95-064
Response
October 3, 1995
Request
XXXXX
Utah
State Tax Commission
Taxpayer
Assistance
210
North 1950 West
Salt
Lake City, UT 84134
Dear
XXXXX:
We
are currently studying a sales and use tax issue regarding the sale of cellular
telephones.
Please
answer the questions on page 2, based on the facts provided below.
Facts
Retailer A sells cellular telephones at its store located
in your state. Such telephones are
purchased by retailer A from a vendor for $250 per telephone.
Company B provides cellular telecommunications service to
subscribers in your state.
Company B contracts with Retailer A for Retailer A to
promote, solicit and obtain requests for the service provided by company B.
To induce customers to purchase Company B’s service,
Retailer A offers customers the following options when purchasing a cellular
telephone from Retailer A:
Option #1 Purchase
only the telephone for $300, or
Option #2 Purchase
the telephone for $10 and agree to subscribe to Company B’s service
for a minimum period of one year.
If option #2 above is chosen, Company B will pay to
Retailer A the following:
(1) A commission of $275 for each subscriber procured by
Retailer A and accepted by Company B, and
(2) $35 for each subscriber procured by Retailer A, to be
used exclusively for advertising Retailer A’s cellular operations.
The commission paid by Company B to Retailer A does not
vary with the type or cost of the telephone sold by Retailer A.
The full commission will be refunded by Retailer A to
Company B (“charge back”) if the service activation is deactivated for any
reason within 90 days after the activation date.
Activated subscribers are subscribers of Company B, and
not of Retailer A.
Retailer A has no right or obligation to bill or collect from
subscribers or potential subscribers any money or charges for services provided
by Company B.
Questions
Please
explain how your state’s sales and use taxes apply to the above facts by
answering the following questions.
1.
May Retailer A purchase from its supplier the cellular telephone exempt from
sales/use tax as a purchase for resale?
2.
What amount of gross receipts must Retailer A use to compute its sales or use
tax due? (Note: Retailer A receives a total of $320; $10 from the customer, a
$275 commission from Company B, and a $35 advertising payment from Company B.)
Please
include copies of your state’s laws, rules, regulations, and/or court cases
related to this issue.
We
would appreciate it if you could respond by XXXXX. You may enter your answers
in the space below and fax your response to me at XXXXX, or call me at XXXXX
with your answers.
Thank
you for your cooperation,
Sincerely,
XXXXX
XXXXX
RE:
Advisory Opinion - applicability of sales tax to sales of cellular phones and
related service agreements.
Dear
XXXXX,
We
have received your request for information pertaining to various types of sales
arrangements that may be entered by retailers of cellular phones. We respond as follows:
A
sale of cellular phone equipment to a retail vendor is exempt from sales tax if
the property was purchased for resale.
However, a sale of cellular equipment to the vendor for the vendor’s own
use does not qualify for this exemption.
In that case, the vendor, as the end consumer, must pay tax on his or
her cost of the equipment. §59-12-103(27) Utah Code Ann.
When
the vendor sells the phone equipment to a customer under option #1, the vendor
must collect sales tax on the amount paid. §59-12-103(1) Utah Code Ann. If the vendor sells cellular phone equipment
to a customer at a price which is below the vendor’s cost, the vendor must
collect sales tax on the amount actually paid by the customer.
If
the vendor sells the phone equipment along with the cellular service under
option #2 and the contract price includes both the cost of the service and the
phone equipment, the vendor must collect sales tax on the entire contract
price. For example, if the customer
pays $10 for the phone and $290 for the service contract, the vendor must
calculate sales tax on the on the entire $300 charge. If, on the other hand, the price of the contract covers only the
service, and the cellular phone equipment is given away as a premium incentive
to purchase the service, it is the vendor, as the end consumer of the phone,
who must pay sales tax on his or her cost of the equipment. Utah Admin. Rule R865-19S-68(A).
The
statute and the administrative rule cited are enclosed for your information. Please let us know if we can be of further
assistance.
For
the Commission,
Alice
Shearer
Commissioner