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Can Tennessee Tribunal Tell Taxable Telecom from Telepathy?

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The Tennessee Court of Appeals has announced another in its recent succession of questionable telecommunications-related verdicts, analysis of which suggests that this Court has lost its grasp of some of the rudiments of telecom taxation. Deciding that IBM’s Wide Area Network (“WAN”) service is NOT taxable telecom, the Court seems to have strayed from common sense (and our common understanding of English) and entered a land of indistinct distinctions and judicial reasoning that doesn’t appear reasonable. (IBM Corporation v. Reagan Farr, Commissioner of Revenue, State of Tennessee, Case No. M2012-01714-COA-R3-CV, In the Court of Appeals of Tennessee, at Nashville, 2013 Tenn. App. LEXIS 639, Appeal from the Chancery Court for Davidson County, Case No. 092144I; quotations are from the Judges’ Opinion.)

In early 2006 after auditing IBM for 1998 to 2003, Tennessee’s Commissioner of Revenue determined that WAN service – a medium for accessing information from remote computers – was a form of taxable telecommunications, and the DOR served a Notice of Assessment on the tech giant “in excess of $5.5 million” for its failures to collect and remit state sales tax on transfers of the product. Following an unsuccessful effort to persuade Revenue to change its mind, IBM (hereinafter “Plaintiff” or “taxpayer”) brought suit against the Commissioner in Davidson County Chancery Court.

In its pleadings, Plaintiff insisted that WAN isn’t telecommunication, “because users were limited to accessing information on geographically remote computers; the WAN did not allow its users to communicate with one another.” [Red Herring Alert: “accessing information on geographically remote computers” is telecommunicating according to every definition imaginable. Additionally, allowing “users to communicate with one another” – that is, enabling two-way telecommunication – is merely one possible communications modality, and not by any stretch the only way to tell if telecommunication occurs. Think about it: Is a pager’s “ping” telecommunication? Of course it is. Is television a telecommunications medium? Of course. Tennessee’s statutory definition is All You Ever Needed To Know to distinguish telecom from telepathy: “‘Telecommunication’ means communication by electric or electronic transmission of impulses.” It encompasses much more than just two-way communication, a confusion that taxpayer’s counsel sought to create and exploit.] The trial court was not taken in by such tactics and agreed with the DOR’s understanding that using a WAN is telecommunicating – and taxable.

The Chancery Court decision, although correct, was itself hardly free of nonsense: “The Court finds that the IBM WAN service was a taxable ‘telecommunication service’ as defined in Tenn. Code Ann. § 67-6-102(a)(32) because the service consisted of the provision of links and hubs that transmitted IBM’s customers’ own information from one point to another. Further, IBM did not provide any original information to its customers. What IBM was selling, therefore, was the means of transmitting its customers’ information and not information that IBM itself provided.” [Herring Again!: Asking whose content is conveyed is another distraction totally irrelevant to deciding whether telecommunication takes place. Does whether I’m using my own words, your words, or Shakespeare’s words make any difference at all if the question is, “Is this communication”? Obviously not. Yet the Chancery Court considers this to be determinative!] Thus, the lower tribunal did the right thing for entirely the wrong reasons.

In its appeal, Plaintiff cited several recent Court of Appeals opinions that already had legal scholars puzzling over their dubious thinking and outcomes: “[T]he State argued in Qualcomm that the OmniTRACS service should be considered a form of taxable telecommunications because Qualcomm did not create the information being transmitted. The taxpayer in Prodigy created the information that was available to its customers, whereas Qualcomm did not create any of the information transmitted through its service.” Again: “IBM points out that, unlike the services at issue in Bellsouth, users of its WAN service were not able to communicate with other users. Because communication between users was not the true object of its service, as it was in Bellsouth, IBM argues that its WAN service was not taxable as a telecommunication service.” Immaterial, irrelevant, and totally flawed as “logic” (A is not C; B is not C; therefore, A is B!).

And yet, astonishingly, the Court of Appeals was persuaded by these specious arguments, accepting one spurious inference piled upon another: “[T]he issue of whether a service is taxable as a telecommunication service does not turn on whether or not a service provides the transmission of information, but whether communication between users of the service was the primary purpose of the service … The court in each of those cases, however, determined that communication was not the ‘true object’ of the service, and that the service therefore was not taxable as ‘telecommunication services.’” Plaintiff proffers that “the true object of its WAN service is information, not communication, and that its WAN service is therefore not taxable.” What, exactly, do they think communication IS? Transmitting information from afar IS telecommunication!

Applying Tennessee’s extremely nebulous true object/primary purpose test – a lawyers’ ploy often invoked to obfuscate and manipulate terms howsoever they please, creating characterizations to suit a persuasive purpose (“The goal here’s not ‘telecommunication.’ It’s ‘information access!’ It’s ‘enhanced service!’ It’s ‘world peace!’ (… that’s not taxable, is it?)”) – has the Appellate Court apparently making up the law as it goes along, producing jurisprudence that is inconsistent, irresponsible, and occasionally even irrational. It would better serve justice, the law, and the people if it were to return to commonsense reality.

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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