00-0616

Sales Tax

Signed 8/21/01

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER, ) FINDINGS OF FACT,

) CONCLUSIONS OF LAW,

Petitioner, ) AND FINAL DECISION

)

v. ) Appeal No. 00-0616

) Account No.

AUDITING DIVISION OF )

THE UTAH STATE TAX ) Tax Type: Sales Tax

COMMISSION, )

) Judge: Davis

Respondent. )

_____________________________________

Presiding:

G. Blaine Davis, Administrative Law Judge

Marc B. Johnson, Commissioner

Appearances:

For Petitioner: PETITIONER REP, from the law firm of COMPANY A

PETTIONER REP 2

For Respondent: Mr. Gale Francis, Assistant Attorney General

Ms. Anna Anderson, from the Auditing Division

Mr. Scott Smith, from the Auditing Division

Mr. Mike Kenney, from the Auditing Division

Mr. Steve Forsling, from the Auditing Division

STATEMENT OF THE CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on July 9, 2001. Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:

FINDINGS OF FACT

1. The tax in question is sales tax.

2. The period in question is July 1, 1996 through April 30, 1999.

3. Petitioner is a retailer of cellular telephones and cellular telephone services. Petitioner is not a telephone corporation, nor are they a telephone service provider. Petitioner does not have any ability to handle telephone calls for its customers, either by way of microwave dishes, telephone lines, or by any other means.

4. Petitioner acts as an independent agent for several other telephone service providers.

5. Petitioner purchases telephones from several manufacturers and wholesalers. It bundles the sale of the telephones which it has purchased together with a telephone service to be provided by a telephone service customer, and sells both the telephone and the service to individual customers. Petitioner also sometimes sells telephones without telephone service, and sometimes sells telephone service without the sale of a telephone.

6. The majority of Petitioner's sales are of both the telephone and telephone service. Petitioner will sell the telephone at a price less than its cost in order to encourage its customers to sign up for telephone service with one of several telephone companies, and the telephone service company will then pay a commission to Petitioner for the new customer which is in an amount sufficient to make up the difference between Petitioner's cost for the telephone and the reduced price at which it sold the telephone.

7. When Petitioner sells a telephone at a price less than its price, it collects sales tax at the appropriate rate on the selling price for the telephone. In addition, when the telephone service provider is paid for the telephone service, it collects sales tax on the amount paid by the customer for the telephone service. Accordingly, sales tax is ultimately collected on the total sales price of the telephone and the telephone service, with the sales tax on the telephone being collected by Petitioner, and the sales tax on the telephone service being collected by the telephone service provider.

8. At the time Petitioner sells telephones and telephone services, it will sometimes provide additional programming for the telephone which it has sold, and impose a fee in an amount of $$$$$ as a programming fee. Petitioner has not collected any sales tax on this programming fee.

9. The programming fees received by Petitioner were not for retail sales of tangible personal property made within the state, nor were they amounts paid to telephone corporations for intrastate telephone service.

10. There were no coupons involved for any of the transactions of Petitioner.

11. Respondent performed an audit and made an assessment for additional sales and use taxes as follows:

A. Schedule 1 on the audit imposed additional sales tax for "programming fees." Respondent testified the tax was imposed because it understood the fees were charged to get the phone ready for use. Petitioner testified the programming fees were not to get the phone ready for use, but were for special programming to give the telephone greater capabilities. Petitioner further represented that some customers elected to have special programming for their phones, and other customers elected to not have special programming. In addition, some customers who already had telephone service plans and already owned their telephones would pay the programming fee to have features added to their telephone.

B. Schedule 2 on the audit was for unreported taxable purchases-expenses, and Petitioner does not challenge the tax imposed on Schedule 2, and acknowledges tax is due on the items shown on Schedule 2.

C. Schedule 3 from the audit assessment was for unreported taxable purchases (assets). Petitioner has challenged some of the items on Schedule 3 as being payments for custom software, which would not be taxable. The parties have stipulated that $$$$$ of the purchases are not taxable, but the balance of the purchases shown on Schedule 3 are subject to sales and use tax.

D. Schedule 4 from the audit assessment from Respondent is for what was called "unreported taxable sales (activation fees)". The largest portion of the audit, which is at issue in this proceeding, results from the taxes imposed on Schedule 4. On this Schedule, Respondent added back in as taxable sales, all sales which had been shown on the return of Petitioner as exempt sales. Respondent did so based upon the reasoning that these sales were like a manufacturer's coupon which is all taxed pursuant to Utah Admin. Code Rule R865-19S-68. There is no coupon that goes from the customers of Petitioner to Petitioner, nor from Petitioner to the manufacturers.

12. The majority of the income on which Respondent has imposed sales tax on Petitioner is for the commission paid by the telephone service provider to Petitioner. From that commission, Petitioner must recover the discount at which it sold the telephone below the purchase price of Petitioner.

13. Petitioner does not provide telephone or cellular telephone service.

14. Petitioner cannot activate telephone or cellular telephone service.

APPLICABLE LAW

Utah Code Ann. §59-12-103(1)(a) and (b) provides:

1. A tax is imposed on the purchaser as provided in this part for amounts paid or charged for the following transactions:

(a) retail sales of tangible personal property made within the state;

(b) amounts paid to common carriers or to telephone or telegraph corporations, whether the corporations are municipally or privately owned, for

. . .

(ii) intrastate telephone service;

Utah Administrative Code Rule R865-19S-90.A5 provides:

5. "Telephone service" means the transmission for hire of signs, signals, writings, images, sounds, messages, data, or other information or other information of any nature by wire, cable, radio waves, microwaves, light waves, satellite, fiber optics, or any other method now in existence or that may be devised, and includes: a) cellular telephone service and cellular telephone service contracts;

. . .

B. Taxable telephone service charges include:

1. subscriber access fees;

2. charges for optional telephone features, such as call waiting, caller i.d., and call forwarding; and

3. nonrecurring charges that are ordinarily charged to subscribers only once or only under exceptional circumstanced, including charges to:

a) establish, change, or disconnect telephone service or optional features; and

b) install or repair telephone equipment that re-tains its character as tangible personal property . . . .

Utah Administrative Code, Rule R865-19S-90.B provides:

Taxable telephone service charges include:

. . 3. Non-recurring charges that are ordinarily charged to subscribers only once or only under exceptional circumstances, including charges to: a) establish, change, or disconnect telephone service or optional features; and . . . .

Utah Administrative Code, Rule R865-19S-68.D provides:

If a retailer accepts a coupon for part or total payment for a taxable product and is reimbursed by a manufacturer or another party, the total sales value, including the coupon amount, is subject to sales tax.

At the times at issue in this proceeding, the only statutory definition of "telephone corporation" was contained in the Public Utilities statutes, and Utah Code Ann. §54-2-1(22) provided:

(22) (a) "Telephone corporation" means any corporation or persons, and their lessees, trustee, receivers, or trustees appointed by any court, who owns, controls, operates, manages, or resells a public telecommunications service as defined in Section 54-86-2.

(b) "Telephone corporation" does not mean a corporation, partnership, or firm providing:

(i) intrastate telephone service offered by a provider of cellular, personal communications systems (PCS), or other commercial mobile radio service as defined in 47 U.S.C. Sec. 332 that has been issued a covering license by the Federal Communications Commission;

(ii) Internet service; or

(iii) resold intrastate toll service

The 2001 Utah State Legislature passed Senate Bill 213, effective July 1, 2001, which amended Utah Code Ann. §59-12-102 and included the following:

(30)(a) "Telephone corporation" means a corporation that:

(i) owns, controls, operates, or manages a telephone service; and

(ii) engages in an activity described in Subsection (30)(a)(i) for the shared use with or resale to any person of the telephone service.

(b) A corporation described in Subsection (30)(a)(i) is a telephone corporation whether or not the Public Service Commission or Utah regulates:

(i) the corporation; or

(ii) the telephone service that the corporation owns, controls, operates, or manages

(31)(a) For purposes of Subsection (30) and Section 59-12-103, "telephone service" means a two-way transmission:

(i) by:

(A) wire;

(B) radio;

(D) other electromagnetic means; and

(ii) of one or more of the following:

(A) a sign;

(B) a signal;

(D) an image;

(E) sound;

(F) a message;

(G) data; or

(H) other information of any nature.

(b) "Telephone service" includes:

(i) cellular telephone service;

(ii) private communications service; or

(iii) automated digital telephone answering service.

(c ) "Telephone service" does not include a service or a transaction that a state or a political subdivision of a state is prohibited from taxing as of July 1, 2001, under the Internet Tax Freedom Act, Pub. L. 105-277.

DISCUSSION

Petitioner has stipulated that the sales and use taxes shown on Schedule 2 of the audit report are due and owing, and therefore the Commission will sustain the taxes shown on Schedule 2.

The parties have stipulated that the amount of purchases as shown on Schedule 3 of the audit report should be reduced by $$$$$, and therefore the Commission will order that the purchases on Schedule 3 be reduced by $$$$$.

With respect to the amounts assessed on the programming fees as shown on Schedule 1 of the audit report, those taxes were assessed pursuant to the provisions of Utah Admin. Code Rule R865-19S-90.5, which defines "telephone service" for purposes of the sales tax under Utah Code Ann. §59-12-103(1)(b), on the basis that the programming fees were "nonrecurring charges" . . . "to establish telephone service or optional features". However, the rule is clear that nonrecurring charges to establish telephone service are only subject to sales tax if the service being provided is a "taxable telephone service charge", because Petitioner is not providing a telephone service as that term is defined in the rule. Therefore, the Commission determines that the programming fees received by Petitioner were not subject to sales and use tax.

With respect to the imposition of sales and use tax on the commissions received by Petitioner from the telephone service providers, the position of Respondent is that it is a similar transaction to Petitioner receiving a coupon for part of the payment on the telephone, which is then reimbursed by the telephone service provider. Respondent therefore takes the position that pursuant to Utah Administrative Code Rule R865-19S-68.D, there should be sales and use tax imposed upon the value of such an implied "coupon".

In this case, it is clear that there is no coupon which is transferred from the customer to Petitioner, nor from Petitioner to the telephone service provider. Therefore, the Commission determines that Utah Admin. Code, Rule R865-19S-68.D, is not applicable to this situation, and does not result in tax being imposed upon Petitioner.

Accordingly, if the commissions received by Petitioner are not received as coupon reimbursement, the only basis for taxing such income would be under Utah Code Ann. §59-12-103(1)(a) and (b), as either a retail sale of tangible personal property or amounts paid to telephone corporations for intrastate telephone service.

The term "telephone corporation" was not defined in the tax law at the times at issue in this proceeding[1], so the Commission refers to the only statute defining a "telephone corporation", Utah Code Ann. §54-2-1(22), which defined a "telephone corporation" as follows:

Utah Code Ann. §54-2-1(22) provides:

(b) "Telephone corporation" does not mean a corporation, partnership, or firm providing:

(ii) Internet service; or

(iii) resold intrastate toll service.

Reviewing Utah Code Ann. §54-2-1(22), the Commission finds and concludes that Petitioner is not a telephone corporation, and therefore the amounts paid to Petitioner are not amounts paid to a telephone corporation for intrastate telephone service. The Commission also finds and concludes that the amounts paid to Petitioner by the telephone service provider are not retail sales of tangible personal property.

Respondent has argued that such a ruling would permit Petitioner to escape the payment of sales and use tax on the difference between the price at which Petitioner purchases telephones and the discounted price at which it sells telephones. However, Petitioner is collecting sales tax on the amount it charges for the telephones, which is a retail sale of tangible personal property, and the telephone service provider also charges the customer sales tax on the full charges agreed to in the contracts in which Petitioner arranges a commitment from the customers to pay the telephone service provider. Therefore, the full amount paid by the customer is subject to sales and use tax, regardless of whether the tax is being paid to the State of Utah by Petitioner or by the telephone service provider. Instead, the Commission concurs with the arguments made by Petitioner, that to impose sales and use tax on the commissions received by Petitioner from the telephone service provider would constitute double taxation by imposing tax on the full amount paid by the customer, and imposing tax again on the amounts received by Petitioner from the telephone service provider. Those amounts have previously been taxed at the time of payment by the customer.

Petitioner also presented an Advisory Opinion dated October 3, 1995 which arrived at a similar conclusion to this decision, and further presented an Advisory Opinion dated August 13, 1996 which further reached a similar conclusion. The Commission believes this decision is consistent and supports those two Advisory Opinions.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission hereby finds and orders as follows:

1. With respect to the sales tax imposed by Respondent on the programming fees on Schedule 1 on the audit report, the sales and use tax is not sustained, and that portion of the sales and use tax is hereby abated and removed from the audit.

2. With respect to the sales tax imposed by Respondent on Schedule 2 of the audit report, such sales tax was not contested by Petitioner and is hereby sustained in full.

3. With respect to the sales and use tax imposed on Schedule 3 of the audit report, Respondent is ordered to remove $$$$$ from the purchases taxed under such Schedule pursuant to the verbal stipulation of the parties at the hearing, and to impose sales and use tax at the applicable rates on the remaining portions of Schedule 3.

4. With respect to the sales and use tax imposed on Schedule 4 of the audit report related to the unreported taxable sales on activation fees, such tax is not sustained and is hereby ordered to be abated and removed from the audit report.

It is so ordered.

DATED this 21^st day of August, 2001.

__________________________________

G. Blaine Davis

Administrative Law Judge

BY ORDER OF THE UTAH STATE TAX COMMISSION:

The Commission has reviewed this case and the undersigned concur in this decision.

DATED this 21^st day of August, 2001.

Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner

Palmer DePaulis Marc B. Johnson

Commissioner Commissioner

[1] The 2001 Utah State Legislature passed Senate Bill 213, effective July 1, 2001, which amended Utah Code Ann. §59-12-102, which included a definition of the terms "telephone corporation" and "telephone service". However, those definitions were not applicable to the times at issue in this proceeding. The Commission has not made any determination of whether that new statutory provision would have made any difference to this proceeding.