FDOR Argues Netflix Subject to Communications Services Tax (CST) in T-Mobile Case

The telecommunications industry has increasingly bundled services to attract customers, often including promotional add-ons like streaming subscriptions. However, this practice has led to disputes over taxability, most recently in Florida in the case T-Mobile South, LLC v. State of Florida, Department of Revenue. T-Mobile South LLC’s legal dispute with the Department over a $2.7 million Communications Services Tax (CST) assessment highlights the complexities of tax law and administrative procedure. This article delves into the key aspects of the case, including the issue, relevant laws, positions of the parties involved, and the potential impact of the outcome.

Issue at Hand
T-Mobile is contesting a tax assessment issued by the Department, which alleges that T-Mobile failed to remit Communications Services Tax (CST) on its “Netflix On Us” program. During the audit period from August 1, 2015, to July 31, 2018, T-Mobile bundled Netflix subscriptions as part of certain mobile service plans, offering the streaming service at no additional cost to customers. The Department determined that these Netflix subscriptions constituted taxable communications services, thereby increasing T-Mobile’s tax liability. Specifically, the Department asserted that the value of the Netflix subscriptions should be included in the tax base for T-Mobile’s mobile plans under Florida’s CST framework. T-Mobile, however, challenges this interpretation, arguing that Netflix does not fall within the scope of taxable services under Florida law and that the Department’s assessment improperly includes non-taxable amounts.

Applicable Statutes

The Florida CST, codified under Chapter 202 of the Florida Statutes, applies to the retail sale of communications services. These services include the transmission of voice, video, and data via various media. The tax base for CST is defined as the “sales price” of the communications services sold. Key statutory provisions relevant to the case include:

• Definition of Communications Services: Section 202.11(1), Florida Statutes, defines communications services broadly to include the transmission, conveyance, or routing of voice, data, audio, video, or other information using any medium or technology, regardless of the protocol. The terms also includes services involving computer processing for transmission purposes and may encompass technologies like voice-over-Internet-protocol. The term does not include: Information services; wiring or equipment;  installation/maintenance on customer premises; sales or rentals of tangible personal property; advertising sales, including directory advertising; bad check charges or late payment charges; billing and collection services; or internet access, email, bulletin boards, or similar online services.
• Definition of Sales Price for Purposes of Communication Services Tax: Section 202.11(13), Fla. Stat., defines “sales price” as the total amount a dealer charges for the right to use communications services in Florida. This includes any property or services that are part of the sale but not listed separately on the customer’s bill. The sales price cannot be lowered by the dealer’s expenses, such as sales taxes or other fees. It includes charges for things like setting up, moving, or changing services, billing, directory listings, voicemail, directory assistance, and fax services (unless the fax is for professional or advertising purposes). The sales price does not include certain things like taxes, government fees, coin-operated services, prepaid calling, air-to-ground communications, the dealer’s internal use of services, or separate charges for non-communications goods or services.

The Department’s Position
The Florida Department of Revenue’s assessment is based on the following arguments:

1. Netflix Subscriptions as Communications Services: The Department contends that Netflix subscriptions provided to customers as part of T-Mobile’s mobile plans qualify as taxable video services under the CST.
2. Taxable Resale to End Users: According to the Department, T-Mobile’s inclusion of Netflix in its plans constitutes a taxable resale of the subscription to end users, rather than an internal use exempt from taxation.
3. Calculation of Tax Base: The Department asserts that the value of Netflix services should be included in the sales price of the mobile plans, regardless of whether customers paid an additional charge for the streaming service.
4. Exclusion of Internal Use Inapplicable: The Department argues that the Netflix subscriptions do not meet the statutory criteria for internal use because they are directly consumed by T-Mobile’s customers.

The Department upheld its assessment after a series of administrative reviews, asserting that its interpretation aligns with the statutes governing CST.

T-Mobile’s Position
T-Mobile’s defense focuses on several key points:

1. Netflix is Not a Communications Service: T-Mobile asserts that Netflix streaming services do not constitute communications services under Florida law. Instead, they are standalone content services, distinct from the transmission mechanisms typically covered by CST.
2. No Additional Charges for Netflix: The company emphasizes that customers did not pay a separate fee for Netflix subscriptions. Thus, the inclusion of Netflix should not increase the taxable base of the mobile service plans.
3. Internal Use of Netflix: T-Mobile argues that the Netflix subscriptions were provided as a promotional tool to enhance its communications services and should be considered an internal use exempt from taxation under Section 202.11(13).
4. Improper Tax Base Calculation: The company contends that the Department’s assessment exceeds the statutory definition of the taxable sales price, violating established case law that limits taxation to amounts actually charged and collected from customers.

The Protest

The procedural journey began with the Department’s audit of T-Mobile’s transactions for the period August 1, 2015, through July 31, 2018. The audit identified the “Netflix On Us” program as a taxable component of T-Mobile’s mobile plans. Following the audit, the Department issued a Notice of Proposed Assessment (NOPA) on May 31, 2022, determining that T-Mobile owed $2,729,207.53 in taxes, interest, and penalties.

T-Mobile formally protested the assessment on July 26, 2022. In its protest, the company argued that:

1. Netflix subscriptions do not meet the statutory definition of communications services.
2. The Department’s interpretation of taxable services was overly broad and inconsistent with Florida law.
3. Including Netflix subscriptions in the tax base improperly inflated the assessment.
4. The Netflix program was a promotional tool and an integral part of T-Mobile’s business strategy, qualifying it for the “internal use” exclusion.

The protest included supporting documentation, such as billing records and contracts, demonstrating that customers did not pay an additional charge for Netflix.

The Notice of Decision

After reviewing T-Mobile’s protest, the Department issued a Notice of Decision on March 16, 2023, affirming the assessment in its entirety. The Department’s decision emphasized:

1. Netflix subscriptions provided as part of T-Mobile’s mobile plans are taxable video services under Section 202.11(1).
2. The value of Netflix must be included in the taxable sales price because it constitutes a benefit to end users, not an internal use by T-Mobile.
3. T-Mobile’s reliance on the “internal use” exclusion was misplaced, as the subscriptions were directly consumed by customers.
4. The Department’s methodology for calculating the assessment was consistent with Florida’s CST framework.

The decision rejected T-Mobile’s argument that ambiguities in the statute should be resolved in its favor, asserting that the statutory language was clear in this context.

The Notice of Reconsideration
Following the Notice of Decision, T-Mobile submitted a petition for reconsideration on April 13, 2023. In its petition, T-Mobile reiterated its key arguments and provided additional documentation to support its position. The company sought to demonstrate that the Department’s interpretation of taxable services was inconsistent with the legislative intent behind the CST.

On October 22, 2024, the Department issued a Notice of Reconsideration, once again upholding the assessment. The Notice of Reconsideration stated:

1. The Department’s assessment was based on a plain reading of the statutory provisions.
2. The Netflix subscriptions were properly classified as taxable services provided to customers.
3. T-Mobile’s petition failed to provide sufficient evidence to warrant a revision of the assessment.

The Notice of Reconsideration represented the Department’s final administrative position on the matter, paving the way for T-Mobile to seek judicial review.

The Complaint

On December 19, 2024, T-Mobile filed a formal complaint in the Circuit Court of the Second Judicial Circuit in Leon County, Florida. The complaint seeks judicial relief by requesting that the court:

1. Invalidate the Department’s assessment, arguing that it is contrary to Florida law.
2. Declare that Netflix subscriptions are not taxable communications services under the CST.
3. Recognize that the Department’s interpretation improperly expanded the scope of taxable services beyond what the statute permits.
4. Refund any amounts paid under protest and award attorney’s fees and litigation costs as authorized by Florida law.

The complaint represents the culmination of T-Mobile’s administrative efforts to resolve the dispute and signals the beginning of a new phase in the litigation process.

Key Disputes

1. Tax Base Exceeded Legal Limits

One of T-Mobile’s central claims is that the Department calculated CST on a tax base larger than the amount actually charged to customers. Under Florida law, CST is imposed on the sales price of communications services. This “sales price” is defined as the total amount charged by the provider for the sale of the service. T-Mobile argues that its “Netflix ON US” offering was included as a free benefit with no additional charge to customers.

According to T-Mobile, the Department improperly attributed a portion of the tax base to the value of Netflix services, even though T-Mobile did not bill customers for Netflix separately. This practice, T-Mobile alleges, violates Florida’s statutory requirements, which restrict taxation to the price actually paid by the customer.

2. Misclassification of Netflix Services as “Communications Services”

The Department classified Netflix streaming services as “communications services” subject to CST, which T-Mobile contends is a misinterpretation of Florida law.

Florida statutes define communications services broadly to include the transmission of voice, data, audio, and video signals. However, T-Mobile argues that Netflix does not meet this definition because it does not provide transmission services; instead, it operates as a content provider offering streaming video. By taxing Netflix subscriptions under CST, the Department allegedly stretched the statutory definition of communications services beyond its intended scope.

T-Mobile further emphasizes that it has consistently collected and remitted CST on all taxable components of its wireless service plans. The inclusion of Netflix services in the assessment, T-Mobile asserts, constitutes an overreach that taxes non-communications services contrary to state law.

3. Failure to Recognize Internal Use Exemption

T-Mobile also alleges that the Department failed to apply Florida’s “internal use” exemption for communications services. Under state law, a dealer’s internal use of communications services in connection with its business of providing such services is exempt from CST.

T-Mobile provided the Netflix subscription as a promotional benefit to attract customers to its wireless communications plans. Since this was part of its broader business strategy to offer communications services, T-Mobile claims the Netflix services should qualify as internal use and, therefore, should not be taxed. The Department’s refusal to recognize this exemption, T-Mobile argues, is inconsistent with Florida statutes and established interpretations of the law.

4. Ignoring Taxpayer Protections

Florida law strongly favors taxpayers in cases of statutory ambiguity, requiring that uncertainties in tax laws be resolved against the government. T-Mobile alleges that the Department disregarded this principle by failing to narrowly interpret the statutory definitions of “sales price” and “communications services.”

Furthermore, T-Mobile asserts that the Department’s approach violates the Florida Constitution, which prohibits taxes that are not explicitly authorized by law. By assessing tax on components that do not fall within the statutory definition of communications services, the Department allegedly acted beyond its constitutional authority.

Potential Outcomes and Implications

The case’s outcome will likely hinge on the court’s interpretation of the following:

• The applicability of the “internal use” exclusion to bundled services.
• Whether the Department’s inclusion of Netflix in the tax base aligns with statutory definitions.

If T-Mobile prevails, the ruling could set a precedent limiting the Department’s ability to tax bundled services that include promotional add-ons. Such an outcome would benefit businesses offering similar incentives. Conversely, a ruling favoring the Department could expand the taxable scope of CST, increasing tax burdens for companies using bundled offerings as a marketing strategy.

Conclusion

The T-Mobile case underscores the complexities of modern tax laws applied to innovative business practices and emerging technologies. As businesses increasingly bundle digital content with traditional services, disputes over taxability are likely to grow. The court’s decision will not only affect T-Mobile’s operations in Florida but also provide critical guidance for businesses navigating the intersection of tax law and digital commerce. Regardless of the outcome, this case exemplifies the need for clarity and precision in tax statutes to address emerging business models in a rapidly evolving economy.