By Nicole Boutros and Pilar Mata

The U.S. Court of Appeals for the Second Circuit determined that dial-up internet services were taxable local telephone services when analyzing an Internal Revenue Service bankruptcy claim for federal excise taxes (FET). The taxpayer, WorldCom, Inc., purchased central-office-based remote access (COBRA) services from local telephone companies to provide internet access services to its customers. The COBRA services transferred telephone signals to a local company’s switch network and over primary rate interface lines, converting the signals into an internet-ready format used for the taxpayer’s services. The court determined such services were local telephone services subject to the FET because the services provided access to a local telephone system and had the technical capacity to transmit voice communications, even though the taxpayer and its customers were unable to make calls using the services. By categorizing the services as telecommunications, the Second Circuit potentially opened the floodgates to taxing other internet-based services as telecommunications under the FET. Internal Revenue Service v. WorldCom, Inc., Docket No. 12-803 (2d Cir. July 22, 2013).