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New York’s Helio Case: A Trial Run for Sprint? (Conclusion)

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Continuing and concluding our report on the outcome of Helio, LLC, a complex and multi-faceted tax case: In December (in the first half of this blogpost), Telecom Taxation laid out the questions and issues in the matter; herewith, the results (with a brief introductory recap):

[A formal Determination resolving the matter of Helio, LLC was made by Administrative Law Judge Barbara J. Russo (In the Matter of the Petition of Helio, LLC for Revision of a Determination or for Refund of Sales and Use Taxes under Articles 28 and 29 of the Tax Law for the Period June 1, 2006 through February 28, 2009, Determination DTA No. 825010, State of New York Division of Tax Appeals). Helio (“Petitioner”), a mobile virtual network operator offering postpaid wireless service, protested the state sales tax assessed against it following audit of its receipts from June 2006 to February 2009. (Note: In August 2008, Virgin Mobile USA acquired Helio; Virgin Mobile was in turn purchased by Sprint Nextel in November of 2009.) This potentially precedent-setting case raises a number of important issues, justifying deeper analysis. Direct quotes are from Judge Russo’s well-crafted Determination (omitting citations).]

At its core, the first question reduced to a procedural matter: The state auditor, citing a desire to economize resources, refused an offer of documents from Helio “because the Division would have to start the process from the beginning.” It chose instead to apply an arithmetic formula to generate an approximation of the amount of tax. This tactic utterly failed to pass muster with the Judge: “The Division’s resort to an estimate for the period of October 1, 2008 through February 28, 2009, without first reviewing petitioner’s records available for that period to determine the sufficiency of those records, was improper. The Division must make a sufficient investigation of the records made available to it …. The Division cannot simply ignore a taxpayer’s records and use an indirect method of estimating tax due if the taxpayer’s records are readily available and provide an adequate basis on which to determine the amount of tax due. … [E]xpediency or inefficiency does not give the Division the authority to ignore available records and instead estimate the amount of tax due. … Accordingly, it must be found that the Division’s refusal to review petitioner’s books and records … precluded it from resorting to an estimated method to determine the tax due for that period, and the tax assessed for the months of October 1, 2008 through February 28, 2009 is canceled” (emphasis supplied). Very costly mistake, that!

The second decision was key, addressing the central argument made by Helio (and by Sprint in its case): “The Division argues that, pursuant to Tax Law § 1105(b)(2), petitioner’s bundled voice services, including both intrastate and interstate services sold for a fixed periodic charge, are taxable. Petitioner, on the other hand, argues that the plain language of Tax Law § 1105(b) provides that charges for interstate voice service are not subject to New York sales tax. Petitioner asserts that Tax Law § 1105(b)(2) must be read together with § 1105(b)(1) and (3), and that, when construed as a whole, the language of the statute does not impose tax on interstate wireless voice service, whether bundled or separately stated.”

ALJ Russo shoots that down in no uncertain terms: “A review of Tax Law § 1105(b)(2) reveals that the language is unambiguous and requires the collection and payment of sales tax on the full amount of fixed monthly charges for mobile voice services. Petitioner misconstrues Tax Law § 1105(b)(2) in stating that it implicates Tax Law § 1105(b)(1)(B) … Contrary to petitioner’s argument, Tax Law § 1105(b)(2), as well as Tax Law § 1105(b)(1)(B) and (3), each address different aspects of how sales taxes apply to telephony.”

The Judge then makes this striking connection: “The New York County Supreme Court recently addressed similar arguments in interpreting Tax Law § 1105(b) in People v. Sprint Nextel Corp.,” which she expertly summarizes, explaining that “the court found that Sprint’s statutory construction was inconsistent with the plain language of the statute … Thus, contrary to petitioner’s similar argument here, Tax Law § 1105(b)(1) and (3) are inapplicable to voice services sold for a fixed periodic charge.” As to Helio, “The Division therefore properly determined that the receipts from petitioner’s sale of mobile telecommunications services that are voice services, including both interstate and intrastate voice services sold for a fixed periodic charge, are taxable pursuant to Tax Law § 1105(b)(2).” This determination largely resolves Helio in the taxing authority’s favor – and could well influence the final outcome of Sprint, too, by both its spot-on resolution of the statutory controversy that the cases share, and by its precedential value.

Item three, positing that NY tax law is superseded by Federal statute, was also asked – and answered – in Sprint. “There is no conflict between this provision and the [Federal] MTSA,” opined the Judge dismissively. The fourth issue, raising constitutional objection to Division of Taxation protocols, required that Judge Russo abstain. “[T]his forum does not have jurisdiction to consider this particular argument advanced by petitioner.”

The fifth dispute arises from a peculiarity in Helio’s business model. “Although it is determined, as discussed above, that Tax Law § 1105(b)(1)(B)’s exclusion for interstate telephony does not apply to receipts from fixed periodic charges for mobile voice services subject to tax under Tax Law § 1105(b)(2), the same does not hold true for petitioner’s interstate overage charges [which] are not part of the ‘bundle’ as the Division contends; the overages for voice service are not sold for a fixed periodic charge. Rather, they are separately stated on the invoices petitioner issues to its customers …. Such charges fall under the purview of Tax Law § 1105(b)(1)(B) and are subject to the exclusion for interstate telephony,” thus becoming sales tax-exempt. “[P]etitioner has met its burden of proving that the overage charges for interstate calls after April 2007 qualify for the exclusion for interstate telephony under Tax Law § 1105(b)(1)(B) and the Division erroneously assessed tax on these charges.” Question number six, regarding overage charges incurred before April 2007, was resolved similarly.

The seventh Helio matter concerned the provider’s internet access fee. “The Division argues that petitioner’s internet access service was a component of the bundle” and taxable, except for the fact that, “so long as the home service provider uses an objective, reasonable and verifiable standard to identify the component of the charge attributable to internet service, the charge for such service is not subject to tax.” Thus, “the Division improperly assessed tax on such internet access charges” and tax does not attach.

“The final issue is whether the federal Universal Service Fund (FUSF) fee which is imposed on petitioner and then passed on to petitioner’s customers is subject to sales tax under Tax Law § 1105(b). … The Division argues the charge is taxable as part of the taxable receipt of the sale of telecommunications service in New York.” The Judge concludes, “petitioner here is selling one service, a mobile telecommunications service. The fee is an integral part of that service … The fee is thus merely a part of the whole service purchased, and is not exempt as interstate telephony. As such, the Division properly imposed sales tax on petitioner’s charges for the FUSF contribution fee,” so the levy is sustained.

In sum, the ALJ sided with petitioner just about as frequently as she did with the Division (final tally: Helio – 4; New York – 3; no decision – 1). Judge Russo brought exemplary common sense to her judgments in this complicated case, drawing on broad legal knowledge and incisive, clear thinking to settle the numerous conflicts presented here, and deserves commendation for her equitable and equable efforts on this case. How much of that good work survives appeal will show in years to come. Neither party here has much to complain of – but that won’t stop them.

About the Author: Marc Palmer Kram is a Senior Tax Analyst at Wolters Kluwer Tax & Accounting US, where he performs quality control and troubleshooting on the vast taxability database supporting its best-in-class CCH tax-compliance software, and then sometimes writes about what he finds. Learn more about him by visiting his author bio page. Learn more about Wolters Kluwer at WoltersKluwer.com and SalesTax.com.

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Comments

3 Responses to New York’s Helio Case: A Trial Run for Sprint? (Conclusion)

  • Posted by David on February 5, 2015 10:26pm:

    I agree, this decision was right on the money. Although I would have tried to allocate a reasonable exempt percentage to the bundled service.

    • Posted by Author photo of Marc Palmer KramMarc Palmer Kram on February 20, 2015 4:21am:

      Dear David Gibson:
      Thank you very much for your (approving) comment. "To allocate a reasonable exempt percentage" just isn't an option under present New York law; there being no safe-harbor provision, it remains a black-or-white, all-or-nothing taxability situation. Judge Russo effectively quashed Helio's attempt to find ambiguity in the law where there was none. MPK

  • Posted by New on January 19, 2015 4:01am:

    […] Judge Russo subsequently applies the law to each of the (very different) dilemmas requiring adjudication here, and does so with impartiality and good common sense. We will take up, in order, each of the eight contended questions, and the Judge’s skillful analyses and resolutions thereof, in the second half of this Helio Case post. […]

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