By Shane Lord and Timothy Gustafson

The Tennessee Court of Appeals held that a taxpayer’s wholesale service of converting end-user information into Internet protocol was an “enhanced” service for which the true object or primary purpose was to provide the non-taxable service of “Internet access” and not the taxable service of “telecommunications.” Adopting definitions set forth by the Federal Communications Commission, the court described taxable telecommunication services as “basic” services that offer “pure transmission capability….” In contrast, the court defined “enhanced” services as non-taxable services that combine basic service with “computer processing applications to act on the format, content, code, protocol or similar aspects of the subscriber’s transmitted information, or provide the subscriber additional, different or restructured information, or involve subscriber interaction with stored information.” The court held that the taxpayer offered “enhanced” services to Internet service providers and large corporations because the services converted end-user data into Internet protocol, the language of computers, and only then used the communications infrastructure to transmit the converted Internet protocol to the appropriate location on the Internet. The court held that despite the fact that the taxpayer’s service allowed end-users to communicate over telecommunication lines, the ultimate purpose and true object was to enable an end-user to access the Internet. Level 3 Communications, LLC v. Richard Roberts, Comm’r of Revenue, No. M2012-01085-COA-R3-CV (Tenn. Ct. App. Sept. 20, 2013).