The Tennessee Court of Appeals recently ruled that a company's dial-up and broadband internet services were not taxable telecommunications services.
The taxpayer provided two internet services. Internet Service Providers (ISPs) bought these services to enable end users to access the internet. The taxpayer used telecommunications services to provide its internet access services. The taxpayer had collected sales tax on its charges for internet access services and later filed for a refund.
Tennessee taxes services that are specifically identified as taxable, including telecommunications services. "Telecommunication" is communication be electric or electronic transmission of impulses and includes transmission by or through any media such as wires, cables, microwaves, radio waves, or light waves. "Basic" telecommunications services are subject to tax. "Enhanced" services are not. Tennessee considers the provision of internet access an enhanced service.
The Court of Appeals ruled that the taxpayer's provision of internet access was not subject to tax. Although the taxpayer used telecommunications services to provide internet access, the primary purpose of the service was to provide internet access. Because the provision of internet access was an "enhanced" service, it was not taxable. The taxpayer's charges were therefore not taxable.