            IN THE COMMONWEALTH COURT OF PENNSYLVANIA


Level 3 Communications, LLC,                 :
                       Petitioner            :
                                             :
              v.                             :   No. 166 F.R. 2007
                                             :   Argued: September 17, 2015
Commonwealth of Pennsylvania,                :
                     Respondent              :


BEFORE: HONORABLE DAN PELLEGRINI, President Judge
        HONORABLE RENÉE COHN JUBELIRER, Judge
        HONORABLE P. KEVIN BROBSON, Judge



OPINION BY JUDGE BROBSON                                  FILED: October 15, 2015

              Level 3 Communications, LLC (Level 3), petitions this Court for
review of an order of the Board of Finance and Revenue (the Board). For the
reasons set forth below, we reverse.
              Level 3 is an international Internet1 Service Provider (ISP) operating a
Tier 1 network.2      Level 3 sells various services, including (3)ConnectModem
(3CM). 3CM is a service that provides the infrastructure, including the local dial
network, telephone numbers, and modems, for ISPs desiring to outsource the


       1
        The internet constitutes the facilities which comprise the interconnected world-wide
web network of networks that employ the Transmission Control Protocol/Internet Protocol
(TCP/IP) and other protocols to communicate information by wire or radio between computers.
America Online, Inc. v. Commonwealth, 932 A.2d 332, 333 n.3 (Pa. Cmwlth. 2007)
(AOL/Sprint), aff’d, 963 A.2d 903 (Pa. 2008).
       2
         A Tier 1 network is a network that can reach every other network on the internet
without paying a fee to the other networks.
remote access to their network or the internet. America Online, Inc. (AOL) and
other retail ISPs3 purchased Level 3’s 3CM service to provide internet access to
their dial-up end-users. In other words, AOL sold internet access to its end-users
and outsourced to Level 3 the physical infrastructure necessary for AOL’s
end-users to access the internet.
                 To initiate an internet session utilizing the 3CM service, the end-user
opens the ISP software on his or her home computer. The software initiates an
analog call over the local telephone lines. The call is then routed to a Level 3
facility, which contains a network access point, modems, modem banks, and
network access servers, along with other equipment. Level 3 then converts the
analog call to a digital signal. Traffic on the digital side of the Level 3 modem is
routed by Level 3 directly to or from one or more datacenters.4                         In order to
accomplish this, Level 3 looks-up the numerical IP5 address6 associated with the
end-user’s requested web page,7 routes the end-user to the requested web page
using the IP address, and ultimately creates the end-user’s internet session.
                 In the case of AOL end-users, the first-requested web page was
always www.aol.com, because the AOL software resident on the end-user’s device
required that all end-users be routed there first. AOL took advantage of several

       3
           A retail ISP sells internet access to an end-user, such as a residential customer.
       4
            A datacenter is a facility that hosts web content and that contains hardware and
software.
       5
         IP, short for Internet Protocol, is the principle communications protocol used to transmit
content over the internet.
       6
          An IP address is a unique numerical label assigned to each device in a network that uses
IP to transmit content.
       7
           This look-up process is known as domain name service, or DNS.



                                                   2
options offered by the 3CM service in order to create a Virtual Private Network
(VPN),8 which it utilized to direct its end-users to www.aol.com.                   The VPN
provided “tunnels” from Level 3’s modem bank through Level 3’s IP network
infrastructure to an AOL datacenter. This “tunneling” prevents an AOL end user
from accessing internet content without first visiting www.aol.com.
                The Pennsylvania Department of Revenue (Department) audited
Level 3’s sales for the period of January 1, 2000 through April 30, 2003. During
the audit period, Level 3 sold its 3CM service to AOL and other retail ISPs.
Level 3 did not collect or remit sales and use tax on its sale of 3CM to retail ISPs
during the audit period. Following the audit, the Department issued a sales and use
tax assessment of $2,939,985.56. Level 3 appealed the assessment to the Board,
which reduced the assessment to $2,331,481.07. The Department and Level 3
have reached an agreement disposing of $1,330,050.07 of the assessed tax, leaving
only $1,001,431 at issue in this proceeding. The remaining tax assessment pertains
to Level 3’s sales of 3CM to AOL. Thus, Level 3’s sales of 3CM to AOL are the
only sales at issue in this appeal.
                On appeal to this Court,9 Level 3 argues that the 3CM service sold to
AOL constitutes internet access and is, therefore, exempt from sales and use tax



       8
           A VPN is a private network configured within a public network.
       9
          This Court’s review of an appeal from the Board is de novo. AOL/Sprint, 932 A.2d
at 335 n.7. A stipulation of facts is binding and conclusive on this Court, but we draw our own
legal conclusions from those facts. Concentric Network Corp. v. Commonwealth, 897 A.2d 6,
8 n.2 (Pa. Cmwlth. 2006) (en banc), aff’d, 922 A.2d 883 (Pa. 2007) (per curiam). Although we
hear appeals from the Board in our appellate jurisdiction, this Court essentially functions as a
trial court. Id.



                                                3
under the Pennsylvania Tax Code (Tax Code)10 and the federal Internet Tax
Freedom Act (ITFA).11           The Commonwealth, relying heavily on this Court’s
decision in America Online, Inc. v. Commonwealth, 932 A.2d 332 (Pa. Cmwlth.
2007) (AOL/Sprint), aff’d, 963 A.2d 903 (Pa. 2008), argues that the 3CM service
sold to AOL is a basic telecommunications service and is, therefore, subject to
tax.12
               Section 202 of the Tax Code, 72 P.S. § 7202, imposes a sales and use
tax on purchases of tangible personal property sold within the Commonwealth.
“Tangible personal property” includes “interstate telecommunication service
originating or terminating in the Commonwealth and charged to a service address
in this Commonwealth.”           Section 201 of the Tax Code, 72 P.S. § 7201(m).
“Telecommunications service,” as defined in Section 201(rr) of the Tax Code,
72 P.S. § 7201(rr), includes:

         10
         Tax Reform Code of 1971, Act of March 4, 1971, P.L. 6, as amended, 72 P.S.
§§ 7101-10004.
         11
           Pub. L. No. 105-277, Div. C, Title XI, §§ 1100-1104, 112 Stat. 2681-719 (1998)
(current version at 47 U.S.C. § 151).
         12
           To the extent this Court is asked to interpret the relevant portions of the Tax Code, we
note that “[t]he object of all interpretation and construction of statutes is to ascertain and
effectuate the intention of the General Assembly.” 1 Pa. C.S. § 1921(a). “The clearest
indication of legislative intent is generally the plain language of a statute.” Walker v. Eleby,
842 A.2d 389, 400 (Pa. 2004). “When words of a statute are clear and free from all ambiguity,
the letter of it is not to be disregarded under the pretext of pursuing its spirit.” 1 Pa. C.S.
§ 1921(b). A court must read the sections of a statute together, and construe them to give effect
to all of the statute’s provisions. 1 Pa. C.S. § 1921(a); Roethlein v. Portnoff Law Assocs., Ltd.,
81 A.3d 816, 822 (Pa. 2013). “In addition to these basic principles of statutory construction, we
note that it is equally well-settled that taxing statutes are to be strictly construed against the
Commonwealth, and any reasonable doubt as to their construction or application must be
resolved in favor of the taxpayer.” PPL Holtwood, LLC v. Pike Cnty. Bd. of Assessment,
846 A.2d 201, 206 (Pa. Cmwlth.), appeal denied, 860 A.2d 491 (Pa. 2004).



                                                4
              Any one-way transmission or any two-way, interactive
              transmission of sounds, signals, or other intelligence
              converted to like form, which effects or is intended to
              effect meaningful communications by electronic or
              electromagnetic means via wire, cable, satellite, light
              waves, microwaves, radio waves, or other transmission
              media. The terms include all types of telecommunication
              transmissions, such as local, toll, wide-area or any other
              type of telephone service . . . . The term does not include
              any of the following:
                     ....
                     (3) Charges for access to the Internet. Access to
                     the Internet does not include any of the following:
                            ....
                            (B) Telecommunication services purchased
                            by an Internet service provider to deliver
                            access to the Internet to its customers.
              “Telecommunications service” is also defined in the Department’s
Policy Statement 60.20 to include “all types of telecommunications transmissions,”
but explicitly excludes “enhanced telecommunications services.” 61 Pa. Code
§ 60.20(a).     “Enhanced telecommunications services” is defined in the Policy
Statement as:
              (i) Services, offered over a telecommunications network,
              which employ computer processing applications that
              include one or more of the following:
                     (A) Acts on the format, content, code, protocol or
                     similar aspects of the purchaser’s transmitted
                     information.
                     (B) Provides the purchaser additional, different or
                     restructured information.
                     (C) Involves the purchaser’s interaction with
                     stored information.
              (ii) Examples of enhanced telecommunications services
              include electronic publishing, Internet access, voice mail
              and electronic mail services. Services utilizing any of the
              computer processing applications in subparagraph (i)
                                          5
            solely for the management, control or operation of a
            telecommunications system or the management of a
            telecommunications service is not an enhanced
            telecommunication service.
61 Pa. Code § 60.20(a).
            In AOL/Sprint, AOL sought a refund of sales and use tax it had paid
on purchases of port modem management (PMM) services from Sprint
Corporation (Sprint). The PMM service was described as follows:
                  A customer’s dial-up access begins with the
            computer modem attached to the customer’s
            computer. . . . The modem attached to the customer’s
            computer dials a telephone access number associated
            with a business local exchange service line that Sprint
            obtains from a local exchange carrier. . . .
                  The exchange service line connects to a bank of
            AOL service modems physically located at premises
            controlled and managed by Sprint. The modems are
            tangible personal property leased by AOL from third
            party leasing companies. The bank of modems at the
            Sprint premises convert the analog signal coming in from
            the exchange service line into a digital signal, which is
            then transmitted over Sprint’s data network to the
            computers located in the AOL data center.
AOL/Sprint, 932 A.2d at 334.
            AOL      argued    that   the   PMM       services   were    enhanced
telecommunications services because they changed the format of information from
analog to digital, interacted with stored information, and interacted with computer
processing applications. This Court rejected AOL’s arguments, holding that the
PMM service
            meet[s] the definition of taxable telecommunications
            services in as much as Sprint’s management and
            operation of the AOL ports/modems is just one of the
            purposes for which AOL uses Sprint services. AOL
            purchased the Sprint services to assemble and manage a
            collection of hardware, software and telecommunications
                                        6
                services that transport data to and from its data center to
                AOL’s members.
Id. at 337.
                Here, the Commonwealth argues that the 3CM service serves the
same purpose and function as the PMM service in AOL/Sprint, and that the 3CM
service is, therefore, a taxable telecommunication service as well.                     The
Commonwealth acknowledges the technical differences between Sprint’s network
in AOL/Sprint and Level 3’s network here, but argues that these differences are
irrelevant. We disagree. In AOL/Sprint, the analog call traveled along Sprint’s
lines to AOL service modems physically located at premises controlled and
managed by Sprint. The AOL modem performed the analog to digital conversion,
and the digital signal was transmitted over Sprint’s data network to the hardware
located in the AOL datacenter. Sprint provided dedicated private line channels
created using Time Division Multiplexing (TDM)13 technology. Here, by contrast,
the analog call travels over Level 3’s lines to a Level 3-owned and operated
facility. This facility contains modems, a network access point and network access
servers—“hardware that resides in the Level 3 Gateway into which ISP end-users


       13
            TDM is a
                telecommunication transmission protocol in which a large
                bandwidth digital transmission facility is shared among a number
                of individual telecommunications channels through the assignment
                of fixed or synchronous “time slots” at designated intervals. . . .
                Because individual TDM time slots are assigned to the exclusive
                use of a specific telecommunications channel, if there is no traffic
                to be transmitted at the time that the time slot becomes available to
                the designated channel, the timeslot goes unused and its capacity
                cannot be transferred to another channel or use.
(Resp’t Br. Appx. B.)



                                                 7
dial to get access to the [i]nternet. This equipment converts dial-up calls to IP.”
((3)ConnectModem Product Guide, p.5.) Level 3 then transmits the digital signal
over its IP network to the requested IP address. Level 3 uses Packet Switching14
and VPNs to deliver end-users to the AOL datacenter.
                 As this brief recitation demonstrates, there are fundamental
technological differences between Sprint’s 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 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 Commonwealth argues that the 3CM service was not

       14
            Packet Switching is a
                 telecommunications protocol in which a small quantity of
                 information is encapsulated in a virtual envelope or “packet”
                 where it is routed intact to the “address” specified on the “header”
                 of the packet. Packet capacity is assigned only as needed to
                 support a particular transmission demand; thus, if a user is not
                 sending traffic, the capacity can be made available to another user
                 or for another purpose.
(Resp’t Br. Appx. B.) Packet switching is replacing TDM as a newer, more efficient protocol.
(Id.)



                                                  8
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).15




       15
           Because our determination that the 3CM service is internet access under the Tax Code
is dispositive, we need not address the remaining arguments.



                                              9
              For the reasons discussed above, the order of the Board is hereby
reversed.16




                                   P. KEVIN BROBSON, Judge




       16
           Also before this Court is the Commonwealth’s motion for reconsideration of this
Court’s April 30, 2015 order denying the Commonwealth’s petition to strike Level 3’s reply
brief as untimely. This Court concluded that the Commonwealth’s brief was not properly served
and that, consequently, Level 3’s reply brief was not untimely. We perceive no error with this
decision, and the Commonwealth’s motion for reconsideration is hereby denied.



                                             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 15th day of October, 2015, the order of the Board of
Finance and Revenue is hereby REVERSED. The Commonwealth’s motion for
reconsideration is DENIED.
             Unless   exceptions    are   filed   within   30   days   pursuant   to
Pa. R.A.P. 1571(i), this order shall become final.




                                P. KEVIN BROBSON, Judge
