95-032
Response
July 12, 1995
Request
Re: Sales and Use Tax Ruling Request, Cellular
Telephones
Dear
XXXXX:
We
are requesting a ruling from Utah confirming our client's (the taxpayer) and
his authorized agent's proposed tax treatment of the purchase and sale of
cellular telephones (cellular equipment) to the end user (customer). We would like you to address the tax
treatment of the sale of phones when marketed both by a service provider or by
an agent for a service provider.
Each
of the following scenarios presents a unique kind of arrangement in that the
price paid for the cellular equipment by the customer may be only a fraction of
the seller's cost. When a customer
commits to purchase cellular service, the equipment can be sold for a nominal
cost (and in some instances no cost).
Facts
The
taxpayer acquires cellular equipment from a wholesaler/manufacturer. He markets both the cellular equipment and
the cellular service (service). The
service is marketed in two ways. The
taxpayer can be a direct seller of the service that is provided from the
taxpayer's own network (marketed as a service provider). Secondly, he may also market service as an
agent of another service provider; whereby, he earns a commission for
activating service on another service provider's system.
Additionally,
in markets in which the taxpayer is the service provider, the taxpayer may have
authorized agents marketing its service.
The agent is paid a commission when a customer agrees to purchase
service. In this instance the
authorized agent sells the cellular equipment, and the taxpayer has no
knowledge of the type or cost of the cellular equipment.
Cellular
Equipment Marketed By the Service Provider
When
the taxpayer, as a service provider, markets the cellular equipment with a
customer
activation (the customer also subscribes to cellular service) he may be willing
to
sell the cellular equipment below cost (or in some cases at no charge at all),
if the
customer
commits to a long-term service contract (usually one to three years). Should
the
customer enter a long-term service agreement and later cancel the agreement,
the
customer
may be subject to a penalty.
For
example, a service provider may offer to sell cellular equipment for $10 if the
customer will agree to a one-year contract to purchase the service. The contract will provide that if the
customer cancels his service prior to one year, he will be charged a $200
penalty. This penalty will compensate
the service provider for the loss he incurred on the sale of the cellular
equipment.
Cellular
Equipment Marketed by an Agent
The
agency relationship described below would apply to situations where the
taxpayer is an agent of an unrelated service provider, and in situations where
the taxpayer has an authorized agent marketing its service. The agent is free to purchase cellular
equipment from any vendor. He also
makes the decision of how much to charge for the cellular equipment. In a totally separate transaction the
service provider will pay the agent a commission for adding a subscriber of
service to their system.
For
example, an agent may offer to sell a cellular phone for $$$$$ if the customer
will agree to purchase service.
However, the customer will pay $$$$$ without the cellular service. If the customer signs up for service, the
service provider will pay a $$$$$ commission to the agent. Should the customer discontinue service
(i.e., he moves out of the service area), there is generally a “charge back” of
the commission against the agent. The
customer usually does not get an additional charge for the cellular equipment.
Specific
Ruling Requests
We
have described specific transactions below and our anticipated tax treatment of
those transactions. Please confirm our
proposed treatment or provide us with your position on these transactions. Additionally, we would appreciate the legal
authority relied upon should your findings differ from our anticipated tax
treatment.
1. How is the purchase and sale of cellular
equipment by agents treated when cellular equipment is sold below cost?
We
believe that tax should be collected on the actual sales price realized from
the sale of the equipment to the customer.
Furthermore, the equipment can be purchased tax-free as a sale for
resale.
2. How is purchase and sale of cellular
equipment by agents treated when cellular equipment
is
furnished to a customer at no charge, if the customer subscribes to cellular
service through the agent?
We
believe that in instances where cellular equipment is furnished to a customer
at no charge, the agent would be considered the end user of the cellular
equipment and tax would be due on the agent's cost of the phone.
3. When a customer subscribes to service, how
is the purchase and sale of cellular equipment by service providers treated
when cellular equipment is sold to a customer below the service provider's
cost?
We
believe that tax should be collected on the actual sales price realized from
the sale of the equipment. Furthermore,
the equipment can be purchased tax-free as a sale for resale.
4. When a customer subscribes to service, how
is the purchase and sale of cellular equipment by service providers treated
when cellular equipment is furnished to a customer at no charge, if the
customer subscribes to the providers' service?
In
this instance, the revenues derived from the service contract would also
compensate the service provider for the loss he incurred on the sale of the
phone. Since the service is subject to
tax, the additional tax collected in this arrangement, in most instances, would
be greater than the total tax collected if the cellular equipment and service
were sold separately. Thus, we believe
that the tax related to the sale of the cellular equipment would be included in
the tax derived from the sale of service.
Furthermore, the cellular equipment can be purchased tax-free as a sale
for resale.
We
appreciate your assistance in this matter.
Should you have any questions or desire to discuss this matter, please either
write me at the above address or phone me at XXXXX, or XXXXX at XXXXX.
Very
truly yours,
XXXXX
RE: Advisory Opinion - Application of Utah Sales
Tax to the Sale of Cellular Phone Service Contracts and Equipment.
Dear
XXXXX,
You
requested an advisory opinion as to the application of sales tax to the sales
of cellular phone service contracts and phone equipment. Your letter suggested four possible
scenarios, and our response corresponds to them in the order presented in your
letter.
1. A sale of cellular phone equipment to an
agent (vendor) for resale is exempt from sales tax. However, a sale of cellular equipment to the agent for the
agent's own use does not qualify for this exemption. In that case, the agent, as the end consumer, must pay tax on his
or her cost of the equipment. §59-12-104 (27) Utah Code Ann.
2. When the agent sells the phone equipment to
a customer, the agent must collect sales tax on the amount paid. §59-12-103 (1)
Utah Code Ann. However, if the agent
gives the phone away as a premium or incentive to purchase a service contract,
the agent is the end consumer of the phone and must pay sales tax on his or her
cost of the equipment. Utah Admin. Rule
R865-19S-68 (A).
3. When the agent sells cellular phone equipment
to a customer at a price which is below the agent's cost, the agent must
collect sales tax on the amount paid by the customer. However, if the agent receives a rebate or other compensation as
reimbursement, the amount of the rebate or reimbursement must be included in
the taxable amount paid by the customer. We interpret that situation to be
closely akin to an instance where a retailer accepts a manufacturer's coupon as
part payment and is reimbursed by the manufacturer. Under Utah Administrative Rule R865-19S-68 (D), the total sales
value, including the discounted amount, is subject to tax.
4. When an agent sells the phone equipment
along with the cellular service and the contract price includes the cost of the
service and the phone equipment, the agent must collect sales tax on the entire
contract price. However, if the price
of the contract covers only the service, and the value of the cellular phone
equipment is not included in the contract price, the agent, as the end consumer
of the phone equipment, must pay sales tax on his or her cost of the equipment.
We
seem to be in general agreement with the rulings that you requested. However, if you do not agree with this
determination, you may appeal to the Tax Commission for a formal hearing. The results of that hearing would constitute
a declaratory judgment and be appealable to the Utah State Supreme Court. A Notice of Appeal Rights and a copy of the
Utah Taxpayer Bill of Rights are attached.
This
opinion is based only on the facts presented above. If additional facts arise which present you with new questions,
please feel free to ask for another advisory opinion.
For
the Commission,
Alice
Shearer
Commissioner