New York Decision Holds Internet Tax Freedom Act

In the world of state taxes, there are few words more powerful than “federal preemption.” They’re the legal equivalent of a
bouncer politely (but firmly) removing a tax from the party. And in July 2025, New York’s Tax Appeals Tribunal used those words
to send a clear message: when a state tax walks too close to internet access, the Internet Tax Freedom Act (ITFA) can
slam the door.

The case involved a big-name telecom company, a familiar broadband backbone (ADSL and fiber), and a New York franchise tax on gross
receipts. But the bigger story is about how ITFA works in practiceespecially when services are sold “wholesale” to Internet service
providers (ISPs) instead of directly to consumers. If you’ve ever wondered whether the federal internet access tax ban is mostly
symbolic (like those “Do Not Feed the Pigeons” signs that pigeons ignore), New York’s decision says otherwise.

What Happened in New York (and Why It Made Headlines)

In July 2025, the New York State Tax Appeals Tribunal affirmed an administrative law judge’s conclusion that
New York’s gross receipts tax under Tax Law § 184 (and related surcharge provisions) could not be applied to certain receipts tied
to internet access services. The audit years at issue were 2008–2011, and the state’s notice of deficiency sought more than
$12 million in tax (plus interest and penalties).

The services in question weren’t exotic. They were the behind-the-scenes “plumbing” that makes the modern internet work:

• ADSL (asymmetric digital subscriber line), transmitting data over copper wires
• Fiber broadband access and aggregation services, transmitting data over fiber optic cables

ISPs bought these services so their own customers could connect to the internet. In other words: the telecom company wasn’t selling
“internet access” directly to your household; it was selling the critical transmission component that enabled the ISP’s internet access
offering.

New York’s tax department argued that this “not sold directly to the end user” detail should matter. The Tribunal largely responded:
Nice try, but no.

What the decision did not do

Let’s clear up a common misunderstanding before it starts multiplying like browser tabs:
ITFA does not prohibit states from collecting sales tax on items purchased online. States can tax retail sales
whether the purchase happens in a store, in an app, or while you’re in pajamas at 2 a.m. searching for “ergonomic chair that fixes my life.”
The New York decision is about taxes on internet access (and certain discriminatory e-commerce taxes), not a blanket
tax holiday for the internet.

Internet Tax Freedom Act 101: The Federal “Hands Off Internet Access” Rule

Congress enacted the Internet Tax Freedom Act in 1998, originally as a temporary moratorium. The goal was straightforward:
let the internet grow without every state and local jurisdiction treating internet access like a new “sin tax” category.
Over time, Congress extended the moratorium multiple times and ultimately made it permanent in 2016.

Today, ITFA broadly prohibits state and local governments from imposing:

• Taxes on internet access
• Multiple taxes on electronic commerce (taxing the same online transaction in more than one jurisdiction)
• Discriminatory taxes on electronic commerce (singling out online transactions for worse treatment than offline equivalents)

It also contains guardrails and carve-outs. ITFA doesn’t wipe out state taxing authority in general; it targets certain
types of state and local taxes that interfere with internet access and fair treatment of e-commerce.
In practice, the toughest debates tend to be about definitionsespecially what counts as “internet access,” what’s merely adjacent to it,
and whether a tax is truly “discriminatory.”

The definition that mattered most in New York: “Internet access”

Early versions of ITFA didn’t fully cover modern broadband realities. Congress later expanded the definition to make clear that certain
telecommunications services used to provide internet access are included in the protected category. That expansion is a big reason the
New York case came out the way it did: the Tribunal viewed the services as the transmission component necessary for internet access.

The Legal Core of the Verizon Dispute: Wholesale vs. “End User”

New York’s position leaned heavily on a practical-sounding idea: if the company sells services to ISPs (who then sell internet access to end users),
maybe the company isn’t selling “internet access” under ITFA. This is the tax version of arguing that the flour supplier isn’t part of the bakery
business because it doesn’t sell cupcakes directly.

The Tribunal rejected that “end user” framing for ITFA purposes, emphasizing the broad statutory language and congressional intent.
The key takeaway was that ITFA’s protection can apply even when the internet access “stack” is split across multiple businesses.
When the ultimate function is enabling users to connect to the internet, the transmission component can fall within ITFA’s “internet access” umbrella.

Why the “end user” argument failed

The Tribunal focused on how ITFA defines internet access as a service enabling users to connect to the internetand how the statute’s
language (as amended) captures telecommunications “purchased, used, or sold” by providers to deliver that access.
The broadband services at issue weren’t incidental add-ons; they were essential to the ISP’s ability to deliver internet access to customers.

Practically, this matters because modern internet delivery is rarely a single-company, single-invoice situation. Wholesale capacity, backhaul,
last-mile connections, aggregation, and interconnection arrangements are normal. If ITFA only protected the final retail bill to the consumer,
states could sidestep the moratorium by taxing the entire supply chain upstreamultimately raising consumer costs anyway. The Tribunal’s reasoning
reflects the idea that Congress was trying to prevent exactly that workaround.

The Other Big Fight: Can New York “Grandfather” the Tax Anyway?

Even when federal law preempts a tax, states sometimes argue that they’re protected by ITFA’s grandfather provisions.
Historically, ITFA allowed certain states that had already been taxing internet access before ITFA’s original enactment to continue for a period of time.
There was also a special structure for taxes that states were imposing on telecommunications components prior to later amendments that broadened ITFA’s scope.

In the New York case, the state argued that its tax should fall under these grandfather exceptions. The Tribunal said nolargely because the state
couldn’t meet the statute’s notice-and-collection requirements.

Grandfather provisions require more than “We always thought we could”

The Tribunal explained that, to qualify for grandfather protection, a state generally needs to show things like:

• a statute authorizing the tax, and
• clear public notice (such as a rule or public proclamation) that the tax is applied to internet access, and/or
• evidence the tax was generally collected on internet access charges

New York pointed to a 1996 report discussing telecommunications taxes. The Tribunal found that the report was not the kind of clear “public rule”
or “proclamation” that would put internet access providers on notice. It also noted that Tax Law § 184 itself does not explicitly mention internet access.
In short: the state didn’t check the boxes required to claim grandfather protection in this context.

A Crucial Nuance: Verizon Lost the State-Law Exclusion Argument, But Won on ITFA

One reason this decision is especially useful for businesses is that it separates two ideas that often get blended:

• State-law exclusions (what New York’s statute itself exempts or excludes)
• Federal preemption (what ITFA prevents the state from taxing at all)

In the case, the company argued it should qualify for a state statutory exclusion for certain interstate telecom services sold for “ultimate consumption.”
The Tribunal agreed with the administrative law judge that the exclusion did not apply because the ISPs were reselling the services as part of their own
offerings to end customers. But that didn’t end the matter. The Tribunal still concluded that ITFA preempted the tax on those receiptsso the notice of
deficiency was canceled.

Translation: you can lose on the “fine print of the state tax statute” and still win the bigger battle if federal law blocks the tax altogether.

Why This Decision Matters for Businesses (Even Outside New York)

Although this was a New York administrative decision, it’s relevant well beyond one state’s audit dispute because the underlying question is national:
how do you apply a federal internet tax moratorium to modern broadband delivery models?

1) It strengthens ITFA arguments for wholesale and upstream providers

Companies that sell transmission, transport, or broadband-enabling services to ISPs (rather than to end customers) often face a familiar audit question:
“Are you really providing internet access, or just selling telecom capacity?” The Tribunal’s reasoning supports the view that upstream services can still be
part of “internet access” when they are purchased and used to provide that access.

2) It puts pressure on states to be specific (and consistent)

Grandfather arguments depend on clear notice and consistent collection history. If a state’s position relies on vague references, old reports, or “we always
meant it this way,” it may not hold up. States that want to tax near the edges of internet access face a higher burden to show they’re not stepping on ITFA.

3) It highlights the importance of how services are described and documented

The facts that mattered were practical: what the services did, how ISPs used them, and whether end customers could access the internet without them.
That means contracts, service descriptions, network diagrams, invoices, and internal product documentation can become key evidence. In tax disputes,
paperwork isn’t glamorousbut it’s often the main character.

Practical Compliance Tips: How to Reduce ITFA Risk (and Increase ITFA Defensibility)

If your business touches internet connectivitywhether you’re an ISP, a telecom carrier, a wholesale bandwidth provider, or a company that bundles services
here are practical steps that can help:

Map your revenue streams the way an auditor would

• Which receipts are tied to providing internet access (including transmission components used to deliver that access)?
• Which receipts are tied to taxable telecom services (voice, SMS, certain regulated offerings, etc.)?
• Which receipts relate to equipment or non-access services (routers, managed IT, installation, maintenance)?

Be careful with bundles and “all-in” pricing

Bundling can be great for marketing (“one bill, no headaches!”), but it can be a tax headache if you can’t reasonably identify charges for internet access.
If invoices and books-and-records don’t separate components, states may argue more of the charge is taxable under their rules.
Thoughtful line-iteming and product taxonomy can prevent a small invoice design choice from becoming a six-figure dispute.

Document the “ultimate use” for wholesale services

When selling to ISPs or other providers, build documentation showing the services are purchased to provide internet access to end users.
That can include contract language, service-level descriptions, customer classifications, and internal product definitions that align with ITFA’s framework.

Watch the fast-moving edge cases

ITFA questions increasingly show up in disputes involving cloud services, streaming ecosystems, digital advertising taxes, and other digital-economy taxes.
Even when a tax isn’t labeled an “internet access tax,” companies may argue it discriminates against electronic commerce or targets internet-delivered services
differently from offline equivalents. If your business model is “digital-first,” keep an eye on how states define taxable digital activity.

The Bigger Picture: ITFA’s Quiet Role in the Digital Tax Wars

ITFA is sometimes treated like a 1998 time capsule: dial-up era, dot-com optimism, and the hopeful belief that nobody would ever put a printer on Wi-Fi.
But state and local governments continue to look for revenue in a digital economy, and the lines between “telecommunications,” “information services,”
and “internet-based services” are still contested.

The New York decision shows ITFA can still have sharp teeth, especially when a tax hits what looks and functions like internet access.
It also reminds lawmakers and tax agencies that “creative labeling” won’t necessarily avoid preemption if the substance of the tax burdens internet access.
In that sense, ITFA is less like a relic and more like a speed limit sign: ignored until a courtor tribunaldecides to enforce it.

Conclusion

New York’s 2025 Tribunal decision is a modern reminder of an old federal promise: states and localities generally can’t tax internet access.
The key lesson isn’t just that ITFA existsit’s that ITFA can apply to the real-world structure of broadband delivery, including wholesale services sold to ISPs,
when those services enable end users to connect to the internet.

For businesses, the decision underscores the value of clean documentation, careful service descriptions, and proactive tax planningespecially for companies
operating at the intersection of telecommunications and internet access. And for states, it’s a cautionary tale: if you want to tax in this space, the
federal guardrails are not imaginary.

Afterword: Real-World Experiences Around ITFA and Internet Access Taxes (About )

If you’ve ever lived through an audit involving internet access services, you know the most intense debates can start with the calmest sentence:
“So, tell us what this service actually does.” What follows is often a crash course in network architecture for people who didn’t ask for oneand
a crash course in statutory interpretation for people who definitely didn’t ask for that either.

One common experience for wholesale providers is getting stuck in the “middle child” problem. The provider doesn’t bill the end consumer, so the state
assumes the receipts must be taxable telecom. Meanwhile, the ISP’s retail bill looks like “internet access,” which feels protected. Businesses in the middle
end up explaining, repeatedly, that the internet is not delivered by vibes and good intentions. It’s delivered by transmissioncopper, fiber, routing, switching,
and a stack of services that only looks simple when everything works.

Another pattern: bundling. A business rolls out a popular “connectivity plus managed services” package. Marketing loves it. Customers love it. Finance loves
the predictable recurring revenue. Then an auditor asks for a breakdown of charges for internet access versus other services. Suddenly, everyone realizes the
invoice has one line item labeled “Premium Package – $X” and absolutely no helpful detail. The company scrambles to reconstruct pricing logic from product
decks, contracts, and spreadsheets that were never designed to be courtroom exhibits. The lesson often learned the hard way is that invoice design is not
merely a design choiceit’s evidence.

On the state side, agencies often describe their job as preventing loopholes: if “telecom” is taxable and “internet access” is not, taxpayers will try to relabel
everything. That concern isn’t frivolous. But businesses regularly experience the opposite problem too: states treating anything that smells like a wire as taxable,
even when it’s clearly used to deliver internet access. In practice, disputes become less about labels and more about functionwho is buying the service, what the
service enables, and whether it is a transmission component necessary for internet connectivity.

Then there’s the “grandfather clause nostalgia tour.” Some taxpayers have heard that certain internet access taxes were once grandfathered, so they assume the
state can keep taxing internet access forever. Others assume the oppositethat any mention of “grandfathered” means the state is automatically wrong. Real-world
experience sits in the middle: grandfather provisions were technical, fact-specific, and tied to notice and collection history. Companies that do best in these
disputes are usually the ones that treat the timeline as a factual issuewhat the state publicly said, what it actually collected, and when federal amendments
changed the definition of protected services.

Finally, there’s a cultural experience that shows up in almost every ITFA-related dispute: the moment when engineers and tax professionals realize they need each
other. The engineers explain how the service enables users to connect to the internet. The tax team translates that explanation into the legal categories that matter.
When that collaboration clicks, the story becomes simple enough to survive an audit, a hearing, andif necessaryan appeal. When it doesn’t, the business ends up
with two competing internal narratives and a state auditor who is not paid to guess which one is correct.