access to its end-users and outsourced to Level 3 the physical infrastructure necessary for AOL's end-users to access the internet.
To initiate an internet session utilizing the 3CM service, the end-user opens the ISP software on his or her home computer. The software initiates an analog call over the local telephone lines. The call is then routed to a Level 3 facility, which contains a network access point, modems, modem banks, and network access servers, along with other equipment. Level 3 then converts the analog call to a digital signal. Traffic on the digital side of the Level 3 modem is routed by Level 3 directly to or from one or more datacenters.4 In order to accomplish this, Level 3 looks-up the numerical IP5 address6 associated with the end-user's requested web page,7 routes the end-user to the requested web page using the IP address, and ultimately creates the end-user's internet session.
In the case of AOL end-users, the first-requested web page was always www.aol. com, because the AOL software resident on the end-user's device required that all end-users be routed there first. AOL took advantage of several options offered by the 3CM service in order to create a Virtual Private Network (VPN),8 which it utilized to direct its end-users to www.aol.com. The VPN provided “tunnels” from Level 3's modem bank through Level 3's IP network infrastructure to an AOL datacenter. This “tunneling” prevents an AOL end user from accessing internet content without first visiting www.aol.com.
The Pennsylvania Department of Revenue (Department) audited Level 3's sales for the period of January 1, 2000 through April 30, 2003. During the audit period, Level 3 sold its 3CM service to AOL and other retail ISPs. Level 3 did not collect or remit sales and use tax on its sale of 3CM to retail ISPs during the audit period. Following the audit, the Department issued a sales and use tax assessment of $2,939,985.56. Level 3 appealed the assessment to the Board, which reduced the assessment to $2,331,481.07. The Department and Level 3 have reached an agreement disposing of $1,330,050.07 of the assessed tax, leaving only $1,001,431 at issue in this proceeding. The remaining tax assessment pertains to Level 3's sales of 3CM to AOL. Thus, Level 3's sales of 3CM to AOL are the only sales at issue in this appeal.
On appeal to this Court,9 Level 3 argues that the 3CM service sold to AOL constitutes internet access and is, therefore, exempt from sales and use tax under the Pennsylvania Tax Code (Tax Code)10 and the federal Internet Tax Freedom Act (ITFA).11 The Commonwealth, relying heavily on this Court's decision in America Online, Inc. v. Commonwealth, 932 A.2d 332 (Pa.Cmwlth.2007) (AOL/Sprint ), aff'd, 600 Pa. 99, 963 A.2d 903 (2008), argues that the 3CM service sold to AOL is a basic telecommunications service and is, therefore, subject to tax.12
Section 202 of the Tax Code, 72 P.S. § 7202, imposes a sales and use tax on purchases of tangible personal property sold within the Commonwealth. “Tangible personal property” includes “interstate telecommunication service originating or terminating in the Commonwealth and charged to a service address in this Commonwealth.” Section 201 of the Tax Code, 72 P.S. § 7201(m). “Telecommunications service,” as defined in Section 7201(rr) of the Tax Code, 72 P.S. § 7201(rr), includes:
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.
“Telecommunications service” is also defined in the Department's Policy Statement 60.20 to include “all types of telecommunications transmissions,” but explicitly excludes “enhanced telecommunications services.” 61 Pa.Code § 60.20(a). “Enhanced telecommunications services” is defined in the Policy Statement as:
(i) Services, offered over a telecommunications network, which employ computer processing applications that include one or more of the following:
(A) Acts on 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 telecommunications services include electronic publishing, Internet access, voice mail and electronic mail services. Services utilizing any of the computer processing applications in subparagraph (i) solely for the management, control or operation of a telecommunications system or the management of a telecommunications service is not an enhanced telecommunication service.
In AOL/Sprint, AOL sought a refund of sales and use tax it had paid on purchases of port modem management (PMM) services from Sprint Corporation (Sprint). The PMM service was described as follows:
A customer's dial-up access begins with the computer modem attached to the customer's computer.... The modem attached to the customer's computer dials a telephone access number associated with a business local exchange service line that Sprint obtains from a local exchange carrier....
The exchange service line connects to a bank of AOL service modems physically located at premises controlled and managed by Sprint. The modems are tangible personal property leased by AOL from third party leasing companies. The bank of modems at the Sprint premises convert the analog signal coming in from the exchange service line into a digital signal, which is then transmitted over Sprint's data network to the computers located in the AOL data center.
AOL argued that the PMM services were enhanced telecommunications services because they changed the format of information from analog to digital, interacted with stored information, and interacted with computer processing applications.
This Court rejected AOL's arguments, holding that the PMM service
meet[s] the definition of taxable telecommunications services in as much as Sprint's management and operation of the AOL ports/modems is just one of the purposes for which AOL uses Sprint services. AOL purchased the Sprint services to assemble and manage a collection of hardware, software and telecommunications services that transport data to and from its data center to AOL's members.
Here, the Commonwealth argues that the 3CM service serves the same purpose and function as the PMM service in AOL/Sprint, and that the 3CM service is, therefore, a taxable telecommunication service as well. The Commonwealth acknowledges the technical differences between Sprint's network in AOL/Sprint and Level 3's network here, but argues that these differences are irrelevant. We disagree. In AOL/Sprint, the analog call traveled along Sprint's lines to AOL service modems physically located at premises controlled and managed by Sprint. The AOL modem performed the analog to digital conversion, and the digital signal was transmitted over Sprint's data network to the hardware located in the AOL datacenter. Sprint provided dedicated private line channels created using Time Division Multiplexing (TDM)13 technology. Here, by contrast, the analog call travels over Level 3's lines to a Level 3–owned and operated facility. This facility contains modems, a network access point and network access servers— ((3)ConnectModem Product Guide, p. 5.) Level 3 then transmits the digital signal over its IP network to the requested IP address. Level 3 uses Packet Switching14 and VPNs to deliver end-users to the AOL datacenter.
As this brief recitation demonstrates, there are fundamental technological differences between Sprint's PMM service and Level 3's 3CM service. AOL/Sprint, therefore, is not controlling in this case. Furthermore, these technological differences are material. The Level 3 facility, as the point at which the end-user connects with the network access point and network access servers, is a Point of Presence (PoP)—“an access point, location or facility that connects to and helps other devices establish a connection with the [i]nternet.” (Resp't Br. Appx. B.) Because the Level 3 facility is a PoP, it is where the end-user's connection to the internet begins....
To continue reading
Request your trial