Private Letter Ruling

Ruling Number:P-2013-001
Tax Type:Kansas Retailers' Sales Tax
Brief Description:Charges for telecommunications services subject to sales tax.

Office of Policy & Research

July 3, 2013


Thank you for your recent letter. You request a private letter ruling for XXXX. (XXXX).

According to its web site, XXXX offers customers “Conferencing and Video Solutions” (CAVS) that consist of “audio, Web, and video technologies using a variety of hardware, software, WAN, and PSTN technologies.” CAVS is said to “improve communications among [a business’s] coworkers, clients, and partners. . . . Through the use of audio, Web, and video bridges (servers/devices that aggregate these communications media) conferencing and video [become] a part of [the business’s] everyday organizational tools.”

XXXX explains “Voice and Data Services” are “[a]lso known as telecommunications services, voice and data services [that] provide access to audio, Web, and video communications.” XXXX offers other services that supplement its CAVS offerings. These services include “Audio Conferencing,” “Video Conferencing,” “Web Conferencing,” and “Digital Media Services.” XXXX indicates, “Audio conferencing provides a bridge to facilitate voice calls between three or more parties.”

You ask if charges for telecommunications services XXXX provides to an end user, whose “primary place of use” is in Kansas, are subject to Kansas retailers’ sales tax. Please be advised the charges are taxable. XXXX is required to register as a Kansas retailer and collect the appropriate state and local sales tax on telecommunications and ancillary service charges billed to customers whose primary place of use is in Kansas.

Kansas retailers’ sales tax is levied on:

K.S.A. (2011 Supp.) 79-3602(aaa) provides:
K.S.A. (2011 Supp.) 79-3602 also defines “ancillary services,” "conference bridging service," and "voice mail service" for purposes of the imposition at K.S.A. (2011 Supp.) 79-3603(b):

K.S.A. (2011 Supp.) 79-3673 contains the Kansas sourcing rules for telecommunication services. These rules conform to the uniform telecommunication sourcing rules that the Streamlined Sales and Use Tax Project (SSUTP) adopted for use by member States. In general, telecommunications services are sourced to the customer’s “place of primary use.” (PPU) This sourcing requirement assures state and local taxing authorities with jurisdiction over the PPU have the right to tax customer charges for interstate telecommunication services, including telephone calls and other taxable services that neither originate nor terminate within their jurisdiction. See March 31, 2009 Hearing before the Subcommittee on Commercial and Administrative Law of the House of Representatives’ Committee on the Judiciary (Serial No. 111-23). The SSUTP and Kansas sourcing rules mirror the sourcing rules Congress adopted in the Mobile Telecommunications Act of 2000, Public Law 106-252. (MTSA). K.S.A. (2011 Supp.) 79-3673 applies to all telecommunications services --- not just mobile telecommunications services. Congressional authority for states to use the MTSA sourcing rules for all telecommunications is implicit in the Congress’s enactment of the Internet Tax Freedom Act Amendments Act of 2007, which allows State to tax telecommunication services provided by Voice over Internet Protocol (VoIP) services. Congress did not intend to reintroduce the same nexus and the sourcing problems that existed for State taxation of mobile telecommunications prior to its 200 enactment of the MTSA when it authorized States to tax VoIP service charges.

State sales tax “nexus” refers to a connection or link between a State and the interstate activity of an out-of-state business that is sufficient under the Constitution to allow the State to impose its sales tax collection duties on interstate sales the business makes into the State. For Due Process purposes, nexus requires (1) “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax,” and (2) a rational relationship between the values attributed to the state and the taxpayer’s presence in the state. Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 777-8 (1992) (quoting Miller Bros. Co. v. Maryland 347 U.E. 340, 344-5 (1954) see Walter Hellerstein, State Taxation of Electronic Commerce, 52 Tax L. Rev. 425, 434-35 (1997). For Commerce Clause purposes, the Constitution grants Congress the authority to establish the nexus standards for State taxation of interstate commerce. Quill Corp. v. North Dakota, 504 U.S. 298, 313 (1992). If Congress does not act to establish the standards, the four-pronged test set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 277 (1977) is applied to determine whether nexus exists for Commerce Clause purposes.

Quill recognizes that any nexus standards Congress adopts must satisfy Due Process. More significantly, Quill recognizes that the nexus standards that Congress adopts are no longer required to satisfy the traditional physical-presence standards established in National Bellas Hess v. Dep’t of Revenue, 386 U,S, 753 (1967), Scripto, Inc. v. Carson, 362 U.S. 207 (1967), National Geographic Soc’y. v. California Bd. of Equalization, 430 U.S. 551 (1977), and their prodigy. As Justice Scalia observed, “Congress has the final say over regulation of interstate commerce, and it can change the [physical-presence] rule of [National] Bellas Hess by simply saying so.” Quill Corp., 504 U.S. at 320. (Scalia, J., concurring in part and concurring in the judgment).

In the late 1990’s, States and nationwide telecommunications providers petitioned Congress to resolve the ongoing nexus and technical issues created by existing State laws that taxed interstate mobile telecommunications services. Fashioning a workable nexus standard required Congress to weigh the revenue needs of the States, the burdens that State taxation places on interstate mobile providers, and the technology available to allow efficient collection of taxes for multiple States. These policy concerns needed to be balanced in the context of common notions of tax fairness and the practical needs of interstate commerce.

The Mobile Telecommunications Sourcing Act, Pub. L. No. 106-352, 114 Stat. 1370 (MTSA). codified the nexus standards for State taxation of interstate mobile telecommunications services. The MTSA authorizes State and local taxing authorities to tax interstate telecommunications charges billed to customers with a PPU within their jurisdiction. The PPU essentially is the customer’s residence or business address. This nexus standard places the same tax collection burdens on competing in-state and remote providers and assures fair apportionment of taxes among the taxing States. As Walter Hellerstein explains,

The MTSA allows States to enact laws that require remote telecommunications providers to register with their State and collect the appropriate tax on charges billed to customers who list the taxing state as their PPU. State courts may not defeat such legislated nexus standards by requiring proof that one of the traditional physical-presence nexus tests is also satisfied. See e.g. State ex rel. Schneider v. Kenney, 225 Kan. 13, 587 P.2d 844 (1978).

The MTSA authorizes States to tax interstate telecommunications services they could not have taxed under Goldberg v. Sweet, 488 U.S. 252 (1989) and precludes them from taxing other interstate calls they may have historically taxed. See March 31, 2009 Hearing before the Subcommittee on Commercial and Administrative Law of the House of Representatives’ Committee on the Judiciary (Serial No. 111-23). This clarification of State tax authority was a quid pro quo that major telecommunications providers lobbied for. While the MTSA imposed additional tax collection duties on certain interstate providers, it relieved all providers from the uncertainty and the more onerous tax-collection burdens created by the “welter of complicated [State tax collection] obligations” that were currently in place. See National Bellas Hess, supra at 759-60.

The MTSA establishes the presence of the telecommunications customer’s PPU within a State provides sufficient nexus between the State and a remote provider to allow the State to impose its tax collection duties on the remote provider. Once a State enacts the nexus standards that conform to the MTSA, nexus exists even though telecommunications services are provided electronically from a remote provider’s out-of-state servers that link to the nationwide telecommunications or Internet network which, in turn, links to a customer with an in-state PPU. See Cable One, Inc. v. Arizona Dept. of Revenue, __ P.3d __662 Ariz. Adv. Rep. (Ariz. Ct. of Appeals June 11, 2013), Mayor and City Council of Baltimore v. Vonage America Inc., 544 F.Supp 458, 472 (D. Md 2008). After the MTSA, nexus exists between a State and remote mobile provider even in the absence of contacts that satisfy one of the tradition physical-presence nexus requirements. See Quill at 308; Complete Auto Transit, supra.

Your client provides customers with voice, video, messaging, presence, audio conference, web conferencing, and mobility services that the customer accesses via VoIP. These services satisfy the definitions of “telecommunication services” or “ancillary services” since they: (1) either route “electronic . . . voice, data, audio, video or any other information or signals to a point, or between or among points(underlining added) or “are [ancillary services] associated with or incidental to the provision of telecommunications services”; and (2) use applications that act on the form and protocol of the signals for purposes of transmission and routing. See K.S.A. (2011 Supp.) 79-3602(uu) and (aaa), quoted above.

Remote providers are subject to tax on interstate telecommunications and ancillary services they bill to a customer’s in-state PPU even though another, unrelated in-state provider links the customer to the public switched telephone network or the World Wide Web. See Cable One, Inc. supra; Mayor and City Council of Baltimore, supra. Such remote third-party telecommunications providers compete with Kansas providers with traditional nexus “to establish and maintain a market in this state for the sales” of the same telecommunications services. See Tyler Pipe Indus., Inc. v. Washington State Dep’t. of Revenue, 483 U.S. 232, 249-51 (1987). Accordingly, Congress acted reasonably when it authorized States to require remote telecommunications providers to register for sales tax purposes and begin collecting and remitting State and local tax on the same services offered by providers with traditional nexus. The new nexus standards based on the customer’s PPU greatly simplified nexus determinations for both interstate telecommunications providers and the States.

XXXX acknowledges its telecommunications services “provide access to audio, Web and video communication, and that its “[a]udio conferencing provides a bridge to facility voice calls between three or more parties.” Accordingly, XXXX’s services are subject to Kansas tax. Similarly, the telecommunications services your discuss are for general business use. These services do not satisfy any of the five exceptions provided in K.S.A. (2011 Supp.) 79-3603(b) (1) through (5). The services being provided are not 800 or 900 services, private communication services as defined in K.S.A. 2011 Supp. 79-3673, non-voice data services, services sold for resale, or telecommunications services that are provided among affiliated entities. See K.S.A. (2011 Supp.) 79-3603(b)(1) through (5).

The Kansas Department of Revenue previously determined the services XXXX provides are taxable telecommunications or ancillary services. Information Guide EDU-65, Sales Taxation and Sourcing of Telecommunication Services (September 19, 2011) instructs taxable services include “voice mail services,” “voice over Internet protocol (VoIP),” “teleconferencing and videoconferencing services,” “text messaging services,” “conference bridging services,” and “mobile telecom charges,” among others. The broad definitions provided by statute for these services encompass the services XXXX provides. Accordingly, the services you discuss are taxable.

Your letter also discusses cloud-computing. The term “cloud-computing” means different things to different people. As of mid-2011, the National Institute of Standards and Technology had published no less than fifteen iterations of its “Working Definition of Cloud Computing.” See Working Definition of Cloud Computing @ (August 5, 2011). For the most part, cloud-computing uses well-tested, existing technology.

In 2010, the Office of Management and Budget highlighted cloud computing services as key service offerings the United States government can utilize to increase its efficiency and effectiveness. The 2010 budget memo explains:

Cloud-computing is commonly used to provide hosted application services, such as SaaS (Software as a Service) or PaaS (Platform as a Service), that provide remote access to software and data stored on the “cloud” provider’s servers However, cloud-computing is also used to route “electronic . . . voice, data, audio, video or any other information or signals to a point, or between or among points.”

When cloud-computing is used to route such electronic signals, the customer charges are, by definition, charges for telecommunications or ancillary services. These services are taxable in Kansas. Such services charges are mischaracterized by legal and technical arguments that assert they are nontaxable customer charges for: (1) remote access to pre-written software; (2) Internet access; (3) the use of hosted software; (4) software delivered in or outside Kansas; (5) remote software management; (6) SaaS or PaaS; (7) remote application services; or (8) any other terms used to describe customer access to and use of remote software and servers.

These arguments were implicitly rejected by Federal approval of State taxation of VoIP services. See Internet Tax Freedom Act Amendments Act of 2007. The Texas Comptroller rejected the same arguments by determining cloud computing services are taxable if the services being provided satisfy one of the definitions of telecommunications, data-processing, or information services, all of which are taxable in Texas. The Texas impositions on these services apply even though customers secure the services by accessing software and/or data stored on a remote “cloud” provider’s servers. Texas Comptroller’s Letter Ruling No. 201207533L (July 31, 2012).; See e.g. Vermont H.B. 782; Wash. Rev. Code Sec. 82-08.020(1).

Your letter notes that Policy & Research previously issued at least two letter rulings that opine monthly fees charged for customer access to prewritten software programs located on an out-of-state server are not subject to Kansas sales tax. As the previous paragraph explains, this position does not mean Kansas cannot tax telecommunications services a customer accesses through electronic links to a cloud-providers’ software and servers.

This private letter ruling is issued pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your written request. If it is determined that undisclosed facts were material or necessary to make an accurate determination, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, case law, or published revenue ruling that materially effects this private letter ruling.


Tom Hatten
Attorney/Tax Specialist

Date Composed: 07/16/2013 Date Modified: 07/16/2013