California – Online Fax Service Did Not Qualify as Exempt Internet Access

SALT Report 2907 – A California Appeals Court ruled that a Taxpayer’s provision of online fax services, virtual phone systems, hosted email, email marketing, online backup, and bundled suites of services was not entitled to a refund of the California local communications users tax.  The tax was paid on telecommunication services that were used in connection with eFax services that the Taxpayer provided to its customers.

In this case, the Taxpayer filed an application for refund with the City of Los Angeles in the amount of $175,000 claiming that, “the taxes were incorrectly imposed on telecommunications service used for exempt Internet access.”  However, the City argued that the Taxpayer’s purchase of telecommunications services was not exempt under the Internet Tax Freedom Act because the Taxpayer did not provide “Internet access” as defined in ITFA.

In 1998, Congress enacted ITFA, which imposed a moratorium on the collection of taxes by state and local governments on providers of “Internet access.” In addition to the moratorium, the legislation defined Internet access as a service that enables users to access content, information, or other services offered over the Internet.

In the Court’s opinion, the Taxpayer’s purchase of telecommunications service did not fall within the exemption provided under ITFA.  Specifically, the Court stated that although the Taxpayer’s customers must connect to the Internet to access the efax service, content, information, or other services that does not prove that the Taxpayer “provides the service that enables its users to connect to the Internet to access the desired content, information, or services.”

In fact, the Court ruled that the City was able to establish that the Taxpayer requires its customers to acquire services from a third-party Internet provider that will enable them to connect to the Internet and the Taxpayer’s eFax service.

As a result, the Court ruled that the Taxpayer did not establish that its eFax service qualifies as Internet access under the ITFA exemption. Further, the Court ruled that the eFax service did not qualify as an exempt service that is “incidental to the provision of Internet access” because sending an efax to a customer through that customer’s own email service, and allowing customers to access their accounts through eFax’s home page does not constitute the provision of a homepage or email service, as required by the exemption.

As a result, the Court ruled in the City’s favor thereby denying the Taxpayer’s claim for refund.

For Further Information

Court of Appeal of California, Second District – Docket #B241151