IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Level 3 Communications, LLC, :

Petitioner :

:

v. : No. 166 F.R. 2007

: Submitted: September 14, 2016

Commonwealth of Pennsylvania, :

Respondent :

BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge

HONORABLE ROBERT SIMPSON, Judge

HONORABLE P. KEVIN BROBSON, Judge

HONORABLE PATRICIA A. McCULLOUGH, Judge

HONORABLE ANNE E. COVEY, Judge

HONORABLE JULIA K. HEARTHWAY, Judge

HONORABLE JOSEPH M. COSGROVE, Judge

OPINION BY JUDGE BROBSON FILED: December 8, 2016 

Pursuant to Pennsylvania Rule of Appellate Procedure 1571(i), the 

Commonwealth of Pennsylvania (Commonwealth) filed exceptions to this Court’s

three-judge panel opinion and order in Level 3 Communications, LLC v. 

Commonwealth of Pennsylvania, 125 A.3d 832, 836-37 (Pa. Cmwlth. 2015) 

(Level 3 I), dated October 15, 2015, in which the Court reversed an order of the 

Board of Finance and Revenue (Board), dated March 30, 2007. In so doing, we 

concluded that Petitioner Level 3 Communications, LLC’s (Level 3) sale of its 

(3)ConnectModem (3CM) service to America Online, Inc. (AOL) constitutes 

internet access and is, therefore, exempt from sales and use tax under the 
2

Pennsylvania Tax Reform Code of 19711(Tax Code) and the federal Internet Tax 

Freedom Act2(ITFA). Upon careful review, we overrule the Commonwealth’s 

exceptions. 

The Commonwealth takes exception to the Court’s ultimate finding 

and conclusion in Level 3 I that the 3CM service that Level 3 sold to AOL does not 

constitute a taxable telecommunication service but rather constitutes nontaxable 

Internet access. In so doing, the Commonwealth takes exception with findings and 

conclusions distinguishing the technology utilized in the 3CM service that Level 3 

sold to AOL in the matter now before the Court from the technology utilized in the 

service that Sprint Corporation (Sprint) sold to AOL in America Online, Inc. v. 

Commonwealth, 932 A.2d 332 (Pa. Cmwlth. 2007) (AOL/Sprint), exceptions 

denied, 942 A.2d 236 (Pa. Cmwlth.), aff’d per curiam, 963 A.2d 903 (Pa. 2008). 

This Court concluded that the service Level 3 sold to AOL in the matter now 

before the Court constituted nontaxable Internet access, whereas the service Sprint 

sold to AOL constituted a taxable telecommunications service. More specifically, 

the Commonwealth takes exception to several of the Court’s technological findings 

that the Court relied upon in reaching the determination that the 3CM service 

constitutes nontaxable Internet access. For instance, the Commonwealth 

challenges the finding that Level 3’s Point-of-Presence (PoP) is where the AOL 

end-user’s connection to the Internet begins; instead, the Commonwealth contends 

that the connection to the Internet begins at AOL’s PoP, which is the AOL data 

 

1 Act of March 4, 1971, P.L. 6, as amended, 72 P.S. §§ 7101-10004. 

2

Pub. L. No. 105-277, Div. C, Title XI, §§ 1100-1104, 112 Stat. 2681-719 (1998) 

(current version at 47 U.S.C. § 151.) 
3

center. The Commonwealth also challenges the findings that after Level 3’s 

equipment converts dial-up analog calls to digital Internet protocol (IP), Level 3 

transmits the digital signal over its IP network to the “requested IP ADDRESS”

and that the 3CM service that Level 3 sold to AOL provides the same functions as 

the version of the 3CM service Level 3 sold to Internet Service Providers (ISPs) 

that do not maintain a data center. The Commonwealth focuses much attention on 

its challenge to the findings that delivering an AOL end-user to the AOL data 

center is no different than delivering an end-user to websites such as 

www.msn.com or www.google.com and that a hacker by-passing the AOL data 

center demonstrates that it is not necessary to deliver AOL end-user traffic to the 

AOL data center in order for the end-user to access the internet. Finally, the 

Commonwealth takes issue with the Court’s finding that Level 3’s Virtual Private 

Network (VPN) provided “tunnels” from Level 3’s modem bank through Level 3’s 

IP network infrastructure to the AOL data center.

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The Commonwealth contends that the Court, in issuing its findings 

and conclusions, overlooked the following: (1) that Level 3 performs a domain 

name service (DNS) routing for the limited purpose of routing the AOL end-user’s 

call exclusively to one of four AOL data centers and that AOL, not Level 3, 

performs the DNS routing to the World-Wide-Web destination specified by the end 

user; (2) that AOL, not Level 3, creates the end-users Internet session; (3) that the 

contract between Level 3 and AOL contains no reference to the provision of 

 

3

The Commonwealth maintains that Level 3 used the VPN tunnel to transmit AOL 

end-user traffic between Level 3’s modem bank and Level 3’s gateway. Between Level 3’s

gateway and the AOL data center, the Commonwealth contends that Level 3 used private lines 

solely dedicated to carrying AOL end-user traffic. 
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Internet access or routing of AOL end-user traffic to the Internet and that the 

contract describes the service sold by Level 3 to AOL as a managed modem 

service delivered directly to or received from a limited number of AOL data 

centers; (4) that Level 3 converted AOL end-user analog calls to digital IP format 

at Level 3’s modem banks, transmitted the IP traffic over Level 3’s IP network to 

Level 3’s gateways and then used private lines to transmit the digital signal 

between Level 3’s gateway and the AOL data center; and (5) that the 3CM service 

is the telecommunications service AOL purchased to deliver Internet access to 

AOL end-users and, as such, is subject to tax. The Commonwealth argues that 

these “overlooked” facts support the conclusion that the Court erred in determining 

that Level 3’s 3CM service that it sold to AOL constitutes nontaxable Internet 

access.

The Court, in Level 3 I, examined the technological aspects of the 

3CM service and opined, as follows: 

[T]here are fundamental technological differences 

between Sprint’s [port modem management (PMM)]

service and Level 3’s 3CM service. AOL/Sprint, 

therefore, is not controlling in this case. Furthermore, 

these technological differences are material. The Level 3 

facility, as the point at which the end-user connects with 

the network access point and network access servers, is a 

Point of Presence (PoP)—“an access point, location or 

facility that connects to and helps other devices establish 

a connection with the [i]nternet.” (Resp’t Br. Appx. B.) 

Because the Level 3 facility is a PoP, it is where the 

end-user’s connection to the internet begins. The 3CM 

service, therefore, constitutes internet access—a service 

“furnished via an arrangement of physical transmission, 

routing and switching facilities that utilize the

[Transmission Control Protocol/Internet Protocol 

(TCP/IP)] protocol suite and that provide connectivity 

between individual end-user[s] . . . and the . . . 

[i]nternet.” (Resp’t Br. Appx. B.) To the extent the 
5

Commonwealth argues that the 3CM service was not 

internet access because it always delivered AOL’s 

end-users to www.aol.com first, we find this 

unpersuasive for two reasons: (1) delivering an end-user 

to www.aol.com as a homepage is no different than 

delivering an end-user to www.msn.com or 

www.google.com; and (2) a skilled end-user could hack 

the AOL software and direct that a different homepage be 

used, bypassing the mandatory stop at www.aol.com and 

demonstrating that it is not necessary for an AOL 

end-user to visit www.aol.com in order to access the 

internet. (See Rebuttal Report of William H. Lehr, 

Expert Report submitted on behalf of Level 3, p. 8.) 

The fact that Level 3’s 3CM service provides 

internet access is dispositive. Internet access is an 

enhanced telecommunications service. 61 Pa. Code 

§ 60.20(a). As an enhanced telecommunications service, 

it is excluded from the definition of telecommunications 

services. Id. Because the 3CM service is not a 

telecommunications service, it cannot fall under the 

exception in Section 201 of the Tax Code, allowing taxes 

on “telecommunication services purchased by an Internet 

service provider to deliver access to the Internet to its 

customers.” 72 P.S. § 7201(rr)(3)(B). Thus, the 3CM 

service is exempt from tax as internet access under 

Section 201 of the Tax Code, 72 P.S. § 7201(rr)(3).

Level 3 I, 125 A.3d at 836-37. In so doing, the Court considered the technological 

aspects of the service at issue and rejected the Commonwealth’s characterization of 

the service for the reasons set forth above. 

The Commonwealth, here, presents largely the same issues and 

arguments that this Court addressed in our opinion in Level 3 I and presents no 

basis for abandoning our earlier reasoning. Contrary to what the Commonwealth 

contends, Level 3’s 3CM service is materially different from the port modem 

management (PMM) service at issue in AOL/Sprint, and the Court in Level 3 I

carefully examined and compared the services at issue in this case and in 
6

AOL/Sprint, concluding that the services Sprint sold to AOL did not provide 

Internet access but that the service Level 3 sold to AOL did. The Commonwealth, 

in advancing its positon that Level 3 does not provide Internet access, ardently 

adheres to its assertion that AOL end-users are not “on the internet” when they 

arrive at AOL’s data center. We disagree. To the contrary, end-users are already 

on the internet, having entered through Level 3’s PoP and having been directed to 

www.aol.com. The Commonwealth maintains, however, that arrival at 

www.aol.com is not sufficient; rather, the end-users must be directed to what it 

refers to as the “public internet” in order for the tax exemption to apply and that 

www.aol.com is not the public internet. We agree with Level 3 that “[t]here is no 

generally recognized demarcation point that delineates the boundaries of the 

so-called ‘public internet’ as distinct from a private internet or internets,” 

(Petitioner’s Br. at 15), as the Internet is a collection of interconnected networks. 

When end-users are on www.aol.com, they are on the Internet, regardless of 

whether the website’s content is proprietary or whether traffic is directed to AOL’s 

data center. We further agree with Level 3 that its product—3CM—delivered 

end-users to the Internet, and it is irrelevant that AOL chose to have end-users

routed first to www.aol.com. 

As to the Commonwealth’s reliance on In the Matter of Business Data 

Services in an Internet Protocol Environment, 31 F.C.C.R. 4723 (2016), a 

383-page Tariff Investigation Order (Tariff Order) and Further Notice of Proposed 

Rulemaking (Further Order), issued by the Federal Communications Commission 

(FCC) on May 26, 2016, such reliance is misplaced. The FCC, in the Tariff Order, 

acknowledged that for several decades it “has struggled to find the best way to 

ensure that competitive benefits flow to customers, and onward to consumers, from 
7

the provision of so-called ‘special access’—business data service(s) (BDS) firms 

use to fulfill their enterprise–level broadband requirements.” Id. at 4725. 

Recognizing that the marketplace for telecommunication services has been 

changing and competition is uneven, the FCC announced in its Tariff Order that it 

is initiating “reform by proposing to end the traditional use of tariffs for BDS 

services and discarding the traditional classification of ‘dominant’ and 

‘nondominant’ carriers.” Id. The FCC explained that its new regulatory 

framework is built on four fundamental principles: (1) competition is best, but 

where competition does not exist the government’s role is to ensure that business 

customers are not disadvantaged; (2) the regulatory framework should be 

technology-neutral; (3) the FCC should remove barriers that may be inhibiting 

technology transitions; and (4) the FCC should construct regulations to meet not 

only today’s marketplace, but tomorrow’s as well. Applying those principles, the 

FCC declared unlawful certain terms and conditions in tariff pricing plans that the 

FCC found to be “unjust and unreasonable and [had] the effects of decreasing 

facilities-based competition and the transition to newer technologies.” Id. at 4727. 

It also proposed in an “accompanying Further Notice to replace the existing, 

fragmented regulatory BDS structure with a new technology-neutral framework 

that classifies markets as either competitive . . . or as non-competitive.” Id. The 

FCC explains that the Further Notice “[b]egins by surveying current marketplace 

conditions,” “[p]roposes a set of de-regulatory rules to govern competitive 

markets,” “[p]roposes a tailored set of rules to safeguard customers in 

non-competitive markets,” “[p]roposes that tariffs should not be used in the future 

as part of the regulation of any BDS,” “[p]roposes . . . future periodic data 

collection,” and, “in order that the new regulatory framework be applied in a 
8

technology-neutral manner, proposes to eliminate [a] current exemption” Id. 

According to the FCC, the Further Notice emphasizes that “no issue raised by the

Further Notice is locked in stone; rather the [FCC] seeks broad comment on the 

best way to execute its principles, evaluate its proposals and answer its questions.” 

Id. at 4727-28. 

Although the Tariff Order concerns the FCC’s development of a new 

regulatory framework to address competition in a changing marketplace, the 

Commonwealth cites the Tariff Order as a reiteration of the FCC’s distinction 

between BDS, a telecommunications service subject to common carrier regulation, 

and “best efforts” Internet access services provided to residential end-users. The 

Commonwealth, citing just four paragraphs of the Tariff Order (three background 

paragraphs and one paragraph concerning the 2015 collection overview) and 

maintaining that the only difference between the telecommunications service that 

AOL purchased from Sprint in AOL/Sprint and the 3CM service that AOL 

purchased from Level 3 in the matter now before the Court is the technology that 

was utilized, argues that the 3CM service falls within the FCC’s definition of BDS. 

The Commonwealth bases this argument on its characterization of the 3CM service 

as “a point-to-point telecommunications service interconnecting AOL’s modems 

with AOL’s data centers. [The] 3CM [service] provides no connection to the 

Internet and in no sense constitutes an Internet access service.” (Commonwealth’s 

Reply Br. at 3.) Thus, the Commonwealth’s argument that the 3CM service is a 

BDS and, as such, a taxable telecommunication service, is premised on the same 

factual scenario already rejected by this Court, namely the Commonwealth’s 

contention that the 3CM service does not deliver end-users to the Internet. 
9

Because the Commonwealth’s argument is based upon a factual premise rejected 

by this Court, it is unpersuasive and does not further its position.

Furthermore, the Commonwealth’s reliance on this Court’s statement 

in Commonwealth v. A.J. Wood Research Company of Pennsylvania, 431 A.2d 367 

(Pa. Cmwlth. 1981) (A.J. Wood), that “[t]he law’s concepts have sufficient vital 

capacity for growth to accommodate technological evolution,” is misplaced. The 

Commonwealth contends that the difference between this case and AOL/Sprint is 

merely technological advancement and that, pursuant to A.J. Wood, the type of 

technology used to provide a service does not change the taxability of a service. 

The Commonwealth urges the Court to conclude that the services at issue in 

AOL/Sprint are the same as the services at issue here, but with changes that merely 

reflect the continuing development of technology. The Court, however, continues 

to disagree with the Commonwealth’s characterization that the only difference 

between AOL/Sprint and this case is how the services were provided. Rather, the 

Court views the key difference as being what services were provided. As such, our 

decision in A.J. Wood does not advance the Commonwealth’s position. 

Finally, the Commonwealth also takes exception to this Court’s denial 

of the Commonwealth’s motion for reconsideration of the Court’s order, dated

April 30, 2015, denying the Commonwealth’s petition to strike Level 3’s brief as 

untimely and the finding that the Commonwealth’s brief was not properly served. 

As we wrote in our earlier opinion, “we perceive no error with this decision.” See 

Level 3 I, 125 A.3d at 837 n.16. Moreover, even if the Court were to conclude that 

the filing was late, the Court fails to discern how the Commonwealth was in any 

way prejudiced by the late filing, as the Court did not hear argument on this matter 

until September 17, 2015, four and one-half months following the Court’s order 
10

denying the Commonwealth’s petition to strike Level 3’s brief. Certainly, given 

the lapse of time between the filing of the brief and argument, the Commonwealth 

had sufficient time to prepare to address at argument Level 3’s brief.

Accordingly, we overrule the Commonwealth’s exceptions to the 

Court’s opinion and order in Level 3 I, thereby confirming the Court’s order of 

October 15, 2015. 

 

 P. KEVIN BROBSON, Judge
IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Level 3 Communications, LLC, :

Petitioner :

:

v. : No. 166 F.R. 2007

:

Commonwealth of Pennsylvania, :

Respondent :

O R D E R

AND NOW, this 8th day of December, 2016, the exceptions filed by 

Respondent Commonwealth of Pennsylvania to this Court’s opinion and order in 

Level 3 Communications, LLC v. Commonwealth of Pennsylvania, 125 A.3d 832, 

836-37 (Pa. Cmwlth. 2015), are hereby OVERRULED. The order of the Board of 

Finance and Revenue in the above-captioned matter, dated March 30, 2007, is 

REVERSED, and Respondent’s motion for reconsideration, dated April 30, 2015, 

remains DENIED. 

 

 P. KEVIN BROBSON, Judge