Ruling revoked on communications tax exemption.

• Author: Kautter, David J.

In Letter Ruling 200242021, the Service revoked Letter Ruling 200133008, in which it held that a communications company's payments to local exchange carriers (LECs) for line services and its sales of access to those services are exempt from the Sec. 4251 communications excise tax.

Sec. 4251 imposes a 3% Federal excise tax on amounts paid for communications services, which, for these purposes, is defined as (1) local telephone service, (2) toll telephone ser vice and (3) teletypewriter exchange service. In Letter Ruling 200133008, the Service ruled that this tax does not apply to payments made to LECs for primary-rate-interface (PRI) line service and "other line services" provided by a communications network operator that sells access to Internet service providers (ISPs). In addition, payments made by ISPs to the network operator for line-service access were not subject to the tax.

In the ruling, the IRS considered whether a taxpayer that "builds communication networks and sells access to these networks" to ISPs is subject to the Sec. 4251 tax for payments made to LECs for providing PRI and other line services.

To build its networks, the taxpayer purchased from LECs two distinct types of line services: (1) one-way PRI line service that "permits [the] [t]axpayer to receive, but not to initiate, voice and data transmissions"; and (2) other line services, not specified in the ruling, that connect the taxpayer's modern bank to its data network and, ultimately, to the ISP'S services. The IRS found that payments for these two services were not subject to the tax, because they were not for local telephone service, toll telephone service or...