Les Jones

East Tennessee > Tennessee Drops Tax On Internet Access

Tennessee has eliminated tax on Internet service effective February 1. However, our ISP bills may not go down any:

Previously, Internet providers could buy telecommunications services sales-tax-free if they passed them onto customers who paid sales tax.

With customers not paying sales taxes, providers will be required to pay sales tax on the telecommunications services themselves.

"We'll have to increase cost to match the amount that they would have paid," said Steve Siopsis, systems engineer for the Knoxville-based Internet service provider Virtual Interactive Center. But, he added, "It's not going to look like an increase because it's the same amount (as the bill with tax)."

Bryson said he may also raise prices because he'll now be adding $20,000 in telecommunications tax to his expenses rather than simply collecting sales tax from customers.

I've written before about Tennessee ISPs battling the state over sales tax on Internet service. One of the concerns we had at U.S. Internet was that if we collected taxes, we would have to refund the taxes later if the state reversed itself.

That's exactly what's happened now. You can request a refund of sales tax on Internet service going back three years. The request must be processed through your ISP. The state is putting the burden of refunds on the ISPs, who are supposed to issue the refunds, then get compensated by the state:

Bryson estimates Esper has collected more than $250,000 in sales tax over the past three years - as far back as the state will provide refunds. Most businesses, including his, don't have that kind of cash sitting around to refund up front, he said.

In addition, Bryson said if he provided the refund he'd have to pay sales tax on the telecommunications services he bought for the same period.

"I have to just politely tell my customers I cannot do this," he said. "The state of Tennessee has set up a plan where an ISP can refund money if they want to, but the terms are onerous."

Siopsis agreed, calling the refund process a "logistical nightmare."

This puts small ISPs in a cash crunch, and creates a huge accounting expense in tracking past tax paid by each customer. Ask me how much I miss being in the ISP business and I'll tell you "not a bit."

UPDATE: Joe Gray writes:

Here's the Tennessee Court of Appeals opinion:

Prodigy Services V. Ruth Johnson

Apparently the Tennessee legistlature struck the phrase "value added
networks" from the telecommunications tax back in 1993, and in doing so
effectively said they wouldn't tax internet access. Interesting, though,
that the court did this in April last year, and the Department of Revenue
waited nine months, said something this week, and said it takes effect
Sunday. I'd be fuming if I was an ISP.