On September 4, 2020, in New Cingular Wireless PCS LLC v. Commissioner of Revenue, No. 18-P-1317, the Massachusetts Appeals Court held that the Internet Tax Freedom Act (ITFA) preempted Massachusetts’ sales tax on New Cingular Wireless’ (NCW) Internet access charges. The court concluded that NCW satisfied ITFA’s requirement that it offer screening software to its customers, even though: (1) NCW’s salespersons did not affirmatively ask each customer whether it wanted to purchase the software; and (2) the software was not compatible with every device sold by NCW.
Eversheds Sutherland filed an amicus curiae brief in support of NCW on behalf of the Broadband Tax Institute.
Background
Between November 1, 2005 and September 30, 2010, NCW collected and remitted nearly $20 million of Massachusetts sales taxes on its sales of Internet access (primarily through service plans) in Massachusetts. Following a class action lawsuit initiated by its customers, NCW requested refunds in numerous states on the basis that ITFA prohibited the states from imposing sales tax on the Internet access charges. The Massachusetts Department of Revenue (Department) rejected NCW’s application for a sales tax abatement. On June 21, 2018, the Appellate Tax Board issued an opinion in favor of NCW. On appeal to the Appeals Court, the Department focused on its argument that ITFA did not preempt sales tax on NCW’s Internet access charges because NCW did not offer screening software to its customers.
Enacted in 1998, ITFA prohibits state and local governments from imposing “[t]axes on Internet access,”1 including Massachusetts’ sales tax.2 Following several extensions, Congress made this prohibition permanent in 2015.3
But ITFA’s prohibition on taxes on Internet access does “not apply with respect to an Internet access provider, unless, at the time of entering into an agreement with a customer for the provision of Internet access services, such provider offers such customer (either for a fee or at no charge) screening software that is designed to permit the customer to limit access to material on the Internet that is harmful to minors.”4
If NCW had failed to satisfy the ITFA screening software requirement, Massachusetts would impose its sales tax on NCW’s sales of Internet access as taxable telecommunication services.5
Massachusetts Appeals Court decision
The court’s decision revolved around what is required for a vendor to “offer” screening software.6 The Department argued that: (1) the vendor “must affirmatively ask customers whether they would like the software”; and (2) the screening software must have been compatible with all of the devices sold.7 The court rejected both arguments.
| Eversheds Sutherland Observation: Because the Appellate Tax Board is “an agency charged with |
