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In June, a formal Determination resolving the tax case of Helio, LLC was issued by NY 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, Dated June 12, 2014). Helio (“petitioner” here), a mobile virtual network operator offering postpaid wireless service, protested the state sales tax assessed following an audit of its receipts for 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 significant and potentially precedent-setting case raises a number of important questions, warranting dedicating the time (in this and the next Telecom Taxation blogpost) to some deeper analysis and discussion. All direct quotations are from Judge’s Russo’s well-crafted Determination (omitting citations):
Throughout the audit period, Helio offered “All-In” and “A La Carte” Plans at differing price points. The “A La Carte” package included timed inter- and intrastate voice service, plus call waiting, call forwarding, caller ID, and voicemail, but not data-based modalities such as text messaging, internet access, or e-mail. Customers incurred per-minute usage fees for overages and for using services outside the Plan (such as making international calls or texting), and were billed per-kilobyte charges for accessing or sending data. Uses exceeding Plan limits were itemized separately on the monthly statement. Helio’s “A La Carte 500” Plan, for instance, provided 500 minutes of calling for $40 per month during the audit period. “All-In” Plans included everything A La Carte Plans did, adding data capabilities like internet access, texting, e-mail, and information services, with overages again itemized separately. Helio’s “All-In 500” plan provided 500 minutes of air-time for $65 per month at these times.
During the 2006-09 period covered by the audit, Helio assessed its customers and remitted to New York State appropriate sales tax on the intrastate component, but not the interstate portion, of their telecom usage. Helio also, like most telcos, duly “contributed” to the Federal Universal Service Fund over these four years “based on the prevailing safe harbor percentages established by the FCC.” Rates varied – from 28.5% to 37.1% and back again – during these years; such “FUSF Contribution costs” were recouped from Helio’s customers by itemized pass-through detailed on monthly bills. Helio’s highly sophisticated billings gave customers lots of information, including exhaustive “call detail record” data particularly identifying every call placed and received, the phone number connected to, the per-minute charge, the type of call (e.g., “local”), and its length.
Helio applied conservative, well-reasoned methods to assign prices to the component services in its bundled offerings, and to calculate therefrom plausible tax bases:
“In the case of the $65.00 All-In 500 plan, petitioner allocated $2.00 to voice network access, $1.00 to call waiting, $1.00 to call forwarding, $1.00 to caller ID, and $2.00 to voicemail. … [P]etitioner allocated $25.00, the difference between the A La Carte 500 and All-In 500 plans, to data-based services like internet access service, text messaging service and information services. After determining the portion of each fixed monthly charge that was attributable to data-based services, petitioner allocated portions of the price differential amount to the different data-based services, each of which had a unique service code in petitioner’s accounting system, based on costs. For example, petitioner determined that the $25.00 price differential between the All-In 500 and A La Carte 500 plans was attributable to data-based services. Of that amount, petitioner attributed approximately $13.86 to internet access service (referred to as ‘Data Transmission’ in its accounting system), $0.43 to e-mail, $7.39 to information services and $3.33 to messaging service.
“After determining the portion of each fixed monthly charge attributable to data-based services, petitioner allocated the remaining $33.00 to voice service. Petitioner further allocated the amount of the charge for voice service between interstate and intrastate voice services using the prevailing safe harbor percentages established by the FCC for FUSF purposes. For example, petitioner allocated 28.5 percent of the $33.00 voice charge to interstate voice service, or $9.41, for the periods July 2006 through August 2006 and August 2008 through February 2009. Petitioner allocated the remaining 71.5 percent of the $33.00 voice charge to intrastate voice service, or $23.60, during the same periods. After petitioner determined the amount of the charge for intrastate voice service sold as part of a fixed monthly charge, petitioner collected and remitted New York sales tax on the calculated intrastate charges. Petitioner collected New York sales tax on charges for intrastate voice service sold as part of fixed monthly charges based on the safe harbor percentages established by the FCC. Petitioner also collected sales tax on voice overage charges that were attributable to intrastate voice service.”
Accountants Deloitte & Touche were retained to determine the legality and adequacy of Helio’s methodology in New York, concluding that, “if the service provider uses an objective, reasonable and verifiable standard for identifying each of the components of the charge” – which, plainly, Helio bent over backwards to do – then the taxation authorities should have no quarrel with it. Notwithstanding, the New York taxation authority advised Helio in February 2012 that it had significantly undercollected and, in fact, owed additional tax and interest to the tune of – deep breath – $1,108,375.25.
ALJ Russo’s 38-page Determination is a very model of precision and patience, parsing the detailed, complicated billings that form the basis for Helio’s reassessment by the taxation authorities and shaping the issues they present. She clarifies and restates, and then resolves with admirable insight and restraint, the eight individual tax problems raised in the dispute. Preliminarily, however, the Judge presents a “summary of the parties’ positions” that helps frame the conflicts emerging from the litigants’ divergent understandings of the facts and interpretations of the law. In doing so, she revealed surprisingly strong similarities to NY’s pending landmark People v. Sprint tax-fraud case: “Petitioner argues that the Division improperly imposed sales tax on interstate wireless voice service bundled with other services and sold for a fixed monthly charge. Petitioner contends that charges for its interstate wireless voice service, whether bundled with other services or separately stated, are not subject to New York sales tax and are exempt pursuant to Tax Law § 1105(b)(1)(B).” This is very close to a precise articulation of the gist of the Sprint case.
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.
Other recent “Telecom Taxation” posts by Marc Palmer Kram:
- DirecTV Seeks "Unfair Tax Treatment" Verdicts - and Is Disappointed
- GPSPS Penalized $9 Million For Cramming, Slamming … & Chutzpah!
- Kentucky’s Telecommunications Tax: Hanging in Limbo
- D.C. TV Station Is Not “High-Tech Company,” So No Tax Break
- Florida: America's Foremost Purveyor of Tax Nonsense?