MA: E-Fax Services Are Taxable Telecommunication Services

The Massachusetts Appellate Tax Board recently addressed whether a taxpayer’s eFax service was subject to sales and use tax as a telecommunication service. The taxpayer was in the business of converting facsimile transmissions into portable document format (PDF) files or another requested file format. The transmission was then delivered to the customer as an attachment to an email message. It was undisputed that the taxpayer had Massachusetts nexus for the tax periods at issue. The taxpayer, however, believed that its services were not taxable telecommunications services. Alternatively, the taxpayer argued that the Internet Tax Freedom Act (ITFA) prohibited the taxation of the eFax service because the eFax service involved the resale of Internet access and included a hosted email service, personal electronic storage capacity, and was a service offered over the Internet. After the Commissioner assessed sales tax, interest and penalties, the taxpayer appealed to the Appellate Tax Board.

Under Massachusetts law, taxable telecommunication services are defined as “any transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiberoptics, laser, microwave, radio, satellite or similar facilities but not including cable television.” The Board eventually concluded that, “despite the efforts of the appellant to make the issue seem complicated, the plain words of the statute mandate the result” the service was a telecommunications service. In the Board’s view, the eFax service was a telecommunication service because the “critical component of the eFax service was transmission of messages or information – the facsimile – between” the sender and the taxpayer’s customers. Moreover, other services provided along with the core eFax service, such as the storage, editing, forwarding, and transforming of the fax, were merely incidental and “useless” without the transmission component of the eFax service.  

The Board next rejected the taxpayer’s argument that imposing tax on the eFax service was barred by ITFA, as the taxpayer was not purchasing or reselling Internet access nor was the taxpayer providing email service, personal electronic storage capacity service, or any other service offered over the Internet. The taxpayer’s customers were required provide their own Internet access and email addresses to use the taxpayer’s eFax service. Moreover, the e-mail addresses and personal electronic storage capacity provided by the taxpayer were not independent, but rather packaged with the eFax service. Finally, the Board addressed the taxpayer’s argument that none of the receipts from sales of the eFax service should be sourced (for sales tax purposes) to Massachusetts because it was unable to determine from its records where the eFax services were primarily used. The Board disagreed, concluding that the alternative method proposed by the Commissioner, which required taking the taxpayer’s nationwide revenue from the Form 1120 multiplied by the proportion of the total U.S. population attributable to Massachusetts, was reasonable when the taxpayer had not maintained adequate records to aid in determining the amount of sales tax that should be reported to Massachusetts. After stating that the taxpayer took “no reasonable steps to become familiar with its sales tax obligations over a span of more than eight years,” the Board declined to abate the taxpayer’s penalties. Please contact Tom Gangi at 617-988-1360 or Joe Senier at 617-988-1025 with questions on J2 Cloud Services, Inc. v. Department of Revenue.