If a telephone answering service passes through the cost of its dedicated phone lines to customers as part of its bill, does New York sales tax apply to that charge too, on top of the tax already paid when the service bought the lines?

Plain-English summary

S.T.A.T. Communications ran a 24-hour telephone answering service — live operators taking orders and messages by phone on behalf of mail-order companies and other clients. To make it easy for customers to forward their calls, S.T.A.T. bought blocks of dedicated "direct inward dial" (DID) phone lines from the telephone company, paid sales tax on that purchase, and then passed the phone company's charge straight through to each customer without any markup.

S.T.A.T. argued that being taxed once on the phone line purchase and then taxed again when it billed the same cost to its customer amounted to illegal double taxation on the same charge. The Department disagreed. It held that S.T.A.T. is not reselling telephone service to its customers — it is providing a telephone answering service (and sometimes fulfillment services), a different taxable service under the law. Because S.T.A.T. isn't reselling the phone lines as such, the resale exclusion doesn't apply to its purchase, and that purchase is taxed like any other business expense.

Separately, everything S.T.A.T. charges its customers — including the pass-through phone-line cost — counts as part of the "receipt" for its own taxable telephone answering service, so tax applies to that full bill too. The Department said this isn't double taxation of the same transaction; it's two different transactions (S.T.A.T. buying a taxable service for its own use, and S.T.A.T. selling its own taxable service to its customer) that each happen to be taxed.

What this means for you

Answering services, call centers, and similar service businesses

If you buy taxable inputs (like dedicated phone lines) to help you deliver your own taxable service, you generally owe tax on that purchase even if you pass the exact dollar cost straight through to your customer with no markup. You can't avoid tax on your purchase by calling it a pass-through, and the amount you bill your customer — expense and all — is part of your own taxable receipts if what you're selling is itself a taxable service.

Accountants and tax professionals

The key distinction is between reselling a taxable service (which would qualify for the resale exclusion) and merely consuming a taxable service as an expense of providing a different taxable service. Here, telephone answering service and telephone service are legally distinct enumerated services under Tax Law § 1105(b)(1), so S.T.A.T.'s purchase of phone lines to support its own answering-service business didn't qualify as a purchase for resale. Watch for this same "expense consumed in producing another taxable service" pattern in other client fact patterns — it can look like double taxation but isn't legally the same transaction taxed twice.

Common questions

Q: If I pass through an expense to a customer at cost, with no markup, is that pass-through automatically nontaxable?
A: Not if what you're selling to the customer is itself a taxable service. The pass-through amount becomes part of your "receipt" for that taxable service and is taxed along with everything else you charge.

Q: Doesn't this mean the same telephone charge gets taxed twice?
A: The Department says no — it's taxed once when the answering service buys the phone line as its own taxable purchase, and again (as part of a different, larger transaction) when the answering service sells its own taxable service to its customer. Different taxpayers/transactions, not one transaction taxed twice.

Q: Does this ruling apply to my business?
A: Not automatically. This advisory opinion binds the Department only for S.T.A.T. Communications and the exact facts it described. Another taxpayer with similar facts should not assume the same result without its own ruling or advice.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3) (definition of "receipt")
• Tax Law § 1101(b)(13) (definition of "telephone answering service")
• Tax Law § 1101(b)(18) (definition of "fulfillment services")
• Tax Law § 1105(b)(1) (tax on telephony/telegraph service and telephone answering service)
• 20 NYCRR § 526.5(e) (nondeductible vendor expenses, including telephone charges)
• 20 NYCRR § 527.2(e) (resale exclusion procedure)

Prior rulings/cases referenced:

• Matter of Phone Programs, Inc., Dec Tax App Trib, April 6, 2000, TSB-D-00(6)S
• Total Recall Message Center, Adv Op Comm T&F, Feb. 28, 1996, TSB-A-96(14)S
• Matter of Helmsley Enterprises, Inc. v. Tax Appeals Tribunal, 187 A.D.2d 64, app. denied, 81 N.Y.2d 710

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2001.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a01_19s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-01(19)S
Sales Tax
May 24, 2001

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S000825A

On August 25, 2000, the Department of Taxation and Finance received a Petition for
Advisory Opinion from S.T.A.T. Communications, Inc., 121 Franklin Street, Watertown, NY 13601.
Petitioner, S.T.A.T. Communications, Inc., provided additional information pertaining to the Petition
on September 11, 2000.
The issue raised by Petitioner is whether sales tax is applicable to the charges for certain
telephone expenses it incurs as part of the service described below which Petitioner provides to its
customers.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner characterizes itself as a telephone answering service. Petitioner operates a call
center where live operators, available 24 hours a day, take orders over the telephone on behalf of
customers, such as mail order catalog companies, and take telephone messages on behalf of
individuals and businesses.
For customer convenience, Petitioner provides each customer with a specifically assigned
telephone line to which the customer can program its phone to forward its calls to Petitioner. These
telephone lines are direct inward dial (“DID”) lines which can be used to accept inbound telephone
calls only. Petitioner purchases the DID lines in blocks of one hundred from the telephone company,
and remits New York State sales tax imposed on the charges. The telephone company charges are
then passed through directly to Petitioner’s customers without mark-up. Petitioner asserts that the
separate imposition of sales tax on these rebilled expenses results in multiple taxation on the same
charges.
Applicable Law and Regulations
Section 1101(b) of the Tax Law states, in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
hundred ten, the following terms shall mean:
*

*

*

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Sales Tax
May 24, 2001

(3) Receipt. The amount of the sale price of any property and the charge for
any service taxable under this article . . . valued in money, whether received in money
or otherwise, including any amount for which credit is allowed by the vendor to the
purchaser, without any deduction for expenses or early payment discounts and also
including any charges by the vendor to the purchaser for shipping or delivery . . .
regardless of whether such charges are separately stated in the written contract,
if any, or on the bill rendered to such purchaser and regardless of whether such
shipping or delivery . . . is provided by such vendor or a third party. . . .
*

*

*

(13) Telephone answering service. A service that consists of taking messages
by telephone and transmitting such messages to the purchaser of the service or at the
purchaser’s direction. . . .
*

*

*

(18) Fulfillment services. Any of the following services performed by an
entity on its premises on behalf of a purchaser:
(i)

the acceptance of orders electronically or by mail, telephone, telefax
or internet;

(ii)

responses to consumer correspondence and inquiries electronically or
by mail, telephone, telefax or internet;

(iii)

billing and collection activities; or

(iv)

the shipment of orders from an inventory of products offered for sale
by the purchaser.

Section 1105(b)(1) of the Tax Law imposes sales tax, in part, on:
The receipts from every sale, other than sales for resale, of . . . (B) telephony
and telegraphy and telephone and telegraph service of whatever nature except
interstate and international telephony and telegraphy and telephone and telegraph
service; (C) a telephone answering service. . . .
Section 526.5(e) of the Sales and Use Tax Regulations provides, in part:

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TSB-A-01(19)S
Sales Tax
May 24, 2001

Expenses. All expenses, including telephone and telegraph and other service
charges, incurred by a vendor in making a sale, regardless of their taxable status and
regardless of whether they are billed to a customer are not deductible from the
receipts. (Emphasis added)
Example 1:

A photographer contracts with a customer to furnish
photographs at $50 each in addition to expenses.
The customer is billed as follows:
Photographs(2)
Model fees
Meals
Travel
Props(Flowers)
Total due
Receipt subject to tax is $200

$100
60
10
25
5
$200

Section 526.6(c) of the Sales and Use Tax Regulations provides, in part:
(c) Resale exclusion. (1) Where a person, in the course of his business
operations, purchases tangible personal property or services which he intends to sell,
either in the form in which purchased, or as a component part of other property or
services, the property or services which he has purchased will be considered as
purchased for resale, and therefore not subject to tax until he has transferred the
property to his customer.
Opinion
Petitioner operates a call center where live operators take merchandise orders and messages
over the telephone on behalf of its customers. For the customers’ convenience, Petitioner purchases
from the telephone company the direct inward dial (“DID”) phone lines required to forward the
customers’ calls from their own lines to Petitioner’s call center. The purchase of a phone line, which
is intrastate in nature, from the telephone company is subject to the imposition of sales tax under
Section1105(b)(1)(B) of the Tax Law. The purchase of such telephone service cannot be made
without payment of the sales tax unless the service is purchased for resale. See Section 527.2(e) of
the Sales and Use Tax Regulations.
In this case, Petitioner is providing telephone answering services as defined in Section
1101(b)(13) of the Tax Law, and may be providing fulfillment services to some customers, as
defined in Section 1101(b)(18) of the Tax Law. Petitioner is not providing its customers with
telephone or telegraph services. Accordingly, Petitioner is not reselling telephone service to its

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Sales Tax
May 24, 2001

customers, but is merely incurring telephone expenses in conducting its business (see Matter of
Phone Programs, Inc, Dec Tx App Trib, April 6, 2000, TSB-D-00(6)S; Total Recall Message Center,
Adv Op Comm T&F, February 28, 1996, TSB-A-96(14)S). Therefore, the DID phone lines
purchased by Petitioner are not purchased for resale and are subject to sales tax at the time of
purchase.
Contrary to Petitioner’s assertion, the inapplicability of the resale exclusion to Petitioner’s
purchases of the DID telephone lines does not result in unlawful multiple sales taxation of the
rebilled cost of the same phone lines, because the cost of the phone lines is an element of Petitioner’s
service to its customer. See Matter of Helmsley Enterprises, Inc., v. Tax Appeals Tribunal,
187 AD2d 64 app den 81 NY2d 710. Petitioner is deemed to have consumed the taxable service as
an expense of providing its own service. All expenses, including telephone expenses, incurred by
Petitioner and included in its charges to its customers are included in the definition of “receipt”
provided in Section 1101(b)(3) of the Tax Law. Therefore, the charge to a customer for the
telephone expense (including the tax paid by Petitioner on its purchase of such service) is subject
to sales tax as part of Petitioner’s receipts from the sale of telephone answering services. If
Petitioner makes a nontaxable sale, the amount charged to its customers (including expense charges)
is not subject to tax. Whether or not the charges to Petitioner’s customer are taxable, the charge to
Petitioner for intrastate telephone services it consumes is subject to tax.

DATED: May 24, 2001

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.