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Tennessees Court of Appeals Holds That Prodigys Online Information Services Not Subject to State Sales Tax
In Prodigy Services Corporation, Inc. v. Ruth Johnson, Commissioner of Revenue, State of Tennessee, et al., the Tennessee Court of Appeals recently held that online information and communication services provided by Prodigy were not "telecommunication services" and therefore not subject to the State of Tennessee's sales and use tax.
Prodigy's software programs, Prodigy Classic and Prodigy Internet, had been assessed by the Tennessee Commissioner of Revenue for sales and use tax as "telecommunication services" as defined in Tenn. Code Ann. § 67-7-102(29) (now codified at Tenn. Code Ann. § 67-6-102(31) (Supp. 2002)). These programs, which can be downloaded on to personal computers, allow a subscriber to link, through its telephone line, to a Prodigy computer in the state and/or to Prodigy's main computers in New York in order to access tax information, computer services and conversion services. They also provide a link to the Internet, which allows the subscriber to send and receive e-mail.
Prodigy challenged the assessment and succeeded in obtaining summary judgment in the Chancery Court of Davidson County. Prodigy went on to defeat the Commissioner of Revenue's appeal of that Judgment in the Tennessee Court of Appeals. In upholding the lower Court's decision, the Tennessee Court of Appeals relied on the U.S. Federal Communications Commission's (FCC) distinction between "basic" common carrier communication services, such as those included within the definition of "telecommunication services" (e.g., telephone, telegraph, WATS, paging services), and "enhanced" services, which combine basic services with computer processing applications that act on the subscriber's transmitted information, provide the subscriber with information or involve subscriber interaction with stored information (e.g., information services, conversion services, computer services and Internet access). The Court of Appeals concluded that although Prodigy's services involve communication, they are essentially "enhanced" services that do not fall within the sales tax legislation's definition of "telecommunication services". The Court of Appeals further concluded that because subscribers had to supply their own telephone service to the Prodigy computer, and Prodigy used common carrier or telecommunication services as a means of linking its local computers to its main computers in New York, Prodigy was in fact a consumer (and not a provider) of telecommunication services.
For a copy of the decision, visit:
http://www.tsc.state.tn.us/opinions/tca/PDF/033/prodigyservices.pdf