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Verizon (Mostly) Loses Big-Dollar Pennsylvania Gross Receipts Tax Case

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Occasionally, what makes a tax case noteworthy isn’t the novelty or difficulty of its issues, but simply the dollar-amount of the stakes involved. One such is Verizon v. Commonwealth (Case No. 266 F.R. 2008, Commonwealth Court of Pennsylvania, On Appeal from Board of Finance and Revenue Case No. 0625382, 2013 Pa. Commw. LEXIS 238; Honorable Patricia A. McCullough, Judge): The judgments required to decide the case were not intellectually demanding – but the money hanging on those determinations was ENORMOUS, because entailing (1) one entire year’s worth of taxable activities, occurring across (2) the breadth of one of America’s most highly-populated, highly-developed states, by (3) a leading telecom services supplier. Result: MEGA-BUCKS! Attaching nine or ten zeroes to any sum magnifies its fascination, no? (Numbers below are rounded, but closely convey the actual figures.)

Specifically: Verizon Pennsylvania, Inc. (“Verizon”) filed its 2004 State Tax Return in early 2005, where it reported revenue earned supplying intrastate phone service in Pennsylvania of $1.475 billion-with-a-“b,” on which it paid $73¾ million in gross receipts tax (“GRT”). The DOR, however, challenged Verizon’s numbers and “issued a settlement” (its term of art) upping its estimation of the taxable amount to $2.428 billion, creating a tax underpayment of nearly $48 million. Verizon made a counteroffer (a “resettlement petition”) to the State Board of Appeals, which (very obligingly) knocked ¾ billion off the taxable sum (reducing it to $1.673 billion), thereby making the shortfall “only” $10 million. Verizon sought review of the resettlement, which was “denied in its entirety” with the explanation that, legally, Verizon “had an obligation to pay tax on all receipts from telephone messages transmitted” (emphasis added). That formulation actually held the answers.

Three issues needed resolving: the taxability of (1) private line telephone service, (2) directory assistance, and (3) non-recurring charges (like installation/connection, modification, or repair of phones or service). Verizon held that none of such associated revenues incurred tax; the state insisted they all did. This lawsuit resulted. Simple enough.

The history of Pennsylvania’s Utilities Gross Receipts Tax (72 P.S. § 8101(a)(2)) is likewise uncomplicated. The original 1889 statute taxed the gross receipts of any telephone and telegraph business. Revisions of 1925 and 1929 limited its reach, to revenue from “telephone traffic,” then, on instruction from the state’s Supreme Court, to receipts from sending “telephone messages.” Today, the law “imposes a gross receipts tax on telephone companies doing business within the Commonwealth for every dollar of the gross receipts received from telegraph or telephone messages transmitted wholly within this State.” Thus guided, the Commonwealth Court drew these conclusions (citations omitted):

“Private Telephone Line Receipts. Verizon customers may lease a private telephone line between two endpoints for exclusive, uninterrupted use of the private telephone line for the transmission of any communication. Verizon customers are charged a fixed fee for private telephone lines rather than a fee based on the amount of usage. We conclude that Verizon’s receipts from private telephone lines meet the taxability standard set forth by our Supreme Court … [T]he sole purpose of a private telephone line is to transmit messages. … While Verizon also argues that its customers pay a flat fee for the service of having a private telephone line, the method of payment does not mean that messages are not transmitted over the private telephone line and that the receipts from the private telephone line are not taxable. … [T]here is no purpose for a private telephone line other than to transmit messages. Thus, the Board properly concluded that Verizon’s receipts from private telephone lines are taxable gross receipts.

“Directory Assistance Receipts. Directory assistance information, including telephone numbers and addresses, is available to Verizon customers when they make a call to Verizon’s directory assistance platform and/or a directory assistance operator. Verizon charges its customers a fixed fee for each call made. Further, Verizon has a ‘ConnectReQuest’ service where customers are charged if they ask Verizon to connect them to the requested telephone number. … We also conclude that Verizon’s receipts from directory assistance are subject to the gross receipts tax. … In order for a Verizon customer to receive directory assistance, he or she must make a telephone call to Verizon’s operator, thus, transmitting a message. For the same reason, we conclude that Verizon’s ‘ConnectReQuest’ service is subject to the gross receipts tax. When a Verizon customer requests a Verizon operator to dial a telephone number for the Verizon customer and the call is completed, a telephone message has been transmitted. Thus, because the sole purpose of these services is to transmit messages … we conclude that both are subject to the gross receipts tax under section 1101(a)(2) of the Code.

“Non-Recurring Service Charge Receipts. Non-recurring service charges, including telephone line installation, moves, or changes to telephone lines and service, and repairs of telephone lines, are separately stated on Verizon customers’ monthly telephone bills. … Unlike receipts from private lines and directory assistance, we conclude that section 1101(a)(2) of the Code does not apply to cover receipts from the non-recurring service charges. … [T]he court [previously] concluded that receipts from service charges, i.e., ‘work done by [Bell’s] employees,’ were not taxable, because these receipts were not from the transmission of messages. Likewise, work done by Bell’s employees to install telephone lines, move or change telephone lines or service, and repair telephone lines is not taxable, because no transmission of a message has occurred. Stated otherwise, no telephone messages are transmitted when Verizon performs non-recurring services. … Because neither the Legislature nor the courts have broadened the scope of section 1101(a)(2) of the Code, the question regarding the inclusion of these non-recurring charges in the gross receipts tax must be resolved in favor of Verizon.

“Accordingly, we affirm the order of the Board insofar as it concludes that the private line and directory assistance charges are to be included in the gross receipts tax. Insofar as the Board’s order concludes that the non-recurring service charges are also subject to this tax, we reverse” – making Verizon, after the court-ordered reassessment, still responsible for some eight figures’ worth of GRT. (The final number is unclear: prior to May 2014, Board tallies are unreported.) Contesting this clear-cut Order seems unlikely; Verizon will probably just pay up. It would appear they can afford it.

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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