On July 21, 2025, the New York Tax Appeals Tribunal concluded that the Internet Tax Freedom Act (ITFA) precluded imposition of the state’s franchise tax on Verizon New York Inc.’s (“Verizon’s”) receipts from various services sold to internet service providers (ISPs). The case is In the Matter of the Petition of Verizon New York Inc., Decision DTA No. 82940 (July 21, 2025).
Background Law and Regulations
Under New York Tax Law § 184, an additional franchise tax is imposed on the in-state gross earnings by a corporation principally engaged in the conduct of a local telephone business. In 1998, Congress enacted the ITFA to broadly prohibit taxes on internet access. Originally, internet access did not include telecommunications services. However, Congress subsequently extended what is meant by internet access to include telecommunications services that are “purchased, used, or sold by a provider of Internet access to provide Internet access.” The ITFA includes a “grandfather provision” under which the prohibition will not apply to preexisting taxes that were authorized by statute and either a) the state tax administrative agency has issued a rule or other proclamation that it has applied the tax to internet access or b) the state has generally collected that tax on internet access.
Verizon’s Position
On its franchise tax returns for tax years ending December 31, 2008 through December 31, 2011, Verizon excluded receipts from asymmetric digital subscriber line (ASDL) and broadband access and aggregation services sold to ISPs. Verizon claimed that the receipts qualified for the statutory exclusion for sales for ultimate consumption or that its receipts were exempt from tax by operation of the ITFA. The Division of Taxation (“Division”) denied these claims. On appeal of the ensuing assessment, an administrative law judge (ALJ), in May 2023, concluded that although Verizon was not entitled to the statutory exclusion, the tax on its receipts was preempted by the ITFA. The matter was appealed to the Tax Appeals Tribunal (“Tribunal”).
Tribunal’s Conclusion and Reasoning
The Tribunal upheld both of the ALJ’s conclusions, noting that the language of the ITFA broadly applies to services purchased, used, or sold that enables users to connect to the internet. Furthermore, the ITFA’s preemption was expanded to include those services provided by Verizon to its ISP customers, who used those services to connect their customers to the internet. The “plain terms” of the ITFA “strike directly” at the tax. The Tribunal rejected claims by the division that operation of the “grandfather provisions” applied to allow the tax at issue. There was no rule or proclamation that would put taxpayers on notice that the franchise tax would apply to internet access providers—just an indefinite statement in a 1996 report. Furthermore, § 184 does not even mention internet access. Thus, the tribunal concluded, it could not be said that the Division generally collected this tax on internet access.
The Tribunal did agree with the ALJ’s conclusion that the statutory exclusion for sales for ultimate consumption did not apply to Verizon. Its sales to the ISPs were not for ultimate consumption but were sales for resale. Verizon’s claim that its ISP customers were in fact the ultimate consumers of the services rejected.
Ryan’s Take and Action Steps
The New York decision provides some direction for companies seeking preemption of the New York tax under the ITFA. Businesses should remember that the definition of preempted internet access has been broadened since the ITFA’s original enactment. Verizon’s argument became stronger when the definition was broadened to encompass certain telecommunications services. In addition, the decision serves as a reminder that preexisting taxes on internet access must be accompanied by either definitive state tax department guidance that a tax is imposed on internet access or that the state has generally imposed the tax in order for the tax to survive as a “grandfathered tax.”
Interestingly, just nine days after this decision was handed down in New York, Peacock TV made arguments before the Maryland Tax Court that the state’s controversial digital advertising tax also violated the ITFA. The testimony pointed to the state’s Technical Bulletin 59, which specifically defines certain digital advertising conveyed via the internet as taxable.
Another tax on digital advertising was enacted in Washington State on May 20, 2025 (SB 5814), which also imposes tax on a variety of additional services, including website development, IT training, and more. Affected businesses should carefully examine the Washington tax to see if it too runs afoul of the ITFA as effectively taxing internet access. For expert guidance on navigating these complexities, contact our team today.
TECHNICAL INFORMATION CONTACTS:
Glenn McCoy
Principal
Ryan
212.871.3901
glenn.mccoy@ryan.com
Argi O’Leary
Principal
Ryan
212.871.3901
argi.oleary@ryan.com
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