UPDATED October 31, 2007
State and local officials looking for some extra scratch by taxing your dial-up, cable or DSL Internet-access services will have to live with a seven-year itch after Congress banned those fees until 2014.
About the Internet Tax Freedom Act
Legislation imposing a three-year moratorium on new taxes on Internet access and e-commerce and creating an advisory commission on e-commerce. The moratorium was enacted by the U.S. Congress in October 1998 with an end date of September 30, 2001. Internet taxes already in place (Alabama, Connecticut, Iowa, Massachusetts, Nebraska, New Mexico, North Dakota, Ohio, South Carolina, South Dakota, Tennesee, Texas, West Virginia, Wisconsin, and Washington, D.C.) were grandfathered. The commission is expected to develop an Internet tax policy that will address nexus and regressive taxation issues and that will not interfere with the growth of domestic or international e-commerce. Direct marketers fear that any new Internet taxes would also be imposed on direct mail and telephone transactions. Congress did not provide for government funding of the ACEC.
Legality of telephone utility tax (Case)
Washington Court of Appeals Reports
COMMUNITY TELECABLE v. CITY, 57491-4-I (Wash.App.
12-11-2006) COMMUNITY TELECABLE OF SEATTLE, INC.; COMCAST
OF WASHINGTON I, INC.; and COMCAST OF WASHINGTON IV, INC.,
Respondents, v. CITY OF SEATTLE, DEPARTMENT OF EXECUTIVE
ADMINISTRATION, Appellant. No. 57491-4-I. The Court of
Appeals of Washington, Division One. Filed: December 11,
2006.
Appeal from King County Superior Court. Docket No:
03-2-36639-1. Judgment or order under review. Date filed:
12/14/2005. Judge signing: Honorable Richard A Jones.
Counsel for Appellant(s) Kent Charles Meyer, City of
Seattle Attorneys Office, WA.
Counsel for Respondent(s) Randal Lee Gainer, Davis Wright
Tremaine, WA.
Dirk Jay Giseburt, Davis Wright Tremaine LLP, WA.
Published Opinion
COLEMAN, J.
This case concerns the legality of the City of Seattle’s
telephone utility tax as it applies to Comcast’s Internet
transmission activities. Comcast sued the City for a refund
of the tax, arguing that the tax is illegal under
Washington’s Internet Tax Moratorium and the federal
Internet Tax Freedom Act. The trial court granted Comcast’s
cross-motion for summary judgment and denied the City’s
motion for summary judgment. The City appeals. We reverse
because:
1. The tax is not barred by the Washington Internet Tax
Moratorium;
2. The tax is exempt from the federal Internet Tax Freedom
Act’s moratorium on taxes on Internet access under a
grandfather clause; and
3. The tax is not discriminatory under the federal Internet
Tax Freedom Act.
FACTS
Comcast’s Business in Seattle
Comcast owns a cable transmission network leading to many
homes and businesses in Seattle. Comcast and its
predecessor corporations entered into franchise agreements
with the City for the right to run cable to customers in
Seattle. As a result, Comcast owns a transmission system in
Seattle that includes cable running to individual properties
and a network of fiber optics, cables, and other equipment
to transmit between its Seattle customers and Comcast’s
“head end” in Burien, Washington.
In addition to providing cable television signals over its
Seattle cable network, Comcast also offers its customers
the ability to use the cable network for a high-speed
broadband Internet connection. The use of the cable network
for this purpose began in approximately early 1998.
In September 1995, in anticipation of the use of the cable
network as a connection to the Internet, Comcast’s
predecessor and the City entered into a memorandum of
understanding as part of cable refranchise discussions. The
memorandum stated, “[T]elecommunications and Internet
service shall be taxed at the City rate for
telecommunications services (currently 6%).”
Comcast provides its Internet customers with a device for
their home called a cable modem that allows its customers
to use the cable network for the Internet. The actual
pathway to the customer’s house for the Internet is through
the same cable used for cable television service. The
transmission of the Internet signal to and from the
customer’s house is through a coaxial cable that leads to a
pole outside the house, then through fiber optic cable to
hubs in Seattle, and from there through fiber optic cable
to Comcast’s head end in Burien. From Burien, the signal
travels by fiber optic cable to a facility at the Westin
Building in Seattle. The signal leaves the Westin Building
by fiber optic cable.
Comcast’s customers receive, through the network, Internet
services such as email and the ability to use a browser to
access web pages on the World Wide Web. Comcast has
previously entered into contracts with other entities to
provide Internet services to Comcast’s customers. During
much of the time period at issue in this case, Comcast’s
customers received Internet services from a company known
as Excite@home. Excite@home had contracts with Comcast that
allowed Excite@home to provide Internet service and all
equipment necessary to provide those services other than
the equipment provided by Comcast between the subscriber’s
home and the head end in Burien. In exchange for providing
this equipment and services to Comcast’s subscribers,
Excite@home agreed to split certain subscriber revenues with
Comcast. Comcast received 65 percent of these revenues and
Excite@home received 35 percent. In effect, Comcast
provided the portion of the transmission system from the
subscriber’s home to the head end and Excite@home provided
other infrastructure and the Internet services received by
the subscribers. In November 2001, Excite@home ceased
providing Internet services to Comcast’s customers. Comcast
then used a variety of other entities to provide the
services that Excite@home had provided.
The Tax
The City imposes a telephone utility tax on entities
engaged in the business of transmitting data over a network
in Seattle. SMC 5.48.050A. Under SMC 5.48.050A, Seattle
businesses must pay a tax of six percent on the revenue
from that business. The Seattle Municipal Code defines
“telephone business”:
“Telephone business” means the providing by any person of
access to a local telephone network, local telephone
network switching service, toll service, cellular or
mobile telephone service, coin telephone services, pager
service or the providing of telephonic, video, data, or
similar communication or transmission for hire, via a
local telephone network, toll line or channel, cable,
microwave, or similar communication or transmission
system. The term includes cooperative or farmer line
telephone companies or associations operating exchanges.
The term also includes the provision of transmission to
and from the site of an Internet provider via a local
telephone network, toll line or channel, cable, microwave,
or similar communication or transmission system.
‘Telephone business’ does not include the providing of
competitive telephone service, or providing of cable
television service, or other providing of broadcast
services by radio or television stations.
SMC 5.30.060C (emphasis added).
In addition to enacting SMC 5.48.050A, the City amended
Seattle Business Tax Rule 5-44-155(6) in 1995 to advise
Internet companies that provided data transmission services
that data transmission activities were subject to the
telephone utility tax and that Internet services were
subject to the business and occupation (B&O) service tax.
The rule was repealed in 2001. The City continued to rely
on the rule for guidance and placed a statement to that
effect on its website. Since prior to 1998, the City has
enforced the tax code so that a company that owns
transmission capability through wire, cable, microwave, or
other medium is considered a telephone business under SMC
5.30.060C and is subject to the telephone utility tax under
SMC 5.48.050. The City collected the utility tax from other
companies using networks to transmit Internet services and
also collected the service B&O tax from Internet service
providers.
The Audit
Prior to March 15, 2002, Comcast paid the cable television
tax to the City for its cable modem services revenue rather
than the telephone utility tax. The City taxes cable
television activities at ten percent. In a letter dated
September 20, 2000, the City instructed Comcast to report
its cable modem service revenue under the telephone
business classification of the utility tax rather than
under the cable television tax. The City then sent a letter
on October 6, 2000, rescinding these instructions and
advising Comcast that, “[a] task force made up of personnel
from our tax, cable and legal departments is meeting to
discuss your business practices, and to formulate correct
legal and contractual positions.” In a December 26, 2000
letter, the City instructed Comcast to pay the six percent
telephone utility tax on its cable modem activity revenue.
Comcast, however, continued to pay the higher cable
television tax until March 15, 2002. On April 29, 2002,
Comcast informed the City that in the future, it would pay
neither the telephone utility tax nor the cable television
tax. Instead, it would only pay the .415 percent B&O tax
rate imposed on service activities under SMC 5.45.050. The
City disagreed with Comcast’s conclusion and repeated in a
May 9, 2002 letter its instruction that Comcast should
report cable modem revenue under the telephone utility tax.
Comcast refused to comply with these reporting
instructions.
On June 18, 2002, the City notified Comcast that it would
conduct an audit of Comcast’s business activities. The City
conducted the audit and concluded that Comcast was subject
to the telephone utility tax for its revenue from data
transmission activities in connection with Internet
service. Accordingly, the City issued tax assessments to
Comcast on July 25, 2003. The City assessed its utility tax
against Comcast for engaging in the telephone business in
Seattle in 2001 and 2002 (the “audit period”). The
assessments included a credit to reimburse Comcast for the
period during which it had incorrectly paid the ten percent
cable television tax.
Comcast sued the City for a refund of the tax and
declaratory relief, arguing that the tax is illegal under
Washington’s Internet Tax Moratorium and the federal
Internet Tax Freedom Act. The trial court denied the City’s
motion for summary judgment and granted Comcast’s
cross-motion for summary judgment. The City appeals. We
reverse for the reasons stated below.
Analysis
Failure to Make Records Available During Audit
The City argues that Comcast is barred under SMC 5.55.060D
from challenging the tax because it allegedly failed to
make records available during the audit. SMC 5.55.060D
provides:
Any person who fails, or refuses a Department request to
provide or make available records . . . shall be forever
barred from questioning in any court action, the
correctness of any assessment of taxes made by the City
based upon any period for which such records have not been
provided, made available or kept and preserved. . . .
Comcast argues that (1) it did comply with the City’s
requests for information during the audit, (2) SMC
5.55.060D is an unconstitutional limit on the jurisdiction
of superior courts under Article IV, section 6 of the
Washington State Constitution, and (3) SMC 5.55.060D creates
a conclusive presumption in violation of the Washington
State Constitution. We do not decide these issues because
we conclude that the tax itself is legal under the
Washington Internet Tax Moratorium and the federal Internet
Tax Freedom Act.[fn1]
Washington’s Internet Tax Moratorium
Comcast contends that Washington’s Internet Tax Moratorium
prohibits the City from taxing it at more than 0.415
percent, the City’s general B&O service rate. The City
argues that the moratorium does not affect taxes on revenue
from data transmission via a cable transmission system. We
conclude that the moratorium does not preclude the City from
taxing revenue from data transmission activity via a cable
transmission system because of the plain language of the
statutes and a persuasive interpretation of the statutes by
the Washington Department of Revenue.
RCW 35.21.717 states:
Until July 1, 2006, a city or town may not impose any new
taxes or fees specific to Internet service providers. A
city or town may tax Internet service providers under
generally applicable business taxes or fees, at a rate
not to exceed the rate applied to a general service
classification. For the purposes of this section,
“Internet service” has the same meaning as in RCW
82.04.297.
RCW 82.04.297(3) defines “Internet service” as
a service that includes computer processing applications,
provides the user with additional or restructured
information, or permits the user to interact with stored
information through the internet or a proprietary
subscriber network. “Internet service” includes provision
of internet electronic mail, access to the internet for
information retrieval, and hosting of information for
retrieval over the internet or the graphical subnetwork
called the world wide web.
This definition of Internet services does not include the
telephone business activities that are taxed under the
City’s telephone utility tax.
State statutes specifically distinguish between Internet
service and network telephone service, preserving the
City’s ability to tax Comcast’s data transmission
activities as telephone business. In the same legislative
bill that created the Internet Tax Moratorium, the
legislature amended the definition of “network telephone
service” to distinguish it from Internet service. Laws of
1997, ch. 304, §§ 2, 5. RCW 82.04.065(2)
defines network telephone service to include data
transmission, including transmission to and from the site of
an Internet provider:
“Network telephone service” means the providing by any
person of access to a telephone network, telephone network
switching service, toll service, or coin telephone
services, or the providing of telephonic, video, data, or
similar communication or transmission for hire, via a
telephone network, toll line or channel, cable, microwave,
or similar communication or transmission system. “Network
telephone service” includes the provision of transmission
to and from the site of an internet provider via a
telephone network, toll line or channel, cable, microwave,
or similar communication or transmission system. “Network
telephone service” does not include the providing of
competitive telephone service, the providing of cable
television service, the providing of broadcast services by
radio or television stations, nor the provision of
internet service as defined in RCW 82.04.297, including
the reception of dial-in connection, provided at the site
of the internet service provider.
(Emphasis added.) The statute specifically distinguishes
between network telephone service (which includes data
transmission via a cable system) and internet service
(which, under the moratorium, cannot be taxed at a rate
higher than the rate applied to a general service
classification). RCW 82.04.065(2) allows the City to tax
data transmission activities because such activities are
distinct from “internet service” — the subject of
the moratorium.
Comcast’s data transmission activities are covered by the
descriptions of network telephone service in RCW 82.04.065
and, thus, not protected by the moratorium. First, Comcast
provides data transmission over a cable system in
accordance with the first sentence in RCW 82.04.065(2)
(“‘Network telephone service’ means the providing by any
person of . . . data . . . transmission . . . via a . . .
cable . . . transmission system.”). Second, Comcast
provides “transmission to and from the site of an internet
provider” via a cable transmission system as described in
the second sentence of RCW 82.04.065(2). The undisputed
facts show that Comcast provides a cable transmission
system from its customers’ homes and businesses to
Comcast’s facilities in Burien and then to the Westin
Building.
Comcast argues that the definition of network telephone
service does not apply to its activities because it
provides Internet services in addition to a transmission
system. Comcast is incorrect. Under the plain language of
RCW 82.04.065(2), “network telephone service” includes any
entity that provides “transmission to and from the site of
an internet provider via a . . . cable . . . transmission
system.” Comcast also provides “Internet services” (as
defined in RCW 82.04.297), which, under the moratorium,
cannot be taxed at a rate higher than the rate applied to a
general service classification. This does not mean, however,
that the City is precluded from imposing its six percent
telephone utility tax on Comcast’s revenue from data
transmission. As the City points out, “[u]nder Comcast’s
interpretation of RCW 35.21.717, any telephone business
could avoid the telephone utility tax simply by offering
its customers Internet services such as email and access to
the web.” Brief of Appellant, at 20. Comcast cannot avoid
the City’s telephone utility tax on data transmission
activities by bundling its charges for cable data
transmission with its charges for Internet services. State
law distinguishes between network telephone services, such
as data transmission via a cable network, and Internet
services, allowing the City to tax Comcast’s data
transmission activities as a “telephone business.”
This interpretation of Washington law is supported by an
Excise Tax Advisory (ETA) issued by the Washington
Department of Revenue. ETA 2029.04.245 confirms that the
1997 amendment to the definition of “network telephone
service” explicitly includes data transmission via cables
to and from the site of an Internet provider. ETA
2029.04.245 states:
This includes services used to connect an ISP to the
Internet backbone or to ISP customer locations, such as
the provision of transmission capacity over dial-up
connections, coaxial cables, fiber optic cables, T-1
lines, frame relay service, digital subscriber lines
(DSL), wireless technologies, or other means.
Washington has traditionally taxed the sale of these
network telephone services to a customer under the
retailing classification of the business and occupation
tax (B&O) tax and required the seller to collect retail
sales tax. In 1997, RCW 82.04.065 was amended to
explicitly include “the provision of transmission to and
from the site of an internet provider via a local
telephone network, toll line, or channel, cable,
microwave, or similar communication or transmission
system” as taxable network telephone service.
The Department of Revenue concurs with the City that network
telephone services include data transmission over cable
networks to internet customer locations. A reviewing court
gives considerable deference to the construction of an
ordinance by those officials charged with its enforcement.
GMC v. City of Seattle, 107 Wn. App. 42, 57, 25 P.3d 1022
(2001). Network telephone services, which are taxed by the
City as “telephone business,” are not subject to
Washington’s Internet Tax Moratorium.
Comcast argues that under Nat’l Cable & Telecommunications
Ass’n v. Brand X Internet Servs., 545 U.S. 967, 125 S. Ct.
2688, 162 L. Ed. 2d 820 (2005), the data transmission
component of its Internet provision cannot be separated
from the Internet services it offers. Comcast’s reliance on
Brand X is misplaced because Brand X is not binding on a
Washington court interpreting Washington law. In Brand X,
the Court considered whether the Federal Communications
Commission’s classification of broadband cable modem
service under the federal Telecommunications Act of 1996 as
an “information service” rather than a “telecommunications
service” was reasonable under Chevron U.S.A., Inc. v.
Natural Res. Def. Council, 467 U.S. 837, 104 S. Ct. 2778,
81 L. Ed. 2d 694 (1984) and the federal Administrative
Procedures Act. Brand X, 545 U.S. at 967. It did not
consider whether data transmission was inseparable from
Internet service under Washington law. It also did not
address whether, under federal law, states and local
governments can tax revenue from cable modem service as a
network telephone service.
Tax on Interstate Services
Comcast argues that the City’s tax on telephone business is
illegal because RCW 35.21.714 prohibits cities from
imposing their telephone utility taxes on interstate
service. Comcast reasons that this statute bars the City
from taxing its data transmission activities because all of
the Internet traffic from Comcast’s Seattle subscribers is
delivered to an out-of-state location.
Comcast misrepresents RCW 35.21.714. This statute merely
precludes the City from taxing the portion of network
telephone service that represents charges to another
telecommunications company for access to interstate
services. RCW 35.21.714 provides in relevant part:
Any City which imposes a . . . tax . . . upon the
business activity of engaging in the telephone business .
. . may impose the . . .tax . . . on one hundred percent
of the total gross revenue derived from intrastate toll
telephone services . . . : PROVIDED, that the City shall
not impose the . . . tax on that portion of network
telephone service . . ., which represents charges to
another telecommunications company . . . for access to, or
charges for, interstate services. . . .
Comcast has not shown, or even alleged, that it charges
another telecommunications company for interstate services.
RCW 35.21.714 requires cities to give a deduction for the
portion of network telephone service that represents a
charge to another telecommunications company for interstate
services. It does not bar the City from taxing Comcast’s
data transmission revenue simply because data transmission
signals cross Washington’s borders. Comcast’s
interpretation of RCW 35.21.714 would make it impossible for
cities to tax telephone business because many data
transmissions and traditional telephone line transmissions
are delivered to an out-of-state location. RCW 35.21.714
concerns charges to other telecommunications companies for
interstate services. Such charges are not at issue in this
case.[fn2]
The Federal Internet Tax Freedom Act’s Moratorium on Taxes
on Internet Access
Comcast argues that the City is subject to the federal
Internet Tax Freedom Act (ITFA) because its telephone
utility tax is a tax on “Internet access” as that term is
defined in the ITFA. The City contends that its telephone
business tax does not tax “Internet access.” We do not
decide this issue because we hold that even if the City
taxes “Internet access” as that term is used in the ITFA,
(1) the City’s tax is exempt under the ITFA’s grandfather
clause and (2) the tax is not a discriminatory tax on
electronic commerce.[fn3]
ITFA’s Grandfather Clause
Comcast argues that the City is precluded from taxing it as
a telephone business under the ITFA’s moratorium on taxes
on “Internet access.” The City contends that it is exempt
from this moratorium under the ITFA’s grandfather clause.
We conclude that the City’s tax is exempt under the
grandfather clause because it was authorized by the State
before October 1, 1998, the City notified taxpayers of the
tax before October 1, 1998, and the City generally
collected the tax prior to October 1, 1998.
As originally enacted and through its first extension, the
ITFA provides:
No State or political subdivision thereof may impose any
of the following taxes during the period beginning on
October 1, 1998, and ending on November 1, 2003 —
(1) taxes on Internet access, unless such tax was
generally imposed and actually enforced prior to October
1, 1998; and
(2) multiple or discriminatory taxes on electronic
commerce.
ITFA, § 1101(a) (2003) (emphasis added). The ITFA
defines the terms “generally imposed and actually enforced”
to mean that the law was authorized by statute and that
either notice was given or the tax was generally collected:
For purposes of this section, a tax has been generally
imposed and actually enforced prior to October 1, 1998,
if, before the that date, the tax was authorized by
statute and either —
1) a provider of Internet access services had a
reasonable opportunity to know by virtue of a rule or
other public proclamation made by the appropriate
administrative agency of the State or political
subdivision thereof, that such agency has interpreted and
applied such tax to Internet access services; or
(2) a State or political subdivision thereof generally
collected such tax on charges for Internet access.
ITFA, § 1101(d) (2001). To be exempt under the
grandfather clause, the City’s tax first must have been
authorized by statute before October 1, 1998. Second,
either Comcast must have had a reasonable opportunity to
know by rule or other public proclamation that the City
taxed its data transmission activities before October 1,
1998, or the City must have generally collected the tax
before October 1, 1998. Each of these issues will be
considered.
The City’s tax has been authorized by statute since at
least 1997. Cities in Washington are authorized by statute
to impose taxes such as Seattle’s telephone utility tax and
B&O service tax. See RCW 35.22.280(32); RCW 35.22.570; RCW
35.21.714; RCW 35.21.870(1). And as explained above,
Washington’s Internet Tax Moratorium does not preclude the
City from imposing its telephone business tax on Comcast’s
data transmission activities. In 1997, the same year the
state legislature enacted the Internet tax moratorium, it
also amended the definition of “network telephone service”
to preserve state and local government’s ability to tax
data transmission activities such as Comcast’s.
The next requirement is that Comcast had “a reasonable
opportunity to know” by rule or other proclamation that the
City “has interpreted and applied such tax to Internet
access services” before October 1, 1998. ITFA, §
1101(d) (2001). Comcast had a reasonable opportunity to know
by virtue of a rule that the City applied its telephone
utility tax to companies transmitting Internet services. In
1995, the City amended Seattle Business Tax Rule
5-44-155(6) (Rule 155) to advise Internet companies that
provided data transmission services that data transmission
activities were subject to the telephone utility tax and
that Internet services were subject to the B&O service tax.
The Seattle Business Tax Rules are passed according to the
procedures in SMC chapter 3.02. Prior to adoption,
amendment, or repeal of a rule, the City is required to
publish in a newspaper and hold a public hearing, as well
as provide a draft to anyone who requests one. The final
rules are available from the City Clerk, the RCA division,
and, since the mid-1990s, the City’s web site. Rule 155 was
amended in 1995 in accordance with this procedure.
By enacting Rule 155, the City notified the public that it
imposed its telephone utility tax on companies that
transmitted data related to the Internet. Rule 155
provided:
Providers of information services on the Internet, or on
other electronic networks, are subject to the service
classification on their gross “Service” charges. An
internet provider located in Seattle must insure payment
of the Seattle public utility tax on their telephone
access charges for the telephone lines, microwave, or
other method of electronic transmission. Non-payment of
the public utility tax on the aforementioned telephone
access charges will indicate to the City that the
internet provider is holding itself out to be in the
telephone business (see SMC 5.48.020). In such a case, the
gross charges by the internet provider to their clients
will be apportioned between the public utility tax and the
service business and occupation tax classification based
on the ratio of telephone line costs (or similar costs) to
the total costs of doing business.
(Emphasis added.) The City notified the public in Rule 155
that it would apportion an Internet provider’s revenue
based on its transmission costs and other costs of doing
business. Through Rule 155, the City met the notice
requirement of IFTA, § 1101(d)(1) (2001).
Comcast argues that Rule 155 fails the ITFA’s notice
requirement because it was repealed effective December 31,
2001. Comcast cites three cases to support its argument:
Cazzanigi v. Gen. Elec. Credit Corp., 132 Wn.2d 433, 441,
938 P.2d 819, 822 (1997); State v. Burke, 92 Wn.2d 474,
478, 598 P.2d 395 (1979); and Glubrecht v. Dep’t of Revenue,
No. 55759, 2002 WL 726433 (Wash. Bd. of Tax Appeals Feb.
28, 2002), available at http://www.bta.state.wa.us/ and.
None of these decisions concerns the effect of a repealing
a statute on notice requirements.
Though it was repealed, Rule 155 satisfied the ITFA’s
notice requirement. The rule remained in effect for six
years, including the first year of the audit period. The
City continued to rely on the rule for guidance and placed
a statement to that effect on its website. Thus, Rule 155
provided notice prior to October 1, 1998, that the City
applied its telephone utility tax to companies that
transmitted data related to the Internet. Moreover, before
Rule 155 was repealed, the Seattle Municipal Code already
contained provisions taxing utilities engaged in the
telephone business and defined “telephone business” to
include data transmission via cable. See SMC 5.48.050A and
SMC 5.30.060C. These statutes also provided notice that the
City applied its telephone utility tax to companies that
transmitted data related to the Internet.
Comcast argues that Rule 155 was invalid because it (1)
created a conclusive presumption in violation of the
Washington State Constitution, (2) was not authorized under
the Seattle Municipal Code, and (3) was discriminatory.
Rule 155 stated that the City would enforce its tax code so
that companies engaged in both providing telephone business
and Internet services would be required to pay the
telephone utility tax and the Internet service tax. It
stated that the City would apportion revenues between the
two activities. Comcast’s arguments about the validity of
Rule 155 do not eliminate the fact that as early as 1995,
the rule notified businesses that the City applied its
telephone utility tax to companies transmitting data
related to the Internet.[fn4]
Even if the City did not provide sufficient notice to
Comcast, the tax can still qualify for the grandfather
clause if the City “generally collected” it prior to
October 1, 1998. ITFA § 1101(a)(2). The City
contends that it has generally collected the tax since at
least 1994. Comcast argues that the City has not generally
collected the tax because in an October 6, 2000 letter, it
instructed Comcast’s predecessor to continue reporting its
Internet revenues under the ten percent cable television
classification of the utility tax until further notice. In
that letter, the City stated: “A task force made up of
personnel from our tax, cable and legal departments is
meeting to discuss your business practices, and to
formulate correct legal and contractual provisions.” This
letter notwithstanding, the City generally imposed and
actually enforced its telephone utility tax on Internet
related data transmissions prior to October 1, 1998.
The City notified Comcast’s predecessor directly in the
1995 memorandum that cable modem activities would be
subject to the six percent telephone utility tax. It
notified Summit, the only other cable company operating in
Seattle, in 1996 that its cable modem activities were
subject to the utility tax. Since prior to 1998, the City
has enforced the tax code so that a company that owns
transmission capability through wire, cable, microwave, or
other medium are considered a telephone business under SMC
5.30.060C and, thus, subject to the telephone utility tax
under SMC 5.48.050A. Comcast does not deny that the City
collected the utility tax from other companies, such as
Summit, that used networks to transmit Internet services and
also collected the service B&O tax from mere Internet
service providers, such as Speakeasy. The October 6, 2000
letter merely shows that there was confusion over what tax
Comcast was supposed to pay. It does not show that the City
failed to generally collect the six percent tax from
companies using networks to transmit Internet services. The
ITFA does not require a taxing jurisdiction to collect and
enforce its taxes with 100 percent accuracy. This would be
impossible in a self-reporting tax system like the City’s.
Discriminatory Taxes
Comcast argues that the tax violates the ITFA’s moratorium
on discriminatory taxes on electronic commerce. We conclude
that the tax is not discriminatory because all companies in
Seattle that engage in the telephone business are subject
to the telephone utility tax and all companies that provide
Internet services are subject to the B&O tax.
Unlike the ITFA’s moratorium on taxes on Internet access,
the ban on discriminatory taxes does not have a grandfather
clause. The ITFA provides:
No state or political subdivision thereof may impose any
of the following taxes during the period beginning on
October 1, 1998, and ending November 1, 2003 —
(1) taxes on Internet access, unless such tax was
generally imposed and actually enforced prior to October
1, 1998; and
(2) multiple or discriminatory taxes on electronic
commerce.
ITFA, § 1101(a) (2001) (emphasis added). “The term
‘electronic commerce’ means any transaction conducted over
the Internet or through Internet access, comprising the
sale, lease, offer, or delivery of property, goods,
services, or information, whether or not for consideration,
and includes the provision of Internet access.” ITFA,
§ 1104(3) (2001).[fn5] ITFA, § 1104(2) (2001)
defines “discriminatory tax to mean:
(A) any tax imposed by a State or political subdivision
thereof on electronic commerce that —
(i) is not generally imposed and legally collectible by
such State or such political subdivision on transactions
involving similar property, goods, services, or
information accomplished through other means;
(ii) is not generally imposed and legally collectible at
the same rate by such State or such political subdivision
on transactions involving similar property, goods,
services, or information accomplished through other
means, unless the rate is lower as part of a phase-out
of the tax over not more than a 5- year period;
(iii) imposes an obligation to collect or pay the tax on
a different person or entity than in the case of
transactions involving similar property, goods, services,
or information accomplished through other means; [or]
(iv) establishes a classification of Internet access
service providers or online service providers for purposes
of establishing a higher tax rate to be imposed on such
providers that the tax rate generally applied to providers
of similar information services delivered through other
means[.]
Comcast argues the tax is discriminatory under ITFA,
§ 1104(2)(A)(i), (ii), (iii), and (iv). The first
three provisions, ITFA, § 1104(2)(A)(i), (ii),
(iii), do not apply to this case. They are intended to
apply to an attempt to tax transactions differently over the
Internet than off the Internet. Even if these provisions
applied, the City’s taxes would not be affected. The City’s
telephone utility tax applies uniformly to companies
engaged in the telephone business. The City’s service B&O
tax applies uniformly to companies providing services, such
as Internet services.
The City’s tax is not discriminatory under ITFA, §
1104(2)(A)(iv). Under this section, a tax is discriminatory
if it:
establishes a classification of Internet access service
providers or online service providers for purposes of
establishing a higher tax rate to be imposed on such
providers than the tax rate generally applied to providers
of similar information services delivered through other
means[.]
ITFA, § 1104(2)(A)(iv). Seattle taxes Comcast’s data
transmission activities at the same rate as similar
information services delivered through other means. The
City’s telephone utility tax applies uniformly to all
companies engaged in telephone business in Seattle,
including data transmission through telephone networks or
through cable networks. The tax is based on the gross
income from that business activity. Similarly, the City’s
B&O tax applies to companies providing Internet services in
Seattle. The tax is based on the gross income from
providing Internet services. Neither of these taxes creates
a separate class of Internet access service providers that
are taxed at a separate rate despite providing similar
information services. All companies in Seattle that engage
in the telephone business are subject to the telephone
utility tax and all companies that provide Internet services
are subject to the B&O tax.
The Pennsylvania Supreme Court’s decision in Concentric
Network Corp. v. Commonwealth of Pennsylvania, 897 A.2d 6,
15 (Penn. 2006) supports this conclusion. In that case, an
Internet service provider, Concentric, did not own wires
for transmitting “‘its Customers’ data traffic to and from
the [Taxpayer’s] serving office and to and from the
Internet backbone.'” Concentric, 897 A.2d at 8. Instead of
owning wires, Concentric purchased data transport services
and equipment to transmit Internet services. It paid a
state sales and use tax on the purchases. It appealed the
state’s imposition of the sales and use tax, arguing that
the tax was discriminatory under the ITFA because
cable-based and facilities-based Internet service providers
did not have to pay the tax (because they already owned
and, thus, did not need to purchase infrastructure for
transmitting data). The court ruled that Concentric was not
subject to discrimination under the ITFA merely because it
paid a sales and use tax on the purchase of data
transmission services which other companies did not have to
purchase. Any other company that purchased data transport
services and equipment to transmit Internet services would
be subject to the same tax. Similarly, Comcast must pay the
City’s telephone utility tax because it generates revenue
from providing data transmission services to its customers.
There is no discrimination because any other company that
generates revenue from data transmission activities is
subject to the same tax, regardless of whether the
transmission is via “a local telephone network, . . . toll
line or channel, cable, microwave, or similar communication
or transmission system.” SMC 5.30.060(C).
For the foregoing reasons, we reverse the summary judgment
granted in favor of Comcast and direct that summary
judgment be entered in favor of the City of Seattle.
[fn1] We also do not decide whether Comcast was required to
notify the Attorney General about its constitutional
challenge to SMC 5.55.060D.
[fn2] Comcast also argues that RCW 35.21.714 forbids the
City from taxing Internet service as a telephone business.
Comcast cites Western Telepage, Inc. v. City of Tacoma, 95
Wn. App. 140, 974 P.2d 1270 (1999), aff’d, 140 Wn.2d 599,
998 P.2d 884 (2000). Neither the statute nor the case
precludes the City from taxing data transmission activities
as a telephone business.
[fn3] This is similar to the approach taken by the State in
ETA 2029.04.245 regarding the applicability of the ITFA to
Washington’s taxes on network telephone services related to
Internet access. In ETA 2029.04.245, the State declined to
adopt an interpretation of the term “Internet Access” and
instead focused on whether the State’s taxes are exempt
under the ITFA’s grandfather clause. The Pennsylvania
Supreme Court also declined to adopt an interpretation of
“Internet Access” and instead concluded that the tax in
question was exempt under the ITFA’s grandfather clause.
Concentric Network Corp. v. Commonwealth of Pennsylvania,
897 A.2d 6, 15 (Penn. 2006) (“We need not decide whether
application of the Tax Code to Taxpayer’s purchases is a tax
on Internet access, because we conclude that Tax Code
provisions in question were generally imposed and actually
enforced prior to October 1, 1998.”).
[fn4] In addition to Rule 155, the City argues that the 1995
memorandum of understanding between Comcast’s predecessor
and the City also satisfied the ITFA grandfather clause’s
notice requirement. We conclude that Rule 155 and the
Seattle Municipal Code provided adequate notice and that
the City generally collected the tax; therefore, we do not
decide whether the memorandum qualifies as a public
proclamation to Comcast that the City “has interpreted and
applied such tax to Internet access services” before
October 1, 1998. ITFA, § 1101(d)(1) (2001).
[fn5] The City again argues that the six percent tax is not
a tax on “Internet access.” As explained above, we do not
have to decide whether the City taxes “Internet access” as
the term is defined under the ITFA. Instead, we conclude
the tax is not discriminatory.