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California Court of Appeal: ITFA Doesn't Make the CUT

By Saabir Kapoor and Timothy Gustafson

The California Court of Appeal, in affirming summary judgment in favor of the City of Los Angeles

August 29, 2013

By Saabir Kapoor and Timothy Gustafson

The California Court of Appeal, in affirming summary judgment in favor of the City of Los Angeles, concluded that the taxpayer, j2 Global Communications, Inc., did not produce evidence to demonstrate that its purchase of telecommunications services was exempt from the City’s communication users tax (CUT) under the Internet Tax Freedom Act (ITFA). The ITFA imposes a moratorium on the collection of taxes by state and local governments on “Internet access,” which is defined, in part, to include the purchase, use or sale of telecommunications by a provider of a service that enables users to connect to the Internet to the extent such telecommunications are purchased, used, or sold to provide such service or to otherwise enable users to access content, information, or other services offered over the Internet. 47 U.S.C.A. § 151, note, § 1105, subd. (5). At issue was whether the CUT imposed on j2’s purchase of telecommunications services used in conjunction with its core service offering, eFax, was exempt “Internet access” under the ITFA. In order to provide the eFax service, which enables users to receive faxes in their email inboxes and to send faxes via the Internet, j2 purchased telephone numbers known as “direct inward dials” (DIDs) from third-party telecommunications providers and then assigned a number to a customer. j2 filed a refund claim with the City for the CUT imposed on its purchase of the DIDs, asserting that the ITFA precludes the City from imposing such taxes because the DIDs were used to provide Internet access. The City demonstrated that, although the eFax service requires j2’s customers to connect to the Internet in order to access the eFax content and services, it requires them to do so through a third party; thus, j2 itself does not enable customers to connect to the Internet as required under the ITFA. The court agreed with the City and declined to interpret the ITFA’s definition of Internet access so broad as to render it “essentially meaningless.” j2 Global Communications, Inc. v. City of Los Angeles, Los Angeles County Super. Ct. No. BC423661 (Cal. App. 2nd July 26, 2013).

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