Sales and Use Tax

Signed 6/20/03





: Initial Hearing Decision and Order

Petitioner, :

: Appeal No. 02-1355

v. :

: Acct. No. #####

Auditing Division of the Utah State :

Tax Commission, : Tax Type Sales & Use Tax


Respondent. : Tax Period 1999 - 2001





Irene Rees, Administrative Law Judge



For Petitioner: Petitioner

For Respondent: Susan Barnum, Assistant Attorney General, and Bert Ashcroft, Auditing Division.




The audit assessment at issue in this case arises from Petitioner’s failure to collect sales or use tax on cellular phones sold in conjunction with services contracts. At a prehearing scheduling conference, the parties agreed that Respondent would prepare a brief outlining the Auditing Divisions’ position and legal authorities in support of that position. Petitioner’s reply brief was received December 16, 2002, the date of the Initial Hearing.

Petitioner operates as an agent of various cellular phone services providers, including COMPANY1, COMPANY2, COMPANY3, and COMPANY4. Under its arrangements with the service providers, Petitioner purchases telephones and resells them or gives them away at no cost in conjunction with the sale of telephone service contracts. Petitioner is prohibited for selling the phones except in conjunction with a service contract, and it is required to warrant to the service provider that every phone is transferred to an approved dealer or to new service subscriber in conjunction with a service contract. Otherwise, the unauthorized transfer of a phone is subject to a $$$$$ penalty and termination of the contract between COMPANY and the service provider.


The Auditing Division audited Petitioner and issued an assessment for $$$$$ in unpaid tax plus interest against Petitioner for its purchases of phones that were given away to customers at no charge. The assessment was based on Petitioner’s cost of the phones.


In objecting to the assessment, Petitioner argues that the phones were sold along with a phone service contract that is, itself, taxable over the term of the contract, so the state is getting the tax due on Petitioner’s transactions. Furthermore, unlike other kinds of “gifts” or “inducements” that vendors typically give away to promote sales, the phones cannot be sold or used independently of a service contract, so they have no value except for their use in conjunction with the taxable service contracts. Petitioner’s argument misses the point, however, that the sale or use of cell phones is subject to sales or use tax. The fact that Petitioner “bundled” or combined the phones with a taxable service contract does not result in a tax exemption for the phones. Nor is the taxability of the phones determined by their use in conjunction with the service contract.


The Commission has long taken the position that the sale of cellular phone equipment to an agent or dealer is tax exempt if it is purchased for resale and the agent or dealer actually sells the phone and collects the tax from the end user. If the agent or dealer gives the phone away as a premium or incentive to purchase a service contract, the agent is deemed the end user of the phone equipment and is liable to pay over use tax based on his cost of the equipment.


Finally, Petitioner states that it could have avoided the assessment merely by structuring its sales differently. It could have sold the phones for a very nominal amount and satisfied its tax collection obligation by collecting very little tax. Therefore, Petitioner argues, holding it liable for this substantial assessment is unfair. Petitioner is correct that in Utah, the amount of sales or use tax due is generally measured by the actual sales price rather than by some other amount, such as the item’s reasonable value.[1] However, that is not the fact situation before us. We cannot decide this case on what Petitioner could have done. We are limited to reviewing Petitioner’s tax obligations under it actual sales contracts. In this case, Petitioner was the final purchaser of the phones and it was obligated to pay tax on its purchases.





The Commission upholds the audit assessment.




DATED this 30th day of June , 2003.



Administrative Law Judge


The undersigned Commissioners have reviewed this matter and concur in this decision.



Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner






Palmer DePaulis Marc B. Johnson

Commissioner Commissioner


[1] Various states take various approaches to calculating the tax due on an item that is sold at a price below cost, such as calculating the tax on a percentage of actual acquisition cost or on the item’s “fair retail” or “reasonable value.” Utah law has no such provisions.