          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
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.)



                                               2
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.3
             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.



                                            3
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
                                        4
             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


                                          5
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


                                         6
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


                                         7
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.




                                         8
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


                                           9
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




                                         10
          IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Level 3 Communications, LLC,          :
                       Petitioner     :
                                      :
           v.                         :   No. 166 F.R. 2007
                                      :
Commonwealth of Pennsylvania,         :
                     Respondent       :



                                    ORDER


           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
