Sales, Use and International Tax Activity Update - May 2009

The Air up There ~ In-Flight Internet Access Examined

A taxpayer that provides airborne wireless Internet access service to passengers on commercial flights through the use of a Wi-Fi signal originating on board the aircraft is subject to New Mexico Gross Receipts Tax on its sales of this service during intrastate flights. The taxpayer charges a flat fee for the service and the purchaser pays for it by a credit card.

According to the New Mexico Department of Revenue, when an intrastate flight is within New Mexico airspace, taxability applies to the services rendered. If not preempted by federal law, states may regulate or tax activities in the airspace above the state.

Federal law permits states to levy taxes on an activity or service on an aircraft if the aircraft takes off or lands in the state as part of the flight. Currently, Federal law prohibits state taxation of services on aircraft that neither land nor take off from a state. As a result, a sale of Internet services during intrastate flights is taxable.

While the taxpayer has nexus in New Mexico because of the towers it owns or leases inside the state, it does not have a place of business as defined in Regulation 3.1.4.13 NMAC. It has no office, employees or resident sales representatives in New Mexico. As a result the taxpayer should only pay the state gross receipts tax and not any local taxes.

Since the taxpayer is liable for the gross receipts tax on services provided in aircraft that either land or take off from New Mexico, tax will only apply on that portion of the service performed in New Mexico airspace. A reasonable method of prorating the service that is performed within and without New Mexico will be allowed if approved by the Taxation and Revenue Department. Service that is provided on aircraft that neither land nor take off from New Mexico is not subject to tax.

The full ruling can be viewed on the State of New Mexico Taxation and Revenue Website.

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