What amount was subject to Illinois sales tax when a cellular phone was sold below cost with a service contract?

Plain-English summary

A retailer asked how to collect tax when selling a cellular phone with a service contract, often for a phone price below the retailer's cost.

IDOR would not decide the exact transaction on the limited facts. It provided these rules:

• A sold cellular phone was tangible personal property. The retailer owed Retailers' Occupation Tax on the gross receipts actually received for the phone and bought inventory for resale using a resale certificate.
• The retailer collected the complementary Use Tax from the customer and stated it separately from the equipment price—not as an administration or service charge.
• Telecommunications service charges followed the Telecommunications Excise Tax rules. Separately identified customer-equipment lease or rental charges could be excluded from telecommunications “gross charges”; bundled or non-disaggregated charges could be treated differently.
• A qualifying prepaid telephone calling arrangement was treated as tangible personal property under the Retailers' Occupation Tax, while a prepaid plan outside that definition remained under the Telecommunications Excise Tax. Crediting a payment card to an existing subscription account did not qualify as a prepaid calling arrangement.

Common questions

Was tax based on the retailer's cost of the phone? The letter said the retail tax base was the amount actually received from the customer.

Could the customer tax be hidden as a service charge? No. It had to be separately stated as tax.

Did IDOR approve the exact bundle? No, not on the limited information supplied.

Citations and references

• 86 Ill. Adm. Code 130.401 and 150.135
• 35 ILCS 630/2 through 4
• 35 ILCS 120/2-27

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2012/st-12-0049.pdf

Original ruling text

ST 12-0049-GIL 09/01/2012 MISCELLANEOUS
This letter discusses the sales of cellular telephones. 86 Ill. Adm. Code 130.101. (This
is a GIL.)
September 1, 2012
Dear:
This letter is in response to your letter received in this office on August 21, 2012, in which you request
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with a GIL.
In your letter you have stated and made inquiry as follows:
Will you please issue a general information letter explaining what I am to collect sales
tax on when I sell a cellular phone bundled with a service contract? This is the typical
way 99% of phones are sold and in most cases the selling price does not recoup our
cost of the phone.
DEPARTMENT’S RESPONSE:
We cannot comment on your specific transaction based on the limited amount of information
provided, but we hope the following legal information is helpful.
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in the
business of selling tangible personal property at retail to purchasers for use or consumption. See 86
Ill. Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this State, any
kind of tangible personal property that is purchased anywhere at retail from a retailer. See 86 Ill.
Adm. Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
Retailers’ Occupation Tax is measured by the sellers’ gross receipts from sales of tangible personal
property. If retailers sell cellular phones to their customers, the retailers incur Retailers’ Occupation
Tax measured by the gross receipts from the sales. At the time the retailers purchase cellular phones
from their suppliers, the retailers should supply Certificates of Resale to their suppliers. Then, when
the retailers sell the cellular phones, the retailers will pay Retailers’ Occupation Tax based on the
amount they receive from their customers. This amount represents the gross receipts received from
the sale of the cellular phone. It is important that retailers be very careful when computing the
amount of gross receipts from the sales of their cellular phones. “Gross receipts” means “all the
consideration actually received by the seller, except traded-in tangible personal property” from all
sources. See 86 Ill. Adm. Code 130.401. The retailers are required to collect a complementary Use
Tax liability from their customers when the sales of the cellular phones occur. The tax should be

ST 12-0049-GIL
September 1, 2012
Page 2
listed as a separate item from the selling price of the equipment and not as an administration or
service charge. See 86 Ill. Adm. Code § 150.135.
The Illinois Telecommunications Excise Tax Act imposes a tax on the act or privilege of originating or
receiving intrastate or interstate telecommunications by persons in Illinois at the rate of 7% of the
gross charges for such telecommunications purchased at retail from retailers by such persons. 35
ILCS 630/3 and 4. The Simplified Municipal Telecommunications Tax Act allows municipalities to
impose a tax on the act or privilege of originating in such municipality or receiving in such municipality
intrastate or interstate telecommunications by persons in Illinois at a rate not to exceed 6% for
municipalities with a population of less than 500,000, and at a rate not to exceed 7% for municipalities
with a population of 500,000 or more, of the gross charges for such telecommunications purchased at
retail from retailers by such persons. 35 ILCS 636/5-10 and 5-15.
“Gross charges” means the amount paid for the act or privilege of originating or receiving
telecommunications in this State and for all services and equipment provided in connection therewith
by a retailer, valued in money whether paid in money or otherwise, including cash, credits, services
and property of every kind or nature, and shall be determined without any deduction on account of the
cost of such telecommunications, the cost of materials used, labor or service costs or any other
expense whatsoever. “Gross charges” do not include charges for the storage of data or information
for subsequent retrieval or the processing of data or information intended to charge its form or
content. “Gross charges” also do not include charges for customer equipment, including such
equipment that is leased or rented by the customer from any source, wherein such charges are
disaggregated and separately identified from other charges in the books and records of the retailer.
See 35 ILCS 630/2.
You should also be aware that on and after January 1, 2001, prepaid telephone calling arrangements
are considered tangible personal property subject to Retailers' Occupation Tax liability not are no
longer considered telecommunications subject to the Telecommunications Excise Tax. 35 ILCS
630/3 & 4. "Prepaid telephone calling arrangements" generally means the right to exclusively
purchase telephone or telecommunications services that must be paid for in advance, provided that,
unless recharged, no further service is provided once that prepaid amount of service has been
consumed. “Prepaid telephone calling arrangements” include the recharge of a prepaid calling
arrangement. "Prepaid telephone calling arrangement" does not however include an arrangement
whereby a customer purchases a payment card and pursuant to which the service provider reflects
the amount of the purchase as a credit on an account for a customer under an existing subscription
plan. 35 ILCS 120/2-27. Prepaid telephone plans that do not meet the definition of a “prepaid
telephone calling arrangement” are taxed under the Telecommunications Excise Tax.
We suggest you review previous letters issued by the Department that are located on our website
regarding the taxation of the sales of cellular telephones under various scenarios.
I hope this information is helpful. If you require additional information, please visit our website at
www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,
Richard S. Wolters
Associate Counsel