The Kansas Board of Tax Appeals recently addressed whether the Internet Tax Freedom Act (ITFA) barred the Kansas Department of Revenue from assessing sales and use tax on an Internet service provider’s (ISP) purchases of equipment. The taxpayer at issue provided its customers wireless access to the Internet in select regions of Kansas, with an emphasis on rural and underserved areas. The taxpayer purchased a variety of equipment (e.g., transmitters, facilities, cables, routers, and switches) that was used to provide Internet access to its customers. It was not disputed that without the equipment, the taxpayer could not provide Internet access to its customers. After the Department of Revenue assessed sales and use tax on the taxpayer’s purchases, the taxpayer appealed to the Board arguing that the assessment was preempted by the ITFA. Specifically, the ITFA preempts states from taxing charges for internet access. Internet access is defined, in part, to include the purchase, use or sale of telecommunications if the telecommunications are purchased, used, and sold to provide Internet access. The taxpayer’s argument, in essence, was that its equipment purchases were purchases of telecommunications used to provide its services.
The Board did not agree and concluded that the use of the term “telecommunications” as defined in and in the context of the ITFA was not intended to preempt state taxation of the equipment used to create capacity or to provide Internet access to end users. In the Board’s view, the ITFA reference to “telecommunications” was intended to capture when an ISP, such as the taxpayer, purchased capacity that in turn was used to provide Internet access to its customers. The purchase of capacity is a distinct element from the purchase of the equipment utilized by an ISP to provide this capacity. The taxpayer’s argument, the Board noted, ignored the distinction between preemption of fees for the service of providing capacity and pre-emption of the costs for the equipment that provides the capacity. The Board concluded that the assessments at issue were not preempted by the ITFA. Please contact Jeff Cook at (816) 802- 5225 with questions on this decision.
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