On June 11, 2013, the Arizona Court of Appeals overturned a tax court decision and determined that Cable One, Inc.’ s (“Cable One”) provision of VoIP services rendered it a telecommunications company, not a cable service operator, for taxation purposes. In Arizona, the distinction is important, as cable operators are subject to local property taxes and telecommunications providers are subjected to potentially higher centralized property taxes.
Cable One operates multiple cable systems within Arizona and originally offered customers cable and broadband Internet access services. In 2006, it added VoIP services to its customer offerings and currently offers all three services over the same network. In 2009, the Arizona Department of Revenue (“Department”) determined that Cable One was a “telecommunications company” pursuant to the applicable tax statute as a result of its provision of VoIP services.
Cable One disagreed with the Department’s findings, which were upheld by the State Board of Equalization. At that point, Cable One appealed the Department’s decision to the tax court. The crux of Cable One’s argument was that its VoIP service was not a telephone service, but constitutes an “Internet protocol enabled service.” It further argued that because its network was not directly connected to the Public Switched Telephone Network (“PSTN”), it could not be considered a “telecommunications company” under the statute. The tax court agreed and rendered a decision in Cable One’s favor.
Subsequently, however, the appellate court disagreed and overturned the lower court’s determination. In reaching its decision, the Appeals Court was less concerned with the underlying technology associated with the service, and instead focused on the service itself. In doing so, the Appeals Court determined that it did not matter that Cable One’s network was not a regular telephone network and did not interconnect directly with the PSTN. The Court noted that the service provided by Cable One permitted users to place and receive calls to the PSTN and that Cable One advertised its VoIP service as a “phone service.” The Appeals Court also rejected Cable One’s argument that the federal statutes and the FCC have preempted states from classifying VoIP as a telecommunications services for tax purposes. In doing so the Court noted that the authorities relied upon by Cable One concerned regulation, not taxation.
This decision, in conjunction with a 2008 federal court decision allowing the City of Baltimore to tax Vonage’s VOIP services, signal a willingness by state and local taxing authorities to increase their revenue base by imposing taxes on advanced and developing communications services. In particular, the Arizona court’s focus on the service provided rather than the technology used, could encourage other jurisdictions to enforce their existing tax statutes and more aggressively impose a wide array of taxes on advanced communications service that, at their core, allow customers to place or receive calls, regardless of the technology used.