For several years, cases have been piling up in anticipation that Verizon Pennsylvania, Inc. and other taxpayers would be arguing lead cases challenging the application of Pennsylvania’s Gross Receipts Tax to various types of telecom charges. Finally, as briefly noted in our last newsletter, the first decision was rendered on July 5th by Pennsylvania’s Commonwealth Court. (Verizon Pennsylvania, Inc. v. Commonwealth, No. 266 F.R. 2008) The court ruled that receipts from private telephone lines and directory assistance services are subject to tax. However, charges for non-recurring services such as telephone line installation, moves or changes to telephone lines and service and repair of telephone lines are not subject to tax.
Both sides filed “Exceptions” on August 2nd, stating their objections to the court’s decision. The Commonwealth Court could hold another round of oral argument before issuing a decision responding to the Exceptions. However, the court most likely will issue an expedited decision because the parties have filed a joint motion to waive additional argument. Regardless of the disposition of the Exceptions, a further appeal to the Pennsylvania Supreme Court is expected.
Pennsylvania’s Gross Receipts Tax, as applied to telecommunications companies, traces its history to 1889 when the tax was applied to gross receipts “received … from telegraph, telephone or express business done wholly within this state.” Over the years, the imposition language was amended and the tax was expanded to apply to interstate business and mobile telecommunications. Currently, the statute as applied to landline companies imposes tax on gross receipts received from:
telegraph or telephone message transmitted wholly within [PA] and … messages transmitted in interstate commerce where such messages originate or terminate in this State and the charges for such messages are billed to a service address in this State, except for ….”
72 P.S. § 8101(a)(2).
Bell Telephone, predecessor to Verizon, litigated the scope of this tax several times before, but the last case was decided by the Pennsylvania Supreme Court in 1943. On its face, the current language seems to be limited to taxing message charges and not all revenues from the business of the telephone company. However, the 1943 case gave similar language a somewhat broad application, taxing revenues from specialized customer systems and equipment and from auxiliary phone lines. The specialized equipment was taxable because “without the use of the systems to notify the recipient of the call,” the telephone call could not take place. Auxiliary line charges were taxed because the lines actually carried telephone messages.
In the current Verizon case, the Commonwealth Court ruled that, like the auxiliary lines in the 1943 case, receipts from Private Lines are taxable because the lines carry messages. Directory Assistance charges were taxable in the opinion of the court because the customer must transmit a message to an operator in order to receive information and because “Verizon transmits messages more effectively and satisfactorily by providing this service to its customers ….” Non-recurring charges are not taxable because, as held in a 1930 lower court case, these receipts were not from the “transmission of messages.”
This is just the first decision in the first case at the present time to address the scope of this tax. Technology has changed substantially since the 1943 PA Supreme Court case and earlier lower court cases. Business practices have changed. Ideally, the Department of Revenue should have sought legislation and issued formal administrative guidance to make clear the application of this tax over the years. Instead, matters have been left to the courts. There are many cases and opinions yet to come.
Any telecom provider which has not yet filed protective refund claims and contested audits to keep Gross Receipts Tax issues alive should immediately do so, to the extent possible.