Court Opinion

ID: 1044144
Source: CourtListenerOpinion
Date Created: 2013-10-08 02:09:44.657664+00
Date Added: 2024-06-11T13:00:53.209099
License: Public Domain

IN THE COURT OF APPEALS OF TENNESSEE
                            AT NASHVILLE
                               February 19, 2013 Session

       LEVEL 3 COMMUNICATIONS, LLC v. RICHARD ROBERTS,
        COMMISSIONER OF REVENUE, STATE OF TENNESSEE

                Appeal from the Chancery Court for Davidson County
                  No. 052266IV     Russell T. Perkins, Chancellor

              No. M2012-01085-COA-R3-CV - Filed September 20, 2013

Company providing dial-up and broadband Internet services to Internet Service Providers
that in turn provided these services to end-users sought refund of sales taxes it had paid to
the State from January 2001 through March 2004 on the ground that its services did not
constitute “telecommunications” or “telecommunication services” as those terms are defined
in Tenn. Code Ann. § 67-6-102(a)(32). Both the Company and the State filed motions for
summary judgment and the trial court granted the Company’s motion. The trial court found
the Company provided Internet access services, the services were “enhanced” rather than
“basic” services, and the true object of the services was not telecommunications. We affirm
the trial court’s judgment.

 Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed

P ATRICIA J. C OTTRELL, P.J., M.S., delivered the opinion of the Court, in which F RANK G.
C LEMENT, J R. and A NDY D. B ENNETT, JJ., joined.

Robert E. Cooper, Jr., Attorney General and Reporter, William E. Young, Solicitor General,
and Jonathan N. Wike, Assistant Attorney General, for the appellant, Richard H. Roberts,
Commissioner of Revenue, State of Tennessee.

Brett R. Carter, Nashville, Tennessee, for the appellee, Level 3 Communications, LLC.

                                        OPINION

                                I. F ACTUAL B ACKGROUND

       Level 3 Communications, LLC (“Level 3”) is a Delaware limited liability company
with a principal place of business in Colorado. During the period at issue, January 2001
through March 2004, Level 3 provided two internet services it called “(3)Connect Modem”
and “(3)Crossroads.” Level 3 collected Tennessee sales taxes on those services over this
time period and remitted the taxes to the Commissioner of Revenue for Tennessee (the
“State”).

        In January 2004, the State published Sales & Use Tax Notice #04-03, which indicated
that “Internet access is no longer considered a taxable ‘telecommunication service’ under
Tennessee law.” The State invited internet service providers and telecommunications
companies to submit a claim for a refund of sales taxes collected and remitted for Internet
access charges, and Level 3 submitted a claim for a refund in the amount of $1,151,007.77.
The State denied Level 3’s claim for a refund, and Level 3 filed a complaint to recover the
sales taxes it claims it wrongfully had assessed its customers and paid the State.

       Both parties moved for summary judgment. The trial court granted Level 3’s motion
and denied the State’s motion. The facts the trial court relied on, that the parties do not
dispute, include the following:

       (3)Connect Modem was a wholesale dial-up Internet service and (3)CrossRoads was
a wholesale broadband Internet service. Level 3’s customers purchased these services to
enable their end-users to access the Internet. Level 3’s customers were retail or consumer
Internet Service Providers (“ISPs”), such as EarthLink Communications and America Online,
as well as large corporations that used the service for remote access to the corporate Local
Area Network (“LAN”), which houses a corporation’s server, database, file system, and e-
mail. Level 3 considered itself to be a wholesale ISP because Level 3 provided the end-users
access to the Internet; Level 3’s customers did not.

        (3)Connect Modem provided its customers with local telephone numbers. Federal or
State regulatory bodies assigned these local telephone numbers in blocks. The ISPs put the
numbers into a dialer software application and provided the numbers to their end-users, who
had to have local telephone service in order to access the ISPs’ services. When the end-user,
using software provided by Level 3, dialed the local number, the number identified an
Internet access entry belonging to Level 3 that allowed the end-user, through a series of
conversions, to reach the Internet, surf the Internet, exchange e-mails, or use other
applications enabled by access to the Internet. The end-user’s call, made by modem, traveled
through the end-user’s local exchange carrier (“LEC”).

       When a local call initiated by an end-user’s modem reached Level 3’s infrastructure,
Level 3 converted the call to Internet Protocol (“IP”), the means by which Level 3 took data

                                             -2-
and converted it into packets for transmission over the Internet.1 IP divided the information
into packets and marked each packet with a sequence number so that the packets could be
reassembled in the proper order by a receiving system. Upon converting the call to IP, Level
3 terminated the call or transferred the call and created a session on the Internet for the end-
user.

       By providing the local numbers, Level 3 provided its customers with access to the
local dial network. However, Level 3 did not provide a local dial network infrastructure.
The LEC that provided the end-user with local telephone service provided the local
connectivity that enabled the modulated analog modem signal to travel to the LEC’s switch
at the LEC’s central office.2 Level 3 entered into agreements with LECs to provide
(3)Connect Modem service and interconnected with the LECs. As Level 3’s Director of
Product Management for (3)Connect Modem explained, “A significant portion of the steps
required to obtain Internet access would be performed by Level 3.”

       For the (3)Connect Modem end-users, Level 3 was able to convert their data into IP
using its own equipment. The hardware Level 3 used included routers that helped route IP
packets around the country; Network Authentication Services (“NAS”) which converted
signals into Internet Packets; and a Radius device that stored and authenticated end-user
credentials to insure that only end-users who purchased the service from Level 3’s customers
gained access to the Internet. Level 3 analyzed the location indicated by the IP header and
determined the best means to reach that location through the Internet, whether through Level
3’s network or another network.

        An ISP that purchased (3)Connect Modem or (3)CrossRoads service billed its end-
users and provided them with e-mail addresses. The ISPs provided the end-users with
content, such as a home page that contained news streams, and provided access to the
Internet. Level 3 did not provide any content to the end-users. Similarly, it did not create
or modify the content it transmitted . Level 3 billed its (3)Connect Modem customers based
on either the amount of time their end-users spent online or the capacity of Level 3’s network
that the customers’ service consumed. Level 3 billed its (3)CrossRoads customers based on
the size of the port the customers bought and how much traffic ran over it.3

       1
           IP is sometimes referred to as the language of the Internet.
       2
         The local telephone number helped the LEC find Level 3 facilities and transfer the end-user’s
authentication request to Level 3’s equipment. The end-user’s data signal was modulated by a modem
traveling over a local network.
       3
           A port refers to where the data flows and was located in one of Level 3’s gateways. A larger amount
                                                                                                 (continued...)

                                                      -3-
       (3)CrossRoads provided broadband Internet access connections. Like (3)Connect
Modem, (3)CrossRoads was a wholesale Internet service, and it allowed ISPs doing business
with Level 3 to provide their customers with faster access to the Internet than the dial-up
service provided by (3)Connect Modem. Both services crossed Level 3’s “backbone,” which
was the physical infrastructure that Level 3 built and used to offer Internet services to its
customers’ end-users.4 Level 3’s backbone consists of fiber optics in the ground, transport
equipment, IP equipment, switches, routers, and other equipment. Level 3’s routers and
switches are located in numerous gateways throughout the country.5

        The tax statute in effect in 2003 provided that “interstate telecommunication services
sold to businesses shall be subject to a tax imposed at the rate of seven and one-half percent
(7.5%).” Tenn. Code Ann. § 67-6-221(a). The issue in this case is whether the (3)Connect
Modem and (3)CrossRoads services Level 3 provided its customers during the relevant
period, January 2001 - March 2004, were taxable telecommunication services, as that term
was then defined.

           The relevant statute provided as follows:

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

           (B) “Telecommunications” includes transmission by or through any media,
           such as wires, cables, microwaves, radio waves, light waves, or any combination of those or simil

       (C) Except as provided in subdivision (a)(32)(D), “telecommunications”
       includes, but is not limited to, all types of telecommunication transmissions,
       such as telephone service, telegraph service, telephone service sold by hotels
       or motels to their customers or to others, telephone service sold by colleges and
       universities to their students or to others, telephone service sold by hospitals to
       their patients or to others, WATS service, paging service, and cable television
       service sold to customers or to others by hotels or motels;

       3
        (...continued)
of data requires a larger port.
           4
         Level 3’s Vice President of Product Delivery explained that (3)Connect Modem is narrow band and
(3)CrossRoads is broadband. An end-user chooses which type of service to purchase from his or her ISP,
and then the ISP buys the access chosen from Level 3 to provide to its end-user.
           5
         A gateway is a point of interconnection where modems and routers are authenticated so that internet
access can be provided to the end-users of Level 3’s customers using Level 3’s IP backbone.

                                                   -4-
        (D) “Telecommunications” does not include public pay telephone services,
       television or radio programs which are broadcast over the airwaves for public
       consumption, coaxial cable television (CATV) which is offered for public
       consumption, private line service, or automatic teller machine (ATM) service,
       wire transfer or other services provided by any corporation defined as a
       financial institution under § 67-4-804(a)(9) [repealed], unless the company
       separately bills or charges its customers for specific telecommunication services
       rendered.

Tenn. Code Ann. § 67-6-102(a)(32) (2003).6

                                II. T RIAL C OURT’S D ECISION

        The trial court noted that Level 3’s business of providing access to the Internet does
not fall neatly into the definition of either “telecommunications” or “telecommunication
transmissions” as set forth in the statute. The court reviewed the organization of the statutory
definition, noting that subsection (A) includes a broad definition of “telecommunications,”
subsections (B) and (C) provide progressively more limited definitions, and subsection (D)
lists exceptions from the definition.

       The court then applied the “true object” or “primary purpose” test that Tennessee
courts have used when a business activity is difficult to classify for tax purposes, writing:

       The fact that a company may be viewed as being a part of the
       telecommunications industry or as being a part of the Internet access services
       industry . . . is not determinative. . . . [T]he true object test favors Level 3 here
       because the true object of Level 3’s sale of (3)Connect Modem and
       (3)CrossRoads to its customers was to provide Internet access on a wholesale
       basis through the use of telecommunication services - and not to provide
       telecommunication services. The fact that Level 3’s customers were retailers
       (or corporations) who resold (or provided) these services to end-users does not
       change the character or purpose of the services that Level 3 offered during the
       relevant period.

       The trial court reviewed the Court of Appeals’ decision in Prodigy Serv. Corp., Inc.

        6
         The definition of “telecommunications service” was later amended to exclude internet access
service, but that amendment does not affect the outcome of this case. See Tenn. Code Ann. § 67-6-
102(92)(B)(vi).

                                                -5-
v. Johnson, 125 S.W.3d 415 (Tenn. Ct. App. 2003), and determined that under Prodigy’s
analysis, Level 3’s wholesale access business was not taxable. The trial court explained that
the Prodigy court distinguished “basic services,” which satisfy the definition of
“telecommunication services” and are taxable, from “enhanced services,” which do not satisfy
the definition of “telecommunication services,” and are not taxable. Quoting Prodigy, the
trial court explained that basic services “involved the offering of pure transmission capability
over a communications path that is virtually transparent in terms of its interaction with
customer supplied information,” whereas enhanced services combine basic services with
“computer processing applications that act on the format, content, code, protocol or similar
aspect of the subscriber’s transmitted information, or provide the subscriber additional,
different or restructured information, or involve subscriber interaction with stored
information.”

       Then, based on the difference between “basic service” and “enhanced service,” the trial
court determined that Level 3’s services were not taxable telecommunication services:

       The services provided are enhanced services and the true object of transactions
       involving (3)Connect Modem and (3)CrossRoads is the provision of access to
       the Internet. Stated differently, Level 3 is selling, and its customers are buying,
       Internet access in Level 3’s transactions involving (3)Connect Modem and
       (3)CrossRoads. Additionally, the language of the statute, which must be
       construed against the taxing authority, demonstrates that Level 3’s sale of the
       services at issue here did not constitute the sale of “telecommunication
       transmissions” under Tenn. Code Ann. § 67-6-102(a)(32)(C).

        The State makes two arguments on appeal. First, the State asserts the trial court erred
in ruling that the “true object” of Level 3’s services was the provision of access to the
Internet. The State contends instead that Level 3 provided Internet service providers with the
transmission path necessary for end-user communication with the Internet, and that Level 3’s
services were therefore taxable as “telecommunication services.” Second, the State asserts
the trial court erred in ruling that Level 3’s services were “enhanced services” and therefore
not taxable as “telecommunication services” because Level 3’s services involved nothing
more than the protocol conversion that was necessary for efficient transmission.

                                 III. S TANDARD OF R EVIEW

       A trial court’s decision on a motion for summary judgment enjoys no presumption of
correctness on appeal. Martin v. Norfolk Southern Railway Co., 271 S.W.3d 76, 84 (Tenn.
2008); Blair v. West Town Mall, 130 S.W.3d 761, 763 (Tenn. 2004). We review the summary
judgment decision as a question of law. Id. Accordingly, this court must review the record

                                               -6-
de novo and make a fresh determination of whether the requirements of Tenn. R. Civ. P. 56
have been met. Eadie v. Complete Co., Inc., 142 S.W.3d 288, 291 (Tenn. 2004); Blair, 130
S.W.3d at 763. Those requirements are that the filings supporting the motion show that there
is no genuine issue of material fact and that the moving party is entitled to judgment as a
matter of law. Tenn. R. Civ. P. 56.04; Blair, 130 S.W.3d at 764.

       The moving party has the burden of demonstrating it is entitled to judgment as a matter
of law and that there are no material facts in dispute. Martin, 271 S.W.3d at 83; McCarley
v. West Quality Food Service, 960 S.W.2d 585, 588 (Tenn. 1998). To be entitled to summary
judgment, a defendant moving party must either (1) affirmatively negate an essential element
of the non-moving party’s claim or (2) show that the nonmoving party cannot prove an
essential element of the claim at trial. Hannan v. Alltel Publishing Co., 270 S.W.3d 1, 9
(Tenn. 2008). If the party seeking summary judgment makes a properly supported motion,
the burden shifts to the nonmoving party to set forth specific facts establishing the existence
of a genuine issue of material fact. Martin, 271 S.W.3d at 84; Hannan, 270 S.W.3d at 5;
Staples v. CBL & Associates, 15 S.W.3d 83, 86 (Tenn. 2000) (citing Byrd v. Hall, 847 S.W.2d
208, 215 (Tenn. 1993)).

       In our review, we must consider the evidence presented at the summary judgment stage
in the light most favorable to the non-moving party, and we must afford that party all
reasonable inferences. Doe v. HCA Health Servs., Inc., 46 S.W.3d 191, 196 (Tenn. 2001);
Memphis Hous. Auth. v. Thompson, 38 S.W.3d 504, 507 (Tenn. 2001).

       The State does not contend there are any material facts in dispute. Instead, the State
disagrees with Level 3’s characterization of its services as “access” to the Internet. The State
contends Level 3 does not provide “access” to the Internet, but that Level 3 provides a
transmission link and contends the true object of its services was the “ability to
communicate.”

       The Tennessee Supreme Court recently reiterated the applicable principles for statutory
interpretation:

       Statutory construction is a question of law that is reviewed de novo without any
       presumption of correctness. In re Estate of Tanner, 295 S.W.3d 610, 613
       (Tenn.2009). When dealing with statutory interpretation, well-defined precepts
       apply. Colonial Pipeline Co. v. Morgan, 263 S.W.3d 827, 836 (Tenn. 2008).
       Our primary objective is to carry out legislative intent without broadening or
       restricting the statute beyond its intended scope. Houghton v. Aramark Educ.
       Res., Inc., 90 S.W.3d 676, 678 (Tenn. 2002). In construing legislative
       enactments, we presume that every word in a statute has meaning and purpose

                                              -7-
       and should be given full effect if the obvious intention of the General Assembly
       is not violated by so doing. In re C.K.G., 173 S.W.3d 714, 722 (Tenn. 2005).
       When a statute is clear, we apply the plain meaning without complicating the
       task. Eastman Chem. Co. v. Johnson, 151 S.W.3d 503, 507 (Tenn. 2004). Our
       obligation is simply to enforce the written language. Abels ex rel. Hunt v.
       Genie Indus., Inc., 202 S.W.3d 99, 102 (Tenn. 2006).

Estate of French v. Stratford House, 333 S.W.3d 546, 554 (Tenn. 2011).

        Statutes imposing a tax should be construed strictly against the government and
liberally in favor of the taxpayer. Sky Transpo, Inc. v. City of Knoxville, 703 S.W.2d 126, 129
(Tenn. 1985); Prodigy Serv. Corp. v. Johnson, 125 S.W.3d 413, 416 (Tenn. Ct. App. 2003).
“Tax statutes ‘will not be extended by implication beyond the clear import of the language
used, nor will their operation be enlarged so as to embrace matters [or persons] not
specifically named or pointed out.’” Id. (quoting National Gas Distributors, Inc. v. State, 804
S.W.2d 66, 67 (Tenn.1991)). Our primary goal is to determine the Legislature’s purpose and
intent in passing the statute at issue. Limbaugh v. Coffee Med. Ctr., 59 S.W.3d 73, 83 (Tenn.
2001).

                           IV. T ELECOMMUNICATION S ERVICES

        Telecommunications and telecommunication services that fit the definitions set forth
in Tenn. Code Ann. § 67-6-102(a)(32), as quoted earlier in this opinion, are subject to the
Tennessee sales tax for the relevant period. The State contends Level 3’s services fit the
definition of taxable “telecommunication services” in effect between 2001-2004 because
Level 3’s services provided “communication by electric or electronic transmission of
impulses” and “transmission by or through any media, such as wires, cables, microwaves,
radio waves, light waves, or any combination of those or similar media.” As the trial court
noted, however, it is important to consider what the Legislature explicitly included as taxable
in subsection (C) of § 67-6-102(a)(32), and what it explicitly excluded from taxation in
subsection (D) of that provision, to determine whether Level 3’s services fit the definition of
“telecommunications” or “telecommunication transmissions,” as that term is used in
subsection (C).

        The list of “telecommunication transmissions” the statute includes in subsection (C)
does not include the services Level 3 provides. The transmissions excepted from the
definition of “telecommunications” in subsection (D) do not include those provided by Level
3, either. The language used in subsection (D) suggests a legislative intent to exclude from
the definition, and thus from taxation, services offered for public consumption. On the other
hand, subsection (D) carves out “specific telecommunication services” that a business

                                              -8-
separately charges its customer as falling within the definition, and being taxable. Ultimately,
we must determine whether Level 3’s services are properly characterized as taxable
“telecommunications” when viewed in light of the case law and the language of the statute,
taken as a whole.

        When a company’s activity does not easily fall into a clear category for tax purposes,
Tennessee courts consider the “true object” or “primary purpose” of the company’s business
to determine whether the goods or services are taxable. See Sky, 703 S.W.2d at 129 (primary
purpose of gondola chair was transportation and not amusement); Thomas Nelson, Inc. v.
Olsen, 723 S.W.2d 621, 622 (Tenn. 1987) (true object of company’s business of selling
software was the selling of information, not the tangible personal property of tapes and cards).
This test has been used to determine whether a company’s services are taxable as
“telecommunications.” See, e.g., Qualcomm Inc. v. Chumley, 2007 WL 2827513, at *4-5, 8
(Tenn. Ct. App. Sept. 26, 2007) (true object of company’s OmniTRACS service was to
determine location and load status of vehicles, not to transmit text messages); BellSouth
Telecomm., Inc. v. Johnson, 2006 WL 3071250 (Tenn. Ct. App. Oct. 27, 2006) (true object
of company’s messaging system was to facilitate transmission of telephone communication
and was thus taxable as telecommunication); Equifax Check Servs., Inc. v. Johnson, 2000 WL
827963, at *4-5 (Tenn. Ct. App. June 27, 2000) (although telecommunications were used to
transmit information to merchants, true object of service was information about customers,
not telecommunication itself).

       A. Prodigy Services Corp. v. Johnson

       The State and Level 3 agree that the Court of Appeals’ decision in Prodigy Services
Corp. v. Johnson, 125 S.W.3d 413 (Tenn. Ct. App. 2003), determines the outcome of this
case, but they disagree about how that opinion should be applied to the facts here. Prodigy
Services Corporation was the taxpayer, and it provided its end-users with access to the
Internet through a software program the end-users installed on their computers. This program
allowed the end-users to access certain information contained on Prodigy’s computer either
in Tennessee or in New York, where Prodigy’s main computers were located. The link
between Prodigy’s local computer and its main computers was through lines leased from
common carriers or through services leased from other networks. Prodigy’s software also
provided a link to the Internet and allowed its end-users to send and receive e-mail. Id. at 415.

       The Prodigy court noted that federal law distinguishes between regulated “basic
services” and unregulated “enhanced services”:

       Throughout this opinion we use the FCC’s terms “basic” and “enhanced” to
       distinguish between regulated common carrier communications services, which

                                               -9-
       consist largely of plain old telephone service (POTS), and unregulated data
       processing services which use the telephone network to convey information
       from remote computers to customers’ terminals. In the FCC’s formal terms,
       basic service is the offering of a “pure transmission capability over a
       communications path that is virtually transparent in terms of its interaction with
       customer supplied information.” Final Decision, In re Amendment of Section
       64.702 of the Commission Rules and Regulations (Second Computer Inquiry),
       77 F.C.C.2d 384, 420 (1980) (Computer II Final Decision). An enhanced
       service combines basic service with “computer processing applications [that]
       . . . act on the format, content, code, protocol or similar aspects of the
       subscriber’s transmitted information, or provide the subscriber additional,
       different or restructured information, or involve subscriber interaction with
       stored information.” Id. at 387; see also 47 C.F.R. § 64.702(a)(1989).
       Database services, in which a customer dials a number to obtain access to
       stored information, such as Dow Jones News, Lexis, and “Dial It” sports scores,
       are examples of enhanced services.

Prodigy, 125 S.W.3d at 418-19 (quoting California v. F.C.C., 905 F.2d 1217, 1223 n.3 (9th
Cir. 1990)).7 Based on the distinction between “basic” and “enhanced” services, the Prodigy
court concluded that the services Prodigy provided were “enhanced”services and therefore did
not come within the statutory definition of “telecommunications.” Prodigy, 125 S.W.3d at
419.

       The Prodigy court noted at the conclusion of its opinion that telecommunication
services were not the “true object” of Prodigy’s services. The court acknowledged that
Prodigy’s customers had to supply their own telephone service to the Prodigy computer and
that Prodigy used telecommunication services to connect its local computer to the main
computer in New York.8 Id. However, although telecommunication services were used to
connect Prodigy’s customers to its main computer in New York, Prodigy was a consumer of
telecommunications services rather than a provider. Despite the fact that some of Prodigy’s
programs allowed its customers to communicate through the Internet, the court concluded that

        7
          The United States Supreme Court has clarified the meaning of “pure” or “transparent” transmission:
“a communications path that enabled the consumer to transmit an ordinary-language message to another
point, with no computer processing or storage of the information, other than the processing or storage needed
to convert the message into electronic form and then back into ordinary language for purposes of transmitting
it over the network – such as via a telephone or a facsimile.” Nat’l Cable & Telcomms. Ass’n v. Brand X
Internet Servs., 545 U.S. 967, 976 (2005).
        8
         Prodigy was a consumer of telecommunications services, not a provider. The Prodigy court noted
that. Prodigy, 125 S.W.3d at 419.

                                                   -10-
communication was an enhanced service and that telecommunications were not the true object
of Prodigy’s services. Id.

       B. Application of Prodigy to Level 3

       Applying Prodigy’s definitions of “basic services” and “enhanced services” to Level
3’s services, we conclude Level 3’s services qualify as enhanced services. Level 3 did not
provide plain old telephone service, nor did Level 3 offer “pure transmission capability over
a communications path that was virtually transparent in terms of its interaction with
information supplied by a customer.” Level 3’s services converted an end-user’s data into IP,
the language of computers, and then Level 3 used routers to place the subscribers’ IP packets
where they needed to be on the Internet using Level 3’s backbone. Regardless of whether an
end-user used a dial-up modem ((3)Connect Modem) or broadband ((3)CrossRoads) to
connect with the Internet, Level 3 converted the end-user’s information into IP packets and,
using its routers and other hardware, enabled the end-user to access the Internet. Indeed, the
Prodigy court identified “Internet access” as an example of an enhanced service that does not
qualify as a telecommunication service. Prodigy, 125 S.W.3d at 419.

       Turning to the “true object” or “primary purpose” of Level 3’s services, we find the
true object of the services was to provide access to the Internet, not to provide
telecommunication services. (3)Connect Modem used telecommunication lines provided by
LECs to an ISP’s end-user that the end-user utilized to dial into Level 3’s system, but the
ultimate purpose and true object of the connection was to gain access to the Internet. Level
3 provided the necessary link between the ISPs (or large corporations) and the Internet. The
only purpose of providing this link was to enable an end-user to reach the Internet, whether
to access stored information or otherwise.

       The State distinguishes Level 3’s services from Prodigy’s services by pointing out that
Prodigy provided content to its end-users, whereas Level 3 provided no such content to its
customers through either (3)Connect Modem or (3)CrossRoads. The State contends this
distinction should cause us to reach a different result from the Prodigy court’s decision in
classifying Level 3’s services. We disagree.

       The Prodigy court defined “enhanced services” as the combination of basic service
with computer processing applications to act on the format, content, code, protocol or similar
aspects of the subscriber’s transmitted information, or provide the subscriber additional,
different or restructured information, or involve subscriber interaction with stored
information. The State does not dispute that Level 3 utilized LECs’ transmission lines to
connect with end-users for the purpose of acting on the format, code, and/or protocol of a
subscriber’s transmitted information by converting their data into IP, the language of

                                             -11-
computers, and then used routers to get the subscriber’s IP packets where they needed to go
on the Internet. The State ignores the conjunction “or” in the definition of “enhanced
services” by arguing Level 3’s services must provide content to the end-user to qualify as
enhanced.9

        The State characterizes Level 3’s services as providing a “communications pathway”
rather than “Internet access.” The State describes Level 3’s (3)Connect Modem services as
establishing the first segment of the communications path that linked the end-user’s computer
with Level 3’s own communication infrastructure. Although we acknowledge that the
Internet may involve a form of communication, we decline to find that providing Internet
access, or even a component of Internet access, falls within the definition of
“telecommunications” for purposes of the tax statute at issue. The FCC has recognized that
“[e]nhanced services involve communications and data processing technologies . . .
intertwined so thoroughly as to produce a form different from any explicitly recognized in the
Communications Act of 1934.” In the Matter of Federal-State Joint Board on Universal
Serv., 13 FCC Rcd. 11830 § 26 (Apr. 10, 1998). The FCC further noted that enhanced
services cover a wide range of different services, including what might seem to be
predominantly communications services. However, the FCC has taken the position that
“enhanced services, which are offered over common carrier transmission facilities, were
themselves not to be regulated . . . , no matter how extensive their communications
components.” Id. at § 27.

         The State also contends that the “wholesale” Internet access Level 3 provides to its
customers should not be treated as “Internet access,” and be exempt from taxation, because
the end-users could not access the Internet directly using Level 3’s services; the end-users
could only access the Internet by contracting with an ISP that “resold” Level 3’s Internet
access service to the end-user. The question is not whether Level 3 sells Internet access
directly to an end-user, however; the question is whether Level 3’s services are properly
characterized as “telecommunications” as that term is used in the tax statute. Although Level
3 provided its customers with local phone numbers for the ISPs’ (3)Connect Modem
customers to use, Level 3 did not own or control the transmission lines the end-users utilized
to dial into Level 3’s system, Level 3 did not charge for the use of these lines, and these phone
numbers were used only to connect to the Internet, not for telephone or other communicative
purposes.

       Interpreting Tenn. Code Ann. § 67-6-102(a)(32) liberally in favor of Level 3 and

        9
         The FCC has defined the Internet as an information service and has indicated that the Internet is not
a telecommunications service. Gulf Power Co. v. F.C.C., 208 F.3d 1263, 1277 (11th Cir. 2000) (overruled
on other grounds by Nat’l Cable & Telecomms. Ass’n, Inc. v. Gulf Power Co., 534 U.S. 327 (2002)).

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strictly against the State, we conclude the services Level 3 provided from January 2001
through March 2004 did not constitute taxable “telecommunications” or “telecommunication
transmissions.”

                                     V. C ONCLUSION

       The judgment of the trial court granting Level 3’s motion for summary judgment is
affirmed. Costs of this appeal shall be taxed to the appellant, Richard Roberts, Commissioner
of Revenue, State of Tennessee.

                                                        ____________________________
                                                        PATRICIA J. COTTRELL, JUDGE

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