A few weeks ago, in an important sales tax case coming out of New York’s highest court, Judge Troutman lamented in her dissenting opinion in the Dynamic Logic case that “in New York, the taxpayer always loses.”
Well, not always! A couple of weeks ago, Time Warner found its way to victory, albeit in a split decision, in a sales tax case in the telecom area. It's a case about something you may pay every month, but never think about: your phone (or VoIP) bill, and whether extra charges are taxable.
What Happened?
Time Warner Cable Information Services (NY), a Charter affiliate, provided bundled VoIP services (local, long-distance, international) in New York from March 1, 2014, to February 28, 2017. As a telecom provider, they had to pay the Federal Universal Service Fund (FUSF)—a federal surcharge based on interstate (and international) revenue—though providers pass this cost to customers as a line item.
The tax department argued that the FUSF fees were part of Time Warner’s taxable receipts, resulting in a $6.7 million assessment. It argued that since the fee was on the bundled service (which mixes taxable and non-taxable components), the whole thing should be taxed.
But Time Warner fought back, arguing that FUSF recoupments are tied only to interstate/international services—which are non‑taxable under NY tax law (§ 1105[b][1][B])—so the charge shouldn’t be taxable.
The Tribunal’s Decision
The Tax Appeals Tribunal, led by President Kaiman and Commissioner Monaco, sided with Time Warner. Their reasoning turned on a few pivotal points:
- Bundles matter—but so do federal rules. NY law treats sales of interstate/international phone service as non-taxable. The Tribunal agreed that the FUSF surcharge applies only to that part of the service. It doesn’t magically become taxable because the bill is bundled.
- Recoupment ≠ cost of the bundle. Just because Time Warner charged FUSF fees across the bundle, it doesn’t mean the fee was an expense of the entire service. The FCC calculates FUSF obligations based on interstate revenue, whether or not that revenue came from a bundled plan. The Tribunal emphasized that the state cannot tax a federal surcharge on a non‑taxable portion of service.
- Penfold vs. this case. The state cited Penfold (1985), which said you tax the whole bundle if part of it is taxable. But that involved a single fully taxable service (trash hauling). This case involved a service partly non-taxable. The Tribunal found Penfold didn’t apply.
- Federal preemption looms large. The FUSF is a federal regulatory program. The Tribunal hinted that if Albany tried taxing it, that might infringe on federal law, even if the Tribunal didn’t explicitly rule on preemption
The result? Time Warner’s exception was granted, the A.L.J.'s determination was reversed, and the $6.7 million tax assessment was wiped out.
What About the Dissent?
Commissioner Cahill dissented, firmly believing that FUSF fees are expenses included in taxable receipts. His view: calling them part of the bundle doesn’t change their nature. If a fee gets added to your bill—even if federally mandated—it’s still a cost of doing business and should be taxed.
Cahill emphasized NY Tax Law § 1101(b)(3) & 20 NYCRR 526.5(e), which define “receipt” to include all charges tied to a service, taxable or not. He pointed out that Time Warner didn’t itemize the FUSF charge clearly: all customers paid it monthly, whether or not they made international calls. That, to Cahill, showed the fee operated like an “expense” and not as a separate non-taxable receipt
The Takeaway
This case proves once again that in the world of telecom, the devil is in the details—and in the definitions. Calling something part of the “bundle” doesn't change its tax nature under the law. If the service is exempt, mandated federal surcharges on that service are also exempt.
Disclaimer:
This blog is a form of attorney advertising. Hodgson Russ LLP provides this information as a service to its clients and other readers for educational purposes only. Nothing in this blog should be construed as, or relied upon, as legal advice or as creating a lawyer-client relationship.
