Are one-time customer account setup fees subject to Illinois Telecommunications Excise Tax?

Plain-English summary

A telecommunications retailer deducted one-time account setup fees from taxable gross charges, describing them as administrative acquisition costs unrelated to service.

IDOR disagreed. Under 86 Ill. Adm. Code 495.100(a), setup fees were generally necessary for and directly related to providing telecommunications and therefore entered gross charges subject to the 7% Illinois Telecommunications Excise Tax under 35 ILCS 630/3 and 4.

Charges for data storage or processing that changes information's form or content can fall outside gross charges, but a telecommunications retailer must disaggregate and separately state value-added services. Otherwise the entire charge is taxable.

Common questions

Were setup fees deductible from the telecom tax base? Generally no.

Does calling the charge administrative change the result? No. Its relationship to providing telecommunications controlled.

Citations and references

• 35 ILCS 630/2, 3, and 4
• 35 ILCS 636/5-10 and 5-15
• 86 Ill. Adm. Code 495.100(a), (c)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2013/st-13-0073.pdf

Original ruling text

ST 13-0073-GIL 11/26/2013 TELECOMMUNICATIONS EXCISE TAX
Generally, one-time account set-up fees are necessary for, and are directly related to, the
retailer’s provision of telecommunications to customers and are included in the gross charges
subject to Telecommunications Excise Tax. See 86 Ill. Adm. Code 495.100(a).
November 26, 2013

Dear Xxxxx:
This letter is in response to your letter dated October 1, 2013, 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:
After speaking with a representative at the Department of Revenue, we were told
to complete a letter describing client charges that we feel should not be taxable.
After review of our letter, the Department of Revenue would then decide on the
matter and relay the outcome to us. The client charges in question are One-Time
Setup Fees.
Our setup fee is an administration charge that covers the internal setup of the
client account and to offset any administrative expenses to the client acquisition
process. The setup fee is not in any way related to actual services or equipment.
Therefore, we do not charge our clients any tax related to this set-up fee, nor do
we feel we should have to pay tax for these charges.
When filing our Telecommunications Excise Tax and Telecommunications
Maintenance Fee tax forms, we stated our gross sales in line one. We then deduct
our one-time setup fee in line 4d to arrive at our net gross subject to tax. In the
last two months, we have received return correction notices along with a notice of
taxpayer liability and taxpayer statements that showed a tax owed amounts related
to these setup fees. After speaking with a Department of Revenue representative,
we went ahead and paid the fees with the intention of protesting. We were also
charged late payment fees on these tax amounts. If accepted, were told that all
excess tax and late penalties would be credited to our account.

DEPARTMENT’S RESPONSE:
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.
“Telecommunications,” in addition to the meaning ordinarily and popularly ascribed to it,
includes, without limitation, messages or information transmitted through use of local, toll and
wide area telephone service; private line services; channel services; telegraph services;
teletypewriter; computer exchange services; cellular mobile telecommunications service;
specialized mobile radio; stationary two way radio; paging service; or any other form of mobile
and portable one-way or twoway communications; or any other transmission of messages or
information by electronic or similar means, between or among points by wire, cable, fiber-optics,
laser, microwave, radio, satellite or similar facilities. “Telecommunications” do not include
“value added services in which computer processing applications are used to act on the form,
content, code and protocol of the information for purposes other than transmission.” See 35
ILCS 630/2(a) and 2(c). If telecommunications retailers provide these services, the charges for
each service must be disaggregated and separately stated from telecommunications charges in the
books and records of the retailers. If these charges are not thus disaggregated, the entire charge is
taxable as a sale of telecommunications.
“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 change its form or content.” 86 Ill. Adm. Code 495.100(c).
Generally, one-time account set-up fees are necessary for, and are directly related to, the
retailer’s provision of telecommunications to customers and are included in the gross charges
subject to Telecommunications Excise Tax. 86 Ill. Adm. Code 495.100(a).
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