Resale Exemption Denied for Telecommunication Access Services
The Kentucky Board of Tax Appeals (“KBTA) recently held in Sprint Communications Company, L.P. v. Finance & Administration Cabinet, Dep’t of Revenue, K13-R-03, Order No. K-24654 (KBTA, May 22, 2014) that communications services (in particular, those known as “access services”) Sprint Communications Company, L.P. (“Sprint”) sold in 2005 were subject to sales and use tax. Sprint sells access services to other telecommunications carriers. The access services are for transmitting communications services across Sprint’s network. Sprint argued that the access services were sold for resale.
The question in this case was whether or not an emergency regulation conflicted with a subsequent statutory amendment. In 2000, the Department of Revenue (“Department”) promulgated an emergency regulation (later replaced by a non-emergency regulation in 2001) that mandated that switch access services were not exempt as being for resale. In 2005, KRS 139.195 was amended so that tax would not be imposed on switch access revenues, effective January 1, 2006. Sprint argued was that this amendment clarified the existing law that access services were tax exempt, and that the 2001 regulation should be disregarded as inconsistent with the Department’s prior position. Sprint also argued that prior to the 2005 amendment, the statutes were ambiguous and the Department should therefore be bound by the prior statutory construction. The Department, on the other hand, argued that another 2000 law had expanded the definition of “communications services” and the regulation was created to reflect that change. The Department also argued that the 2005 amendment was made to affirmatively change the law to exempt access services but the regulation should be controlling for the 2005 tax year.
The KBTA noted that the Department could not add or detract from the taxing statutes by promulgating a regulation, but it also noted that Sprint was not arguing that there was an addition or detraction. Instead, Sprint argued that the statutes were ambiguous and “subject to conflicting readings.” Sprint’s argument was essentially that the Department should be bound by prior construction of the statutes that exempted access services as being sold for resale. This was an argument of contemporaneous construction, meaning that the Board must disregard the 2001 regulation and “hold the Department to the alleged contrary position that it took on the taxability of switch access revenues prior to 2001.”
The KBTA rejected this argument and held that the doctrine of “contemporaneous construction cannot be founded upon an administrative agency’s failure to correctly apply the law.” The KBTA held that even if the Department had changed its position with the 2001 regulation, such a change would be permissible in order to bring the Department’s actions in line with the correct interpretation of the law, as long as that regulation conformed to the statute. The KBTA noted that Sprint made no argument that the regulation was not inconsistent with the statute in effect at the time, and thus held that the regulation was valid. Sprint was thus subject to sales and use tax on its access services for 2005.