Sunbelt Blog

Are Smart Phones Tax Exempt?

When was the last time you perused the Internet Tax Freedom Act of 1998? Well over a decade old, the Internet Tax Freedom Act doesn't specifically discuss smart phones. After all, back in the late 1990s, cell phones were used mainly for talking on the phone, not surfing the Web or checking email. However, technology has changed the way people access the Internet and it's now extremely common to connect via an iPhone, Blackberry, or other portable device.

Currently, several lawsuits are in the works, alleging that cell phone providers are illegally imposing sales tax on Internet access. For example, in Connecticut where Internet access is specifically excluded from sales tax under the state's telecommunications laws, the law isn't so clear about excluding data plans from the 6 percent sales tax. Several lawsuits have been filed across the United States with similar complaints.

The Connecticut case seeks class action status on behalf of AT&T smartphone customers. Because so many similar lawsuits have been filed, a multidistrict litigation panel has been formed to determine whether the cases should be combined into one.

While we'll need to wait and see how these cases play out, let's take a look at how "Internet Access Service" is defined by the Internet Tax Freedom Act of 1998. According to the Act, Internet Access Service is a term used to mean ". . . a service that enables users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information, and other services as part of a package of services offered to consumers. Such term does not include telecommunications services."

This definition will likely be carefully considered. For example, if you use a Blackberry to access your email, aren't you in fact using an Internet Access Service to access the email? Or are bundled data plans actually telecommunications services?

The Act further defines "Internet access services" as "the provision of computer and communications services through which a customer using a computer and a modem or other communications device may obtain access to the Internet, but does not include telecommunications services provided by a common carrier."

Now let's look at how "telecommunications services" is defined by the Internet Tax Freedom Act. The Act says that "telecommunications service" uses the same meaning given in section 3 of the Communications Act of 1934 which defines telecommunications service as ". . . the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used."

While some states such as Connecticut can, and do, charge sales tax on telecommunications services, it will be interesting to see how the courts interpret smart phones. Are they "other devices" that are used to access and Internet Access Service? If so, they shouldn't be subject to sales tax. Or are they a telecommunications service offered for a few which may be subject to sales tax under state laws?

What do you think? Does the Internet Tax Freedom Act of 1998 apply to checking email and Web surfing on mobile phones? Share your thoughts with us.