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AOL Port Modem Management Service Is Taxable Tennessee Telecom

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Earlier this year, the taxability status of a high-speed data transmission technology – port modem management service – was determined by Tennessee’s high courts, becoming final in February when AOL’s application for permission to appeal further was denied by the state’s Supreme Court. The Court of Appeals’ Opinion memorializes a trial which entailed technical explication and analysis of the service’s electronic engineering; it concluded that no exemption applied under any theory propounded by taxpayer AOL, an Internet access provider. Thus, Tennessee will retain the almost $1 million it collected in sales tax. (AOL, Inc. (Successor to America Online, Inc.), on Its Own Behalf and as Assignee of Sprint Communications Company, L.P., and Sprint Communications Company, L.P. v. Richard H. Roberts, in His Capacity as Commissioner of Revenue for the State of Tennessee, Case No. M2012-01937-COA-R3-CV, Court of Appeals of Tennessee, at Nashville, 2013 Tenn. App. LEXIS 526, Authoring Judge: Richard H. Dinkins) Judge Dinkins writes well, inviting quotation.

Plaintiff AOL argued that the service fell outside the Tax Code’s definition of taxable telecom because it is a “private line service,” whereas Tennessee Revenue wanted it deemed taxable because it is NOT an “enhanced service” – both being exempt. The verdict addressed each hypothesis to definitively resolve the question.

From 2000 to 2003, Sprint remitted $979,812 in Tennessee sales tax incurred when AOL bought its service. In September 2004, Sprint sought refund, claiming the purchases either “constituted value added network services and therefore are not taxable telecommunications within the meaning of TN Code Ann. Sect. 67-6-102,” or “constitute a private line service and therefore are not taxable.” The Davidson County Court of Chancery found for the DOR.

Revenue contended that “Sprint’s service was a taxable telecommunications service within the meaning of the statute; that the ‘true object’ of the Sprint service was communication; that the service was of the type specifically identified as a telecommunication service in [the defining case,] Prodigy Services Corp., Inc. v. Johnson, 125 S.W.3d 413 (Tenn. Ct. App. 2003); that the service was not excluded from taxation as a ‘private line service’; and that the presence of ‘protocol conversion’ within Sprint’s service did not render that service exempt.”

DOR pointed to the inclusive reach of “telecommunications” in state tax laws: “(A) ‘Telecommunication’ means communication by electric or electronic transmission of impulses; (B) ‘Telecommunications’ includes transmission by or through any media, such as wires, cables, microwaves, radio waves, light waves, or any combination of those or similar media; (C) … ‘telecommunications’ includes, but is not limited to, all types of telecommunication transmissions, such as telephone service, telegraph service, telephone service sold by hotels or motels to their customers or to others, telephone service sold by colleges and universities to their students or to others, telephone service sold by hospitals to their patients or to others, WATS service, paging service, and cable television service…”

Trial testimony included considerable techno-speak describing “how the port modem management service that is the subject of the sales tax enables an AOL member to access AOL’s online service.” Judge Dinkins’s helpful synopsis warrants citation in its entirety:

“Upon reviewing [an engineer]’s description of Sprint’s port modem management service as well as the entire record, we have determined that the service provided by Sprint did not constitute a private line service within the meaning of the statute. The uncontested facts show that, in addition to transmitting calls over lines dedicated to AOL, Sprint’s service included the following functions: acquiring and providing to AOL local telephone numbers – known as access numbers – which enabled AOL’s members’ computer modems to connect to the local access node; managing the reception of calls from the members’ modems; and preparing the data received at the local access node to travel to AOL’s Data Centers. During these portions of Sprint’s service to AOL, Sprint was not providing a ‘dedicated line service’ connecting two or more specific locations; rather, Sprint was providing additional services that enabled the receipt and preparation of the call for transmission. The provision of these additional functions by Sprint took the entire service it provided to AOL outside of the statutory definition of private line service, thereby making the service subject to the sales tax at Tenn. Code Ann. § 67-6-905” (emphasis supplied).

The remainder of the decision was less challenging: “Where certain business activity does not ‘fit clearly and indisputably within the discrete categories contemplated by taxation laws, the courts of this state have developed a method whereby judicial inquiry is made into the “primary purpose” or “true object” of the activity.’ … Having examined the totality of the circumstances associated with the port modem management service sold to AOL, we hold that the true object of this service was telecommunications. AOL purchased the service in order to connect its members to its Data Centers; in order to make that connection, the transmission services provided by Sprint included preparing the data for transmission … the true object was not to provide these ancillary functions. Accordingly, the sale of the port modem management service was subject to taxation as telecommunications services.”

A kudos to the Tennessee Court of Appeals for providing clarity here.

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 and

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