97-013

Response March 5, 1997

Request

February 17,1 997

Re: Request for Advisory Opinion on the Applicability of Utah Sales Tax on Pager

Replacement Insurance Program Monthly Charges and Deductibles

Ms. Rees:

COMPANY A respectfully requests that the Utah Tax Commission issue an advisory opinion on whether pager replacement insurance program receipts are subject to Utah sales tax.

Background

COMPANY A sells and leases pagers and paging services to customers nationwide.COMPANY A charges a mandatory fixed monthly fee (approximately $$$$$ per month) for its paging services. A portion of the monthly fee (approximately $$$$$ per month) is charged to COMPANY A customers for their right to receive paging messages. The remaining portion of the monthly fee (approximately $$$$$ per month) represents a service XXXXX("MMS") charge. Payment of this MMS fee, which is a component part of every customer's standard monthly service bill, entitles the customer to free maintenance and repair should the customer's pager malfunction or break. Since Utah imposes sales tax on maintenance/repair service fees, COMPANY A has been collecting and remitting sales tax to Utah on the entire mandatory fixed monthly fee. As such, the MMS fee (which, again, is a component of the standard fixed monthly fee) is already being subjected to Utah sales tax.

Pager Replacement Insurance Program Coverage

COMPANY A also offers its customers an optional XXXXX ("PRIP") insuring a customer's pager against loss, theft or damage beyond repair. The PRlP premium is approximately $2 per month, and is charged in addition to the customer's standard fixed monthly fee (discussed above). Since COMPANY A PRIP coverage will replace the customer's pagers if it is lost or stolen, such insurance plan provides the customer with protections far exceeding those defined under a standard maintenance or extended warranty plan.

When a customer purchases a maintenance contract or extended warranty plan, such proceeds essentially represent the purchase of tangible personal property since it is anticipated that the customer's tangible property will at some point require ordinary service and/or repair. COMPANY A’S PRIP coverage, however, is only utilized when the customer's pager is lost, stolen, or damaged beyond repair. The likelihood that a customer will utilize such pager insurance is remote (similar to car insurance or life insurance), which is why COMPANY A can offer such a low monthly premium for PRIP coverage. As such,COMPANY A contends that its PRIP coverage is substantially different from a maintenance or extended warranty plan, and such pager insurance receipts do not represent the purchase of tangible personal property.

Based on COMPANY A conversations with the Utah Tax Commission as well as the language in Utah's Code and Regulations, insurance receipts are not and were never subject to Utah sales or use tax [see Utah Code Section 59-12-102(23)(b)]. Furthermore, neither the Utah Code nor Utah Regulations require that such exemption apply only to registered insurance companies. The mere fact that COMPANY A self-insures its PRIP coverage (rather than contracting such coverage to a third party insurance company) should have no effect on whether the insurance premium payments are subject to Utah sales tax.COMPANY A contends that had Utah intended to provide more favorable sales tax treatment to registered insurance companies (as opposed to non-insurance companies such as COMPANY A), the state legislature would have expressly stated such intention in Utah law.COMPANY A could not locate any such express language within Utah sales tax law. As such COMPANY A contends that its PRIP coverage premiums should qualify as exempt insurance receipts.

COMPANY A PRIP plan also requires the customer to pay a deductible for each PRIP claim. The deductible payment represents an administrative fee compensating COMPANY A for costs of processing the insurance claims. Since administrative fees are not considered taxable tangible personal property,COMPANY A contends that these deductible receipts should also not be subjected to Utah sales tax.

Conclusion

Based upon the above facts and a literal reading of Utah sales tax law, COMPANY A respectfully requests that the Utah Tax Commission determine that COMPANY A

PRIP monthly insurance charges and deductible receipts are not subject to Utah sales tax. Should the Commission determine otherwise,COMPANY A respectfully requests that the Commission provide COMPANY A with all relevant tax authority(ies) used in arriving at such determination.

Thank you very much for your assistance with this ruling request. Should you have any questions or require additional information regarding COMPANY A pager replacement insurance program coverage, please contact me directly at #####, or my assistant, NAME, at #####. We look forward to hearing from you.

Sincerely,

NAME

March 5, 1997

NAME

ADDRESS

CITY STATE ZIP

Advisory opinion - Application of sales tax on charges for insurance program

Dear PETITIONER,

We have received your request for sales tax guidance pertaining to charges for product replacement insurance. We find as follows:

Utah law imposes sales tax on sales or leases of tangible personal property and certain services. The definition of tangible personal property set out in Utah Code Section 59-12-102 (23)(b)(iii) expressly excludes insurance certificates and policies. When your customer purchases the pager outright, any separate purchase of insurance coverage is nontaxable if the charges are separately stated on the customer’s bill.

With regard to equipment leases, the determination is less clear. Generally, the total charge for the rental or lease of tangible personal property made in lieu of an outright sale is subject to Utah sales or use tax. See Utah Administrative Rule R865-19S-32 (enclosed). Whether the PRIP charges associated with a leased pager are taxable depends upon the true nature of the transaction. Charges added to the lease are subject to sales tax if COMPANY has a blanket policy that covers all of its lease inventory and each lessee is charged a prorated amount. However, if the lessee is actually purchasing an individual insurance policy, the insurance charge is not be subject to sales tax.

If COMPANY A replaces a pager at no cost to the customer, we consider COMPANY A to be the consumer of that pager. As the final consumer of a taxable item, COMPANY A is liable for the sales or use tax on that item.

Please let us know if you have other questions.

For the Commission,

Joe B. Pacheco,

Commissioner