New Cingular Wireless PCS LLC v. Comm'r of Revenue

Citation98 Mass.App.Ct. 346,154 N.E.3d 947
Decision Date04 September 2020
Docket NumberNo. 18-P-1317,18-P-1317
Parties NEW CINGULAR WIRELESS PCS LLC v. COMMISSIONER OF REVENUE.
CourtAppeals Court of Massachusetts

Cassandra Bolanos, Assistant Attorney General, for Commissioner of Revenue.

Margaret Wilson, of New Jersey (Michael Bogdanow also present) for the taxpayer.

Eric S. Tresh, of Georgia, Todd A. Lard, of the District of Columbia, & Kathleen S. Blaszak, for Broadband Tax Institute, amicus curiae, submitted a brief.

Present: Ditkoff, McDonough, & Hand, JJ.1

DITKOFF, J.

With some exceptions not relevant here, Congress prohibits States from imposing taxes on the sale of Internet access, but only where the Internet access provider "offers" its customers screening software designed to protect children from exposure to harmful materials. See Internet Tax Freedom Act (ITFA), codified at 47 U.S.C. § 151 note. Between November 1, 2005, and September 30, 2010 (the tax period), the taxpayer,2 New Cingular Wireless PCS LLC (Cingular), a subsidiary of AT&T, collected sales taxes in the amount of nearly $20 million on its sales of Internet access (primarily through service plans) in Massachusetts and remitted those taxes to the Commonwealth. The Appellate Tax Board (board) found that the ITFA preempted the Commonwealth's sales tax and ordered an abatement of $19,938,368, to be refunded to the customers (through their class action counsel). Concluding that the taxpayer was required to offer screening software and did so by displaying and advertising at least some products designed to protect minors from harmful material, we affirm.3

1. Background. a. Statutory scheme. In 1998, Congress enacted the ITFA, which prohibited State and local governments from imposing any "[t]axes on Internet access" until October 21, 2001. ITFA, § 1101(a)(1), Pub. L. No. 105-277, Division C, Title XI, 112 Stat. 2681-719 (1998).4 Congress extended the moratorium in 2001, Internet Tax Nondiscrimination Act, Pub. L. No. 107-75, § 2, 115 Stat. 703 (2001); 2004, Internet Tax Nondiscrimination Act, Pub. L. No. 108-435, § 2, 118 Stat. 2615 (2004); and 2007, Internet Tax Freedom Act Amendments Act of 2007, Pub. L. No. 110-108, § 2, 121 Stat. 1024 (2007). See j2 Global Communications, Inc. v. Los Angeles, 218 Cal. App. 4th 328, 331-332, 159 Cal.Rptr.3d 742 (2013). Congress made the prohibition permanent in 2015. See Trade Facilitation and Trade Enforcement Act of 2015, Pub. L. No. 114-125, Title IX, § 922(a), 130 Stat. 122 (2015).

Congress's protection from taxation, however, did not come without strings attached. The ITFA's prohibition on State taxes on Internet access applies only if the Internet access provider offers screening software designed to protect minors from harmful content. ITFA, § 1101(e). This provision appeared in the 1998 version of the ITFA as § 1101(f), Pub. L. No. 105-277, Division C, Title XI, and has continued unmodified since.5

Massachusetts imposes sales tax on "telecommunication services," which are defined as "any transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiberoptics, laser, microwave, radio, satellite or similar facilities but not including cable television." G. L. c. 64H, §§ 1, 2. As Internet access services fall comfortably within this definition of "telecommunication services," a vendor is obligated to collect and pay sales tax on Internet access services sold in Massachusetts, unless the ITFA preempts the tax on those transactions.

b. Procedural history. As a general matter, when the taxpayer sells a customer a service plan, the charge includes various services, such as traditional voice communications, text messaging, data services, and the right to download certain software. The data services qualify as Internet access services. During the tax period, the taxpayer collected and paid to Massachusetts sales tax on the fees it charged Massachusetts customers for services, failing to exclude the Internet access services from the taxable amount.

In October and November of 2009, AT&T customers sued AT&T and its subsidiaries, including the taxpayer, alleging that AT&T's collection of State and local sales tax on charges for Internet access violated certain State laws and the ITFA. See In re AT & T Mobility Wireless Data Servs. Sales Tax Litig., 710 F. Supp. 2d 1378, 1379-1380 (J.P.M.L. 2010) ; Sipple v. Hayward, 225 Cal. App. 4th 349, 353, 170 Cal.Rptr.3d 199 (2014). The lawsuits were consolidated into a class action in the United States District Court for the Northern District of Illinois, and AT&T ultimately settled the suit with the members of the class, which included the taxpayer's Massachusetts customers.6 See In re AT & T Mobility Wireless Data Servs. Sales Tax Litig., 789 F. Supp. 2d 935, 940-942 (N.D. Ill. 2011). As part of that settlement, AT&T agreed to stop collecting and remitting sales tax on charges for Internet access. See id. at 940, 942. More important, for our purposes at least, AT&T agreed to request refunds in the various States where it had collected sales taxes. See id.7 AT&T agreed that it would not retain any refunds obtained but rather would remit them to the customers (after payment of attorney's fees and administrative expenses). See id. at 943. Accord Sipple, 225 Cal. App. 4th at 362, 170 Cal.Rptr.3d 199.8

On November 15, 2010, in accordance with the settlement agreement, the taxpayer filed an application for an abatement of the sales tax that it had paid on Internet access charges during the tax period, claiming that the charges were exempt from Massachusetts sales tax under the ITFA. Following a hearing, the Commissioner of Revenue (commissioner) denied the abatement application.

On August 29, 2013, the taxpayer appealed the commissioner's decision to the board. The board first held proceedings to determine whether the tax period Internet access charges were exempt from Massachusetts sales tax under the ITFA, reserving the question of the amount of the abatement for future proceedings.

c. Evidence concerning screening software. Kristen Leatherberry, a senior marketing manager responsible for customer-facing communications for AT&T, testified that information regarding screening software was contained in brochures made available to customers in stores, either on the counter or on a rack. All AT&T stores were required to display the brochures. These brochures advertised "MEdia Net" (essentially an Internet browser), available to customers for free, which was designed to work on Cingular phones with Internet access, and contained a parental controls feature. One brochure explained how to use MEdia Net parental controls and, further, how to restrict access to cellular video content. Information regarding MEdia Net parental controls was also widely available on the taxpayer's website. Later, the website also advertised a more sophisticated version called "AT&T Smart Limits for Wireless," which cost $4.99 per month.

Boxes containing Cingular phones purchased through the taxpayer included inserts both in English and Spanish that explained to customers how to use MEdia Net to restrict Internet access for their children. Customers who purchased phones with Internet access would be mailed a brochure that, among other things, explained that they could use "AT&T's Parental Controls option" to "prevent kids from accessing age-inappropriate Websites."

At least by 2006 or 2007, the taxpayer mailed bills which also contained inserts instructing parents how to use MEdia Net (and encouraging them to upgrade to an advanced version for a fee). Furthermore, for much of the tax period, AT&T was the exclusive service provider for Apple devices. The taxpayer produced an Apple iPhone cell phone manual copyrighted in 2009 that explained the use of parental controls inherent to the iPhone's operating system.

The commissioner's expert, Mehran Nazari, essentially testified that "not all of their [devices] were" compatible with the taxpayer's parental control features. He explained that screening software, which filters content on the Internet, could work in one of three ways. The software could be embedded within the device itself through the operating system, the software could be installed onto a web browser from which a user accesses the Internet, or the software could "block[ ] or filter[ ] [content] at the network level before it reaches the [user]." Regarding the first type of screening software, Nazari testified that the iPhone's inherent parental controls were released in June or July 2008.

Regarding the other types of screening software, Nazari testified that MEdia Net is incompatible with "RIM devices, which are Blackberry, and the data card, PC card," and is incompatible with iPhones as well. Nazari testified that "[s]ome AT&T and Smart Limits for wireless features may not be compatible for some wireless connection and mobile internet browsing services." He opined that Smart Limits did not work with iPhones. He testified that Blackberries (which were marketed for work use) did not contain inherent parental control features either.

d. Board decision. After a five-day hearing in April 2015, at which four witnesses testified, the board ruled that the charges at issue in this appeal were not taxable, because the taxpayer met its burden of proving that it offered screening software to its customers in accordance with the requirements of the ITFA.9 The parties then agreed that the amount of taxes at issue were $19,938,368. The board granted an abatement in that amount, and the commissioner filed a notice of appeal.

2. Appellate jurisdiction. We must first address the timeliness of the commissioner's notice of appeal. The board issued a two-page decision for the taxpayer on March 3, 2017. General Laws c. 58A, § 13, second par., states that (with two inapplicable exceptions), "the board shall make such findings and report thereon if so requested by either party within...

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