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Tax Cybrary
Tennessee Dissects DSL Service Taxability
Tennessee has issued a letter ruling discussing the application of the sales tax to the sale of DSL services to Internet access providers, end-user customers or telecommunications wholesalers.
The taxpayer that requested the letter ruling provided voice and data communications products and services to consumers and businesses at wholesale and retail. The taxpayer, a regulated entity, provided services in several states and held a Certificate of Public Convenience and Necessity (or other regulatory license) required in the states that it did business.
In Tennessee, retail sales are subject to sales and use tax. The term “sale” includes “the furnishing of any of the things or services taxable” under the Tennessee sales and use tax laws.
The sale of telecommunications services is subject to sales tax pursuant to Tenn. Code. Ann. §67-6-205(c)(3). The term “telecommunications service” is defined under Tenn. Code Ann. §67-6-102(81)(A), however Tenn. Code Ann. §67-6-102(81)(B)(vi) specifically excludes Internet access service from the definition of “telecommunications services”.
Furthermore, Internet access service is not listed in the Code as any of the other specifically enumerated taxable services. Finally, the Internet Tax Freedom Act (ITFA) (47 U.S.C. §151) prohibits Tennessee from imposing Tennessee sales and use tax upon the retail sale of Internet access services. ITFA is federal legislation and preempts any Tennessee law relating to the taxation of Internet access or telecommunications services purchased by Internet access providers.
The DOR ruled that Tennessee will not impose sales and use tax on the retail sale of DSL Internet access services provided directly to end-user customers. Under both the Internet Tax Freedom Act and the state’s sales and use tax laws, the retail sale of DSL Internet access services to end-use customers is not subject to sales tax. However, the sale of DSL services will be subject to sales and use tax to the extent such services do not constitute Internet access service. The DOR also ruled that Tennessee will not impose sales and use tax on the telecommunications services the Taxpayer purchased in order to provide DSL Internet access services, provided the taxpayer used such services exclusively to provide Internet access.
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