Internet Phone Provider Tax Liability: A Review of Iowa Supreme Court Cable One Decision

January 27, 2015

Voice over Internet Protocol (VoIP) is a service that allows you to use the internet (a broadband connection) to make phone calls instead of the more traditional phone line method. VoIP calls can be made from a computer or telephone, and it can make calls to a computer or telephone. VoIP is often cheaper, and provide additional features, such as videoconferencing. However, VoIP services often have some of the similar features of the more traditional phone service, including call-forwarding, caller identification, three-way calling and voicemail. It is not a surprise that the FCC has began to regulate companies that provide internet phone in similar ways to its regulation of those that offer traditional phone line-based calling. For example, the FCC imposed “911” obligations in June 2005. The similarities (and differences) between VoIP and traditional phone services was called into question in a recent legal opinion issued by the Supreme Court of Iowa.
The case involved Cable One, Inc., a company that has historically provided cable and internet services, and the more traditional phone line-based method of calling. In 2006, it began providing VoIP to residents of Sioux City. The Iowa Department of Revenue, believing that Cable One, Inc., fell into the category of “telecommunication companies” for the purposes of assessing property taxes. Cable One, Inc., denied this categorization, and argued that they did not own any telecommunication transmission facilities, and therefore their reliance on a third-party telecommunications company to provide VoIP put them outside of the “telecommunication company” definition. While the tax court disagreed with some of Cable One, Inc.’s arguments, it ultimately ruled in its favor, holding that it was not subject to property assessment as a result of its VoIP services. The Arizona Court of Appeals, however, reversed this decision.
Cable One, Inc., raised an important question about the tax treatment of intermediaries in a company’s VoIP operations. Cable One, Inc. used a third-party called Level 3 to “hand-off” long distance service. Since Cable One, Inc., was still the “provider” of the service, even though part of this service was provided by another entity, the Arizona appellate court held, it was still liable for the third-party portion of property taxes. The Court notes, “The relationship between Cable One and Level 3 is analogous to a wholesaler-retailer relationship. Indeed, in the tax court, Cable One’s telecommunications expert described Level 3 as providing wholesale telecommunication services to Cable One.” The analogy that the court makes to supply chain liability, however, has its pitfalls.
Consider a company that sells winter and summer clothes that contracts out the selling of overcoats. Where a consumer sues the company for negligence, while contractor may be a third-party defendant, the company and its contractor are likely, at best, jointly and severally liable for any alleged harm. That is, the consumer cannot recover from both company and contractor. In the case of the third-party provider of telecommunication services, both the parent company and the contractor should similarly not be both responsible for property taxes.

What the Arizona appellate court doesn’t address is the effect of the underlying assumption in its holding – that Cable One, Inc., effectively owns the property interests in Level 3 – on the way in which Level 3 will subsequently be taxed on the same property.

Instead of considering supply chain liability, perhaps a more appropriate analogy would be to consider the Cable One, Inc. case in light of subsidiary taxation regulations. In fact, Cable One, Inc., raises this very argument, claiming that where Level 3 a subsidiary, it’s property would not have been centrally assessed, and therefore this differential treatment of a subsidiary and, in this case, third-party that Cable One, Inc., would argue is essentially the same as a subsidiary, violates the uniformity clause of the Arizona Constitution (requiring the same taxes to be imposed on the same property). The Arizona appellate court responded by asserting that functionally, the subsidiary is different and should therefore be treated differently from a taxation perspective compared to the third-party service provider Level 3. This argument appears to suggest that companies that fear bearing the responsibility of property taxes for quasi subsidiaries like Level 3 is to Cable One, Inc., may perhaps buy out this company and rearrange their corporate structure in light of this Court’s ruling. Another, simpler alternative may simply be to move the company altogether to a state that doesn’t have high property taxes.