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Taxation of Internet Service Providers in Seattle

This article updates IBLS article titled: Internet Tax in Washington: Cmty. Telecable of Seattle, Inc. v. Dep't of Exec. Admin. Comcast provided high-speed Internet services in Seattle.  The city assessed a telephone utility tax against Comcast for the years 2001 and 2002.  Comcast filed a complaint claiming that this tax violated state and federal law. The trial court granted summary judge for Comcast. The city appealed and won the appeal.  Comcast appealed before the Supreme Court of Washington, which rendered its final decision in June 2008.  The Supreme Court was to decide whether Comcast could be taxed as a telephone business when providing Internet services.  The Supreme Court held that the city may not tax Comcast as a telephone business when providing Internet services; it reversed the court of appeals holding and reinstated the trial"s court holding. This article provides information on the Supreme Court's decision on this case.

The City of Seattle imposed a telephone utility tax on entities engaged in the business of transmitting data over a network located in Seattle. Seattle, Wash., Mun. Code § 5.48.050A. Under § 5.48.050A, Seattle businesses must pay a tax of six percent on the revenue from this business. Also, the Federal Internet Tax Freedom Act (ITFA) prohibited levying federal taxes on Internet businesses. Lastly, the Revised Code of Washington (RCW), 35.21.717 provides that "until July 1, 2006, a city or town may not impose any new taxes or fees specific to Internet service providers. A city or town may tax Internet service providers under generally applicable business taxes or fees, at a rate not to exceed the rate applied to a general service classification. For the purposes of this section, "Internet service" has the same meaning as in RCW 82.04.297."

Comcast began providing high-speed Internet services in Seattle since 1998. Comcast offered Internet services through cable, instead of the traditional dial-up service. The city of Seattle decided to tax Comcast with a telephone utility tax for its Internet services at a rate of 6 percent starting in 2000. Comcast opposed this tax and filed a complaint. The trial court held that the city could not tax Comcast as a telephone business with regards to its Internet service.  The court of appeals reversed the trial court holding. The appellate court held that the city was authorized to levy this tax on Comcast. The Washington State Court of Appeals held that the Washington's Internet Tax Moratorium does not preclude the City from taxing revenue from data transmission activity via a cable transmission system, due to the plain language of the statutes and to the persuasive interpretation of these statutes by the Washington Department of Revenue. Also, The Washington State Court of Appeals held that the City's tax is exempt under the ITFA's grandfather clause because it was authorized by the State before October 1, 1998. Comcast appealed the intermediate court ruling.

The Supreme Court reversed the Appellate court's holding and reinstated the trial court's decision. The Supreme Court held that the city may not tax Comcast as a telephone business when providing Internet services. The Supreme Court began its analysis by stating that "[A] municipal corporation's authority to tax must be delegated by the state legislature. Arborwood Idaho, LLC v. City of Kennewick, 151 Wn.2d 359, 374, 89 P.3d 217 (2004)."  Then, the court analyzed and concluded that Comcast provided Internet services because under RCW 82.04.297(3) "'Internet service' … includes computer processing applications, provides the user with additional or restructured information, or permits the user to interact with stored information through the internet or a proprietary subscriber network. "Internet service" includes provision of internet electronic mail, access to the internet for information retrieval, and hosting of information for retrieval over the internet or the graphical subnetwork called the world wide web." Thus, because Comcast offered Internet services, under the Revised Code of Washington (RCW), 35.21.717, the city could not impose any tax or fees on Internet service providers such as Comcast.  The city argued that they could tax Comcast because their services were a "network telephone service" and, as such, the city could tax its transmission activities. Yet, the court did not agree with this position.

The Supreme Court acknowledged that its position was consistent with the federal view and the Federal Communications Commission (FCC), which had issued a declaratory ruling in an unrelated case, explaining that cable Internet service is neither a telecommunications service nor a cable service. Therefore, Cmty. Telecable of Seattle, Inc. v. City of Seattle, Dep't of Exe..., 164 Wn.2d 35 (2008) clearly held that the City of Seattle could not levy taxes on Internet Service Providers; at least until 2006...we all wonder what is going on now. Are Internet service providers now taxed in Seattle?  According to this holding, they could be taxed after 2006 state moratorium.
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