Internet Library of Law
and Court Decisions

Prodigy Services Corporation v. Ruth E. Johnson, et al.

Court holds that information service provider ("ISP") does not have to charge Tennessee sales tax to its Tennessee customers on fees collected for the utilization of ISP's services.  Court holds that ISP is not providing "telecommunication services," which are subject to Tennessee sales tax.  Instead, the ISP is providing information and other services, which are not.

Defendant Prodigy Services Corporation ("Prodigy") provides its customers, some of whom reside in Tennessee, with the ability to access both the Internet and select content.  To utilize these services, Prodigy's customers must connect a modem to Prodigy's computers.  This is typically done by placing a telephone call over a common carrier's lines.  The customer is responsible both for the fees charged for the placement of such calls, as well as for obtaining the wiring permitting their transmission.  Once the customer's telephone call is received by local Prodigy computers, Prodigy connects the caller to its main computers in New York.  This connection is also handled via phone lines.  Prodigy does not own the lines on which these transmissions are made, and pays all fees due therefor.

Tennessee imposes an obligation to collect sales tax on those who supply "telecommunication services" to Tennessee residents.  The Tennessee code defines telecommunication as follows:

(A) "Telecommunication" means communication by electric or electronic transmission of impulses;

(B) "Telecommunication" includes transmission by or through any media, such as wires, cables, microwaves, radio waves, light waves, or any combination of those or similar media ...

Contending that Prodigy's provision of internet access constituted the provision of "telecommunication services," the Tennessee Department of Revenue issued a sales tax assessment to Prodigy.  Granting Prodigy's motion for summary judgment, the court rejected the Department of Revenue's determination, holding instead that the services were not subject to sales tax.

In determining whether a service is subject to taxation, the Tennessee courts look to the dominant purpose and object of the services.  While Prodigy does use telecommunication services to facilitate the provision of its own services, that is just a means used by Prodigy to provide the services that its customers are purchasing - access to the internet and information.  This is particularly true given that the customer is responsible for purchasing from third parties the telecommunication services necessary to access Prodigy's service.  Said the court:

The Court concludes that while the services in issue use telecommunication transmissions as a component, nevertheless, the object and substance of the services are information services.

In reaching this conclusion, the court rejected the Department of Revenues' argument that Prodigy's services fell within the literal definition of telecommunications services contained within the statute.  Said the Court:

Mr. Tolsdorf testified that Prodigy's internet access services provide its members with the ability to communicate by electric or electronic transmission of impulses    testimony which the defendant asserts brings the services squarely within the statutory definition of telecommunication services.

The Tolsdorf affidavit … does not counterbalance or overcome the undisputed facts of record that the object of the services in issue is information.  Having concluded as a matter of law that the object of the services is what determines whether the service is taxable, the Court denies the defendant's motion for summary judgment.