Is providing on-hold message equipment to businesses taxed as a service or as a lease of equipment?

Plain-English summary

A company installs on-hold message equipment at businesses: when a caller is put on hold, the device automatically plays a pre-recorded message promoting the business's products. The question was how Kansas sales tax applies — as one of the taxed "telephone answering services," or some other way.

Kansas taxes sales and leases of tangible personal property, and separately taxes certain enumerated services, including "telephone answering services, including mobile phone services, beeper services and other similar services" (2003 HB 2005, Sec. 6(t)). But the Department concluded this company is not an answering service — it does not prompt and record a caller's message; it just installs equipment that plays an outgoing message. So the enumerated answering-service tax does not govern.

Instead, the Department treated the arrangement as a taxable lease of tangible personal property, like leasing any other piece of office equipment. Two practical consequences follow because the company retains ownership and leases the equipment out:

• Its lease charges to the business customers are taxable.
• The company may buy the on-hold equipment it leases exempt (property purchased for lease/resale), and it is likewise exempt when it pays to have that leased equipment serviced.

What this means for you

Providers of on-hold, background-music, or similar equipment

If you install and retain ownership of equipment at a customer's site, Kansas is likely to treat your charges as a taxable equipment lease, not a service. Charge tax on the lease. In return, you generally buy the leased equipment tax-free for lease, and servicing of that leased equipment is exempt to you.

Businesses that subscribe to on-hold messaging

Expect Kansas sales tax on the lease charge for the equipment placed at your premises.

Distinguishing a taxable "answering service"

A true telephone answering service (which prompts and records callers' messages) is taxed under the enumerated-services provision. Equipment that only plays an outgoing message is treated as leased property instead.

Common questions

Q: Is on-hold message equipment a taxable "telephone answering service"?
A: No. The Department said the company is not an answering service because it does not prompt and record callers' messages; the transaction is instead a taxable lease of equipment.

Q: So is the charge taxable at all?
A: Yes — as a lease of tangible personal property. Equipment leases are taxable in Kansas just like other office-equipment leases.

Q: Can the provider buy the equipment tax-free?
A: Yes. Because it retains ownership and leases the equipment, it can claim exemption on its purchase of that equipment and on servicing it.

Q: Does this ruling apply to my business?
A: A Kansas private letter ruling addresses only the requesting taxpayer's facts and cannot be relied on as precedent by others, though it shows how the Department distinguishes a taxable lease from an enumerated service.

Citations and references

• 2003 HB 2005, Sec. 6(t) — the enumerated tax on "telephone answering services, including mobile phone services, beeper services and other similar services." The Department found the on-hold equipment provider was not an answering service, so it taxed the arrangement as an equipment lease instead.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2003-049

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 24, 2003

XXXX
XXXX
XXXX

RE: You letter dated August 15, 2003

Dear XXXX:

Thank you for your recent letter. You have a client, XXXX, that provides on-hold message equipment to businesses in the Kansas City area. XXXX connects the equipment to a business's telephone system. When a client of the business telephones and is placed on hold, the equipment automatically plays a pre-recorded message. The message promotes the business's products or services. You ask how sales tax should be collected on these transactions.

The Kansas retailers sales tax act taxes sales and leases of equipment and other tangible personal property. It also taxes certain enumerated services. One of the services that is taxed is "telephone answering services, including mobile phone services, beeper services and other similar services . . . ." 2003 HB 2005, Sec.6(t). Taxable answering services sometimes play advertising messages when a caller is placed on hold. Charges by an answering services for playing a pre-recorded advertising message would be taxable as part of the taxable gross receipts of the answering service.

Your client is not an "answering service," but installs equipment at a customer's business premises. The equipment automatically plays a prerecorded message when a telephone caller is place on hold. Unlike a message answering machine, the on-hold message equipment does not prompt and accept a message from the caller.

It is appropriate to tax this transaction as a lease of tangible personal property, just like a business's lease of other office equipment is taxable. Taxable office equipment leases would include the lease of a message answering machine, which typically both plays an outgoing message to the caller and records the caller's message. Taxable equipment would also include the more sophisticated systems that allows a message to be recorded if the recipient of a transferred telephone call is unavailable. The fact that the on-hold message equipment at issue here plays advertising does differentiate it from other leased telephone equipment for sales tax purposes.

You indicate that XXXX retains ownership of the equipment being placed. Please note that treating this transaction as a rental or lease allows XXXX to claim exemption on its purchase of the on-hold message equipment that it leases. It also exempts XXXX when it pays to have this equipment serviced.

I hope that I have adequately explained how sales tax applies to your client's business. If you wish to discuss this matter further, please call me at 785-296-3081. This is a private letter ruling pursuant to K.A.R. 92-19-59, based on the representations you have made. To the extent those representations are incomplete or inaccurate, this ruling is void. This ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 10/28/2003 Date Modified: 10/28/2003

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