Tax Analysts Blog

Are We Getting Anywhere?

Posted on Jul 10, 2013

Often, when people speak of getting back to where they started, it is said with a bit of nostalgia – as if where they were was somehow better than where they are. I’m sure it is true in certain circumstances. Or it is just human nature to look at the past with rose colored glasses. But when it comes to taxes and technological advances, looking back shouldn’t be an option, yet that seems to be exactly what states are doing.

Here is the problem: state tax laws are antiquated. They were enacted decades ago and have not been updated to reflect recent technological advances. But that hasn’t stopped states from trying to tax things like cloud computing transactions and digital goods. They do so, but are forced to shoe horn cutting edge technology into old laws. Not an easy task. Perhaps to make the job a little easier, a few states are putting on their rose colored glasses and looking to the past.

New York is a good example. State law in New York imposes sales and use tax on the “receipts from every [intrastate] sale . . . of . . . telegraphy and . . . telegraph service of whatever nature.” (Tax Law Sec. 1105(b)(1)(B)). Telephony and telegraphy are defined together by the New York State Department of Taxation and Finance to include the “use or operation of any apparatus for the transmission of sound, sound reproduction or coded or other signals.” It is not a precise definition of either term.

And then there is the recurring problem that old laws and new technologies do not mix. The New York Appellate Division recently held that a provider of electronic messaging services was furnishing taxable “telegraphy” services. The company provided electronic fax and telex services, closed network email services and electronic data interchange services. The division reasoned that the services provided were “in the nature of message conduit services” that are comparable to “message switching services” and “facsimile” both of which are referenced as taxable services in the sales tax regulations (20 NYCCR 527.2(d)(2)).

The division didn’t provide much insight into its reasoning beyond that the services being furnished were consistent with the “ordinary meaning of telegraphy.” Yet telegraphy and telephony are not specifically defined by law and the interpretation by the division is not consistent with prior opinions. For example, in the late 1990s, an advisory opinion (TSB-A-99(18)S) was issued which concluded that the electronic services being provided by a company were not among the enumerated services subject to tax. The company was merely transmitting documents; it was not furnishing or selling telecommunications services.

State taxing departments are in a difficult position. I certainly don’t envy them. But the positions they do take with respect to new technologies must, at the very least, be consistent. What appears to be happening is that, depending on the taxpayer, state taxing departments are taking a variety of positions in the hope that they will find the one that works best or results in the most tax dollars. Taxpayers have complained of this practice, but it might not be all bad. At this point, state taxing departments don’t really want a case to go forward to litigation. They know in most cases they don’t yet have a strong case so states are willing to settle these cases for very little money.

There is no easy solution, but all this begs the question: Are we getting anywhere? Will states be able to adapt their laws to rapidly developing technologies? Or will we be stuck in the past?

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