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Discussion Draft, Section 25137-13 Regulations

DRAFT 8/20/97

Section 25137-13. Telecommunications, Subscription Television, Internet Access, and Electronic Information Services--Apportionment of Income.

(a) In general. Except as specifically modified by this regulation, when a taxpayer in the business of providing telecommunications services, electronic information services, subscription television services, access to the Internet, or any combination thereof has income from sources both within and without this state, the amount of business income from sources within this state from such business activity shall be determined pursuant to sections 25120 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto.

(b) Definitions. The following definitions are applicable to the terms contained in this regulation.

(1) "Telecommunications" means the electronic transmission of voice, data, image, and other information through the use of any medium such as wires, cables, electromagnetic waves, light waves, or any combination of those or similar media now in existence or that might be devised, but "telecommunications" does not include the information content of any such transmission.

(2) "Telecommunications service" means providing telecommunications (including services provided by telecommunication service resellers) for a charge and includes, but is not limited to, telephone service, telegraph service, paging service, personal communication services, mobile or cellular telephone service, but does not include "electronic information service," "Internet access service" or "subscription television service" as defined in this regulation.

(3) "Electronic information service" means providing information or entertainment for a charge by means of telecommunications including through access to the "Internet." "Electronic information service" does not include "subscription television service" as defined in subsection (b)(4).

(4) "Subscription television service" means providing transmission of video programming, including single-event programs, to subscribers and includes any subscriber interaction for the selection of video programming or other program services. The term includes, but is not limited to, direct broadcast satellite service, cable television service, satellite master antenna television service, master antenna television service, multipoint distribution service, multichannel/multipoint distribution service, and any audio portion of a video program.

(5) "Private telecommunications service" means a dedicated service that entitles the subscriber to the exclusive or priority use of a "communications channel" or group of "communications channels" from one or more locations ("channel termination point") to one or more locations.

(6) "Communications channel" means a communications path (which can be one-way or two-way, depending on the channel) between two or more points. The path may be designed for the transmission of signals representing human speech, digital or analog data, facsimile, or pictures.

(7) "Channel termination point" is the point at which information can enter or leave the telecommunications network.

(8) "Call" means a specific telecommunications transmission as described in subsection (b)(1).

(9) The "Internet" means the international network of interconnected government, educational, and commercial computer networks.

(10) "Internet access service" means providing end-user access to the "Internet."

(11) "Physical presence in this state" means that, during any portion of the income year, the taxpayer owns or rents real or tangible personal property physically located in this state, has one or more employees physically present or located in the state, or has a business arrangement with another entity under which that entity conducts regular and systematic activity on behalf of the taxpayer in this state by means of that entity’s employees or property physically present or located in this state. A taxpayer shall not be considered to have a "physical presence in this state" if all of its contacts described in the preceding sentence, viewed in the aggregate, are de minimis.

(A) The following activities are not, in and of themselves, considered a physical presence in this state--

(i) Placing advertising or a solicitation of orders within a periodical or other publication of a third party, such as a magazine or newspaper, which is distributed or sold in this state, or

(ii) Storing data on a computer (server) or other electronic device owned by an entity not within the taxpayer’s commonly controlled group (within the meaning of Section 25105), used for advertisement or solicitation of orders, or for linkage through the Internet to a computer or other electronic device owned by the taxpayer in another state.

(B) This subsection (b)(11) is an apportionment rule in the application of this regulation only and is not to be construed as a standard for any other purposes, including determination of constitutional tax nexus.

(12) "Cost of performance ratio," as used in this regulation, refers to the average of the following fractions:

(A) The value of information producing property which is owned or rented and used in this state divided by the value of information producing property everywhere, and

(B) Information producing payroll paid in this state divided by information producing payroll paid everywhere.

(13) "Information producing property" is property described by section 25129-25131, Revenue and Taxation Code, which is directly utilized in the production of gross receipts from electronic information services or Internet access services.

(14) "Information producing payroll" is payroll described by section 25132 and 25133, Revenue and Taxation Code, which is directly utilized in the production of receipts from electronic information services or Internet access services.

(15) "Connection point" is the physical location of a customer at which a transmission of information originates or terminates.

(c) Apportionment of business income.

(1) Property factor.

(A) In general.

(i) Licenses granted by the Federal Communications Commission for use of the electromagnetic spectrum shall be included in the property factor at original cost.

(B) Numerator.

(i) Tangible personal property (such as satellites, undersea transmission cables, and the like) that is not located in any particular state but is owned or rented and used by a taxpayer in providing a telecommunications service, a subscription television service, an electronic information service, or Internet access services shall be attributed to this state based on the ratio of property within this state used in providing that service to property everywhere used in providing the service (other than the property not located in any state). The term "property" refers to property as defined in section 25129 of the Revenue and Taxation Code and this regulation.

(ii) A portion of the value of each license granted by the Federal Communications Commission shall be attributed to this state based on the ratio that the population within the geographic area in this state covered by the license bears to the total population within the geographic area covered by the license, according to the most recent United States census.

(2) Sales factor numerator. Notwithstanding the provisions of sections 25134-25136 of the Revenue and Taxation Code, the following gross receipts are assigned to the numerator of the sales factor of this state:

(A) Gross receipts derived from providing any telecommunications service which both originates and terminates in this state.

(B) Gross receipts derived from providing any interstate or international telecommunications service, other than private telecommunications service, if:

(i) the call originates in this state and is not billed by reference to the equipment receiving the call; or

(ii) the call is received in this state and is billed by reference to the equipment receiving the call (a "collect call"); or

(iii) the service provides for unlimited calls within a specific geographic area and is billed by reference to equipment located in this state; or

(iv) the receipts are not assignable to any other state under subsections (i)- (iii) above, or the taxpayer is not taxable in the state to which the receipts would be assigned by application of those subsections, and the customer’s billing address is in this state.

(C) Gross receipts derived from providing interstate and international private telecommunications services determined as follows:

(i) if the segment of the interstate or international channel between each termination point is separately billed, then 100 percent of the charge imposed at each termination point in this state and for service in this state between those points is assigned to this state. In addition, 50 percent of the charge imposed for service between a channel termination point outside this state and a point inside the state measured by the nearest termination point inside the state to the first termination point outside the state relative to such point inside the state is assigned to this state, or

(ii) if each segment is not separately billed, that portion of the interstate or international channel charge with respect to points inside this state and points outside the state based on the ratio that the number of channel termination points within this state bears to the total number of channel termination points within and without this state.

(D) Gross receipts derived from providing subscription television service which is charged by reference to a subscriber's location within this state.

(E) Gross receipts derived from providing electronic information services or Internet access services, if:

(i) the taxpayer has a physical presence in this state and the information is received, or the Internet access service is provided, at a customer’s connection point located within this state; or

(ii) the taxpayer has a physical presence in this state and the information is simultaneously received, or the Internet access service is simultaneously provided, at a customer’s connection points located both within and without this state, and the charges are for delivery to or for equipment or Internet access provided at a specified connection point within this state; or

(iii) the taxpayer has a physical presence in this state and the information is simultaneously received, or the Internet access service is simultaneously provided, at a customer’s connection points located both within and without this state, and the charges are not for delivery to or for equipment or Internet access provided at a specified connection point, but only in proportion to the number of connection points of the customer in this state to which the information is delivered or at which equipment or Internet access is provided as a percentage of all connection points of the customer to which the information is delivered or at which equipment or Internet access is provided; or

(iv) the taxpayer is not physically present in any of the states described by subsections (c)(2)(E)(i through iii), the taxpayer is physically present in this state and the customer’s billing address is in this state; or

(v) the taxpayer is not physically present in any of the states described by subsections (c)(2)(E)(i through iv) or the location of receipt of information, Internet access or the customer’s billing address cannot be determined, the portion of such receipts determined by multiplying the amount of such receipts by the taxpayer’s cost of performance ratio.

(F) Gross receipts derived from advertising as determined by the ratio of billing addresses within this state to total billing addresses for the service disseminating the advertising. If the taxpayer is not taxable in a state of the applicable billing address, such gross receipts are assigned to this state if the taxpayer’s commercial domicile is in this state.

(G) Gross receipts derived from the sale, license, rental or other use of the taxpayer’s customer lists, as determined by the ratio of the billing addresses of customers on the lists in this state to the billing addresses of all customers on the lists. If the taxpayer is not taxable in a state of the applicable customer’s billing address, such gross receipts are assigned to this state if the taxpayer’s commercial domicile is in this state.

(H) Gross receipts from customer equipment charges relating to tangible personal property in this state, whether or not the customer’s right to use the property can be characterized as a lease.

(3) In the application of subsection (c)(2)(E) of this regulation, if the connection point where the customer’s equipment is located or at which an electronic information service is received or Internet access is provided cannot be determined, and information is received by or Internet access is provided to the customer through a local telephone exchange in this state, it is presumed that the electronic information service or Internet access is received or accessed at a customer location in this state. If such information is not received through a local telephone exchange, the information is presumed received or Internet access is presumed to be provided at the customer’s billing address.

(4) Examples.

EXAMPLE 1:

Customer A subscribes to private telecommunications service provided by taxpayer to interconnect A's various locations in this state. Taxpayer imposes a termination charge at the location of each channel termination point and an interoffice channel mileage charge. A's billing address is in State X. Gross receipts derived from the service are included in the numerator of the sales factor of this state under subsection (c)(2)(C)(i). Gross receipts for the termination charge is in the numerator of this state under the same subsection ((c)(2)(C)(i)).

EXAMPLE 2:

Same facts as in EXAMPLE 1, except that Customer A has two offices in state Y and a home office in this state. An interoffice channel connects its home office in this state with the two offices in state Y. One office in state Y is 1,000 miles from customer A’s home office and the other is 1,200 mile from the home office. There is a separate charge for the segment between customer A’s home office and each of the two offices in state Y. Under subsection (c)(2)(C)(i), 50% of the charge for the segment between customer A’s home office and the office 1,000 miles distant in state Y are included in the numerator of the sales factor of this state.

EXAMPLE 3:

Customer A subscribes to cellular phone service provided by taxpayer in state X and billed to the customer in that state. Customer A travels to this state and calls his office in state X using the cellular phone. Customer A is charged a roaming fee by the taxpayer, a portion of which is paid by the taxpayer to the cellular company in this state. Under subsection (c)(2)(B)(i), all charges related to the call, including roamer charges, are included in the numerator of the sales factor of this state.

EXAMPLE 4:

Company A, has business offices in this state and is a customer of a business electronic information service provided by taxpayer that focuses on providing solutions for businesses by means of software on its mainframe computers in state X. Company A obtains the information by using its own modem to call a local telephone number that connects Company A’s computer to a microprocessor (a node) owned by taxpayer in this state. The impulses from the computer are transmitted on dedicated telephone lines to the mainframe in state X. Company A then performs a number of tasks and receives the information on its computer in this state. Taxpayer imposes an access charge and a time charge. Because Company A receives the information at its office in this state, the access and time charges are included in the numerator of the sales factor of this state pursuant to subsection (c)(2)(E)(i).

EXAMPLE 5:

The taxpayer provides financial information to customers via the taxpayer’s terminals at the customer's place of business. The taxpayer charges customers a base fee for the financial information per location and a desk unit related fee. The taxpayer's data base and headquarters are in state X. The taxpayer manufactures the terminal equipment in state Y. Customer A has locations both within and without this state. Despite the fact that the taxpayer may have significant costs of performance (within the meaning of Section 25136, Rev. and Tax Code) in states X, or Y, under subdivision (c)(2)(E)(ii), the base fees attributable to Customer A’s locations in this state are included in the numerator of the sales factor of this state, because those fees are for providing electronic information at a connection point in this state. The desk unit fee is included in the numerator of the sales factor of this state under subsection (c)(2)(H).