By Stephen Burroughs and Maria Todorova

The Commonwealth Court of Pennsylvania recently reaffirmed its decision that Level 3’s network infrastructure services (including local dial networks, telephone numbers and modems, i.e., Internet “backbone”) sold to retail Internet service providers (ISPs) constitute non-taxable Internet access services. The Commonwealth Court previously held that the taxpayer’s facility was an access point (point of presence or PoP) that enabled ISP end users to access the Internet, and its services were, therefore, Internet access services exempt from sales and use tax (see previous coverage of the court’s holding here). The Commonwealth sought reconsideration of the court’s holding, primarily arguing that: (1) the taxpayer’s services constituted a mere technological advancement to otherwise taxable telecommunications services (such as port modem management (PMM) services—see America Online, Inc. v. Commonwealth, 932 A.2d 332 (Pa. Cmwlth. 2007) here); and (2) the taxpayer merely directed end users to an ISP homepage and it was the ISP and its PoP—and not the taxpayer—that enabled end users to initiate a connection to the Internet. The court disagreed with the Commonwealth and reaffirmed its prior reasoning that: (1) the “fundamental technological differences” between taxable PMM services and the taxpayer’s Internet backbone services related to what services were provided and not how the services were provided; and (2) it was the taxpayer’s PoP that provided the access point for ISP end users to establish an Internet connection. The Commonwealth has filed a Notice of Appeal to the Pennsylvania Supreme Court. Level 3 Communications, LLC v. Commonwealth, 166 F.R. 2007 (Pa. Cmwlth. Dec. 8, 2016) (en banc).