| Matter of Easylink Servs. Intl., Inc. v New York State Tax AppealsTrib. |
| 2012 NY Slip Op 08366 [101 AD3d 1180] |
| December 6, 2012 |
| Appellate Division, Third Department |
| In the Matter of Easylink Services International, Inc., Petitioner, vNew York State Tax Appeals Tribunal et al., Respondents. |
—[*1] Eric T. Schneiderman, Attorney General, Albany (Robert M. Goldfarb of counsel), forCommissioner of Taxation and Finance, respondent.
Stein, J. Proceeding pursuant to CPLR article 78 (initiated in this Court pursuant to Tax Law§ 2016) to review a determination of respondent Tax Appeals Tribunal which sustained asales tax assessment imposed under Tax Law article 28.
Petitioner—a global provider of electronic messaging services, including fax, telex,email and electronic data interchange (hereinafter EDI)—commenced this proceeding tochallenge a determination of respondent Tax Appeals Tribunal that its services constitutetelegraphy subject to sales tax pursuant to Tax Law § 1105 (b) (1) (B).[FN1]Although petitioner initially collected sales tax from its customers utilizing its fax and telexservices, it took the [*2]position, beginning in 2001, that none ofits services was subject to sales tax and ceased paying taxes, despite its auditors' advice to thecontrary. Petitioner did not seek an advisory opinion from respondent Department of Taxationand Finance regarding the taxability of its electronic messaging services.
After auditing petitioner, the Department determined that there were taxes due on petitioner'sintrastate sales of fax, telex, email and EDI services in the amount of $560,095.35 for the periodfrom March 1, 2001 through May 31, 2004.[FN2]Upon petitioner's application to the Division of Tax Appeals seeking redetermination or arevision of the tax assessment, a hearing was held before an Administrative Law Judge(hereinafter ALJ), who determined that Tax Law § 1105 (b) (1) (B) should be narrowlyconstrued, with any ambiguity resolved in favor of petitioner. The ALJ concluded thatpetitioner's services did not fall within what he denominated the "commonly understood"meaning of the term telegraphy for purposes of the statute and, as such, were not taxable. TheDepartment's Division of Taxation filed a notice of exception to the ALJ's determination.
Following oral argument, the Tribunal reversed the ALJ's determination, finding that,because Tax Law § 1105 (b) (1) (B) imposes a tax on "telephony and telegraphy andtelephone and telegraph service of whatever nature," a broad construction should be given to theterms describing the items to be taxed. The Tribunal then concluded, among other things, thatpetitioner's electronic messaging services constituted telegraphy[FN3]as that term is defined by 20 NYCRR 527.2 (d) (2) and, as such, are subject to taxation.Petitioner commenced this CPLR article 78 proceeding pursuant to Tax Law § 2016seeking review of the Tribunal's final determination, and we now confirm.
Initially, we note that our review of the Tribunal's determination is limited where, as here, thequestion before the Tribunal was "one of specific application of a broad statutory term in aproceeding in which the agency administering the statute must determine it initially" (Matterof American Tel. & Tel. Co. v State Tax Commn., 61 NY2d 393, 400 [1984] [internalquotation marks and citation omitted]). It is axiomatic that "[i]f the agency's determination is notsupported by substantial evidence or it constitutes a clearly erroneous interpretation of the law orthe facts, it will be annulled, but if it is supported by facts or reasonable inferences that can bedrawn from the record and has a rational basis in the law, it must be confirmed" (id.[citation omitted]).
Turning to the merits, Tax Law § 1105 (b) (1) (B) provides, as relevant here, that"[t]he receipts from every sale . . . of . . . telegraphy and. . . telegraph service of whatever nature" are subject to taxation (emphasisadded). The applicable regulations define telegraphy as "use or operation of any apparatus fortransmission of . . . coded or other signals" (20 NYCRR 527.2 [d] [2]). Included inthe definition of telegraphy are "[m]essage switching services," which transmit [*3]messages to computers over lines leased from communicationscarriers, fax services and teletypewriter services (20 NYCRR 527.2 [d] [2]). On the other hand, aservice is not considered telegraphy where it "is merely an incidental element of a different orother service purchased by the customer" (20 NYCRR 527.2 [d] [4] [for example, a central alarmsystem, which uses signal transmissions]; see New York State Cable Tel. Assn. v State TaxCommn., 59 AD2d 81, 83 [1977]).
In our view, whether Tax Law § 1105 (b) (1) (B) is construed narrowly—aspetitioner argues it should because it is a statute that levies a tax (see e.g. Debevoise &Plimpton v New York State Dept. of Taxation & Fin., 80 NY2d 657, 661 [1993])—orbroadly—as respondent Commissioner of Taxation and Finance contends based upon theexpress language of the statute—the Tribunal's determination to interpret such statute asapplicable to petitioner's services should be upheld. Petitioner describes its service as onewhereby the customer may send petitioner text or data, in any format, which petitioner can thenconvert to another format (for example, a text message to a fax). Additionally, petitioner may addlogos or letterhead to the message before sending the information to the designated recipient andprovides a secure email service on its closed network, as well as tracking and authenticationfeatures. During the relevant time, petitioner used simple mail transfer protocol (hereinafterSMTP)[FN4]to route data over the Internet and its own network. Applying the definition of telegraphy setforth in 20 NYCRR 527.2 (d) (2) to petitioner's services, it is reasonable to conclude that thisprocess entails the use of "coded or other signals" to transmit information.[FN5]Indeed, "Example 3" of 20 NYCRR 527.2 (d) (2) specifically includes "[m]essage switchingservices, transmitted to a computer over lines leased from a communication carrier" as telegraphservices subject to tax, and "Example 4" specifically includes "[f]acsimile" or fax services astaxable.
Even if we were to find that the definition of telegraphy set forth in the regulation does notcover petitioner's services, when we give meaning and effect to all of the statutory language andapply the usual and ordinary meaning of the term telegraphy[FN6](see Rosner v Metropolitan [*4]Prop. & Liab. Ins. Co., 96NY2d 475, 479 [2001]; Debevoise & Plimpton v New York State Dept. of Taxation &Fin., 80 NY2d at 661), we discern no error in the Tribunal's determination that such servicesare taxable as telegraphy. In light of the definition provided by the controlling regulation and theordinary meaning of telegraphy, we reject petitioner's contentions that we should considerextrinsic information to ascertain the Legislature's intention (see Majewski vBroadalbin-Perth Cent. School Dist., 91 NY2d 577, 583 [1998]) and/or that we should resortto interpreting the meaning of telegraphy based upon the application of the "mere conduit" test(see Quotron Sys. v Gallman, 39 NY2d 428, 431 [1976]).[FN7]
Petitioner's remaining contentions have been considered and found to be unavailing.
Mercure, J.P., Malone Jr., Kavanagh and Garry, JJ., concur. Adjudged that the determinationis confirmed, without costs, and petition dismissed.
Footnote 1: Petitioner utilizes employees,computer servers and other equipment necessary to operate in this state. Petitioner also leasestransmission lines from independent third-party telecommunications providers as part of itsoperations.
Footnote 2: Petitioners agreed that 47% ofthe assessed amount was owed, leaving $297,358.71 in dispute.
Footnote 3: Although reference is repeatedlymade to telephony and telegraphy, it appears that the Tribunal's determination was based on itsconclusion that petitioner's services constituted telegraphy only.
Footnote 4: SMTP transmits commands andreplies over lines via a transmission channel (see J. Klensin, Simple Mail TransferProtocol Memo at 14 [Oct. 2008], available at http://tools.ietf.org/html/rfc5321#ref-25[accessed Nov. 21, 2012]). To complete the transmission, SMTP utilizes "a numeric completioncode (indicating failure or success) [for program use] usually followed by a text string [forhuman users]" (id.).
Footnote 5: We view petitioner's addition ofletterhead, logos and the like as merely incidental to the principal service of messagetransmission.
Footnote 6: Telegraphy is defined as "the artor practice of constructing or operating telegraphs" (Dictionary.com,http://dictionary.reference.com/browse/telegraphy?s=t [accessed Nov. 30, 2012]) which, in turn,are defined as, among other things, "an apparatus, system, or process for transmitting messagesor signals to a distant place, especially by means of an electric device consisting essentially of asending instrument and a distant receiving instrument connected by a conducting wire or othercommunications channel" (Dictionary.com, http://dictonary. reference.com/browse/telegraphs[accessed Nov. 30, 2012]).
Footnote 7: Notably, the Quotroncase concerned a franchise tax imposed pursuant to an entirely different statute upon services thatare distinguishable from those at issue here. However, even if the "mere conduit" test wasapplied here, it would not provide a basis to disturb the Tribunal's determination that petitioner'sservices constitute telegraphy subject to taxation under Tax Law § 1105 (b).