Background: The Federal Telecommunications Act of 1996 granted the Federal Communications Commission ("FCC") authority to regulate pricing of telecommunications services. As the result of FCC regulations, some retail customers may see unfamiliar separately stated charges on their telephone bills. The Department has received a number of taxpayer inquiries concerning whether Massachusetts sales or use tax is properly due on these charges.

Issue: Are FCC regulated surcharges, which may be separately stated as a recurring monthly charge on a retail customer's telephone bill, subject to the Massachusetts sales and use tax on telecommunications services?

Directive: Generally, FCC regulated surcharges, which may be separately stated as a recurring monthly charge on a retail customer's telephone bill, are part of the sales price of telecommunications services subject to tax. The charges include, but are not limited to, local telephone number portability charges, universal service charges, federal subscriber line charges, and Presubscribed Interexchange Carrier Charges.

Discussion of Law:

Massachusetts has imposed a sales and use tax on telecommuncations services since 1990. Taxable telecommunications services include "any transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiberoptics, microwave, radio satellite or similar facilities but not including cable television." [1] G.L. c. 64H, §1 and G.L. c. 64I, §1. Telephone services including separately stated charges for long distance telephone calls are subject to tax. See TIR 99-2 and 830 CMR 64H.1.6. Generally, tax is imposed on the retail sales price of taxable services, which includes the vendor's cost of materials, labor or services, interest charges, losses or other expenses. G.L. c. 64H, § 1.

Following is a brief explanation of some charges or surcharges that may appear on a retail customer's telephone bill based on information from the F.C.C. The description of these charges on a customer's bill (or whether they are separately stated to the retail customer at all) may vary from one telecommunications vendor to another. These charges are not taxes; they are not remitted to any federal or state government agency. The charges represent part of the vendor's cost of doing business and are retained by the vendor. As part of the regulation of the pricing of telephone services, the FCC permits, but does not require, a telecommunications vendor to recover these costs from its retail customers through a separately stated charge appearing on the retail customer's telephone bill. These charges are part of the sales price of the telecommunications services subject to tax. See generally DD 86-1. These recurring charges are eligible for the thirty dollar per month residential exemption. 830 CMR 64H.1.6(5).

The Massachusetts Department of Revenue does not regulate the pricing of telephone services. The following information is provided for general reference purposes only:

Local Telephone Number Portability Charges - To increase competition in local telephone market service, Congress directed local telephone companies to offer "telephone number portability," which refers to the customer's ability to retain the same telephone number if the customer elects to change local carriers. In order to provide this capability, local companies had to invest in upgrades to their network. The FCC determined that local companies could (but were not required to) recover these costs through a small, fixed monthly charge assessed to customers. These charges began appearing in February, 1999 in areas where telephone number portability is available and may continue to appear for 5 years.

Universal Service Charges [2] - Generally, the FCC's Universal Service support mechanisms ensure that affordable access to telecommunications services is available to low income telephone customers, telephone customers who live in areas where the costs of providing telephone service is high, schools and libraries, and rural health care providers. This federally mandated support is funded by compulsory contributions from all interstate telecommunications carriers, including long distance companies, local telephone companies, wireless telephone companies, paging companies, and payphone providers. The amount of the contribution is less than 4 percent of their billings for the previous year, adjusted quarterly based on projected Universal Service demands. The FCC does not require that companies contributing to Universal Service recover these costs directly from their customers, however they are permitted to do so through a separately stated monthly charge that may be a percentage of the customer's bill or a flat amount.

Federal Subscriber Line Charges - Local telephone companies recover some of the costs of the actual lines connecting homes and businesses through a monthly charge appearing on the customer's telephone bill. This charge is usually called the "subscriber line charge," but also may be referred to as the "federal subscriber line charge" because it is regulated and capped by the FCC. Currently, the charge is capped at $3.50 a month for a primary residential line. The charge for additional residential lines at the same service address and business lines is permitted to be higher.

Presubscribed Interexchange Carrier Charges ("PICC") - A charge that long distance companies pay to local telephone companies to help them recover the costs of providing the telephone wires, underground conduit, telephone poles, and other facilities that link each telephone customer to the telephone network. A long distance company pays this charge for each residential and business telephone line presubscribed to that long distance company. There is no tax due on PICC charges paid from one telecommunications vendor to another. However, if a retail consumer or business has not selected a long distance company, the local telephone company may bill the consumer or business for the Presubscribed Interexchange Carrier Charge. If the PICC charge is billed to the retail customer, it is subject to sales tax.

More detailed information on federal regulation of the pricing of telecommunications services is available from the Federal Communications Commission, 445 12 th St., SW, Washington, D.C. 20554 (toll free number: 888-225-5322) and the FCC website at http://www.fcc.gov. Additional information regarding the pricing of telephone services is also available from the Consumer Division of the Massachusetts Department of Telecommunications and Energy (toll free number 800-392-6066), One South Station, Boston, MA 02110 and the DTE website at www.magnet.state.ma.us.

/s/Bernard F. Crowley, Jr.
Bernard F. Crowley, Jr.
Senior Deputy Commissioner of Revenue

BFC:DMS:ecl

January 28, 2000

DD 00-2



[1] A temporary amendment to the definition of taxable telecommunications services which excluded "internet access services, electronic mail services, electronic bulletin board services, web hosting services or similar on-line computer services" expired on July 1, 1999. However, subsequent federal legislation generally created a moratorium on the imposition of new taxes on Internet access charges and electronic commerce until October, 2001. See TIR 99-2 for more details concerning the federal legislation. Despite the expiration of the Massachusetts statutory exclusion for Internet-related services, taxpayers may continue to rely on the lists of taxable and non-taxable services in TIR 99-2 until the expiration of the federal moratorium (and any extensions) or further notice from the Department.

[2] AT&T currently uses the label "National Access Contribution" when they show the combined charges for Universal Service and the Carrier Access Line Charge (PICC).