Ruling Revoked on Communications Tax Exemption

In Letter Ruling 200242021, the Service revoked Letter Ruling 200133008, in which it held that a communications company’s payments to local exchange carriers (LECs) for line services and its sales of access to those services are exempt from the Sec. 4251 communications excise tax.

Sec. 4251 imposes a 3% Federal excise tax on amounts paid for communications services, which, for these purposes, is defined as (1) local telephone service, (2) toll telephone service and (3) teletypewriter exchange service. In Letter Ruling 200133008, the Service ruled that this tax does not apply to payments made to LECs for primary-rate-interface (PRI) line service and "other line services" provided by a communications network operator that sells access to Internet service providers (ISPs). In addition, payments made by ISPs to the network operator for line-service access were not subject to the tax.

In the ruling, the IRS considered whether a taxpayer that "builds communication networks and sells access to these networks" to ISPs is subject to the Sec. 4251 tax for payments made to LECs for providing PRI and other line services.

To build its networks, the taxpayer purchased from LECs two distinct types of line services: (1) one-way PRI line service that "permits [the] [t]axpayer to receive, but not to initiate, voice and data transmissions"; and (2) other line services, not specified in the ruling, that connect the taxpayer’s modem bank to its data network and, ultimately, to the ISP’s services. The IRS found that payments for these two services were not subject to the tax, because they were not for local telephone service, toll telephone service or teletypewriter exchange service.

The payments were not for local telephone service, because the taxpayer and the ISPs were not provided "the privilege of telephonic quality communication with substantially all persons having telephone or radio telephone stations constituting a part of a local telephone system." Further, they were not toll telephone service, because they "do not provide [the] [t]axpayer with telephonic communication for which there is a toll charge for each individual communication or the privilege of an unlimited number of telephonic communications to or from all or a substantial portion of the persons having telephone or radio telephone stations in a specified area that is outside the local telephone system area in which the station provided with the service is located." Finally, the Service concluded, without any analysis, that PRI and "other line services" are not payments for teletypewriter exchange service.

Conclusion

Letter Ruling 200242021 confirms that the Service, in accordance with Rev. Proc. 2002-1, Section 12.04, is revoking Letter Ruling 200133008 (attempts to modify the ruling failed). The revocation became effective on Aug. 9, 2002. Despite the revocation, taxpayers should not automatically assume that the IRS would not rule favorably if presented with appropriate facts.

From Dean I. Schaffer, New York, NY