Are sales commissions a mobile phone carrier pays to its equipment-selling affiliate for signing up customers taxable, and can that affiliate buy discounted phones tax-free as inventory for resale?

Plain-English summary

A mobile phone service provider ("Service Co") has an affiliate ("Salesco") that sells phones and accessories ("Equipment") in New York. Salesco doesn't provide phone service itself — instead, it acts as Service Co's commissioned sales agent, earning a commission every time it signs up or renews a customer's service contract. Salesco often sells Equipment to these same customers at a steep discount (typically more than half off wholesale) funded by that commission, timed to coincide with the customer signing up for service. Critically, even if the customer later cancels the phone service early, neither Salesco nor Service Co has any contractual right to claw back the equipment discount or take back the phone — the customer keeps it regardless.

The Department split this into two separate, independent questions. First, the commissions Service Co pays Salesco aren't a sale of tangible personal property or an enumerated taxable service at all — they're just a payment from a company to its sales agent for closing deals — so no sales tax applies to the commission payments themselves. Second, even though Salesco funds its equipment discounts with those commissions and only offers the discount alongside a new or renewed service contract, that doesn't turn the equipment sale into something other than a genuine resale-inventory purchase: the phones and service are separately available for sale, actually sold as such, and not so integrated that they become one inseparable transaction, and Salesco isn't giving the equipment away for free or selling it for a token price outside its normal business — it's making a real (if discounted) sale in the ordinary course of business it's actually engaged in. So Salesco can still buy its Equipment tax-free from its own suppliers as inventory for resale, but it must collect sales tax on whatever discounted price it actually charges the customer, and Service Co (through Salesco as its agent) must separately collect tax on the mobile telecommunications service itself.

What this means for you

Wireless carriers and their affiliated equipment retailers

Paying an affiliate a sales commission for signing up customers isn't a taxable transaction — commissions between a principal and its sales agent fall outside New York's sales tax entirely. Structuring equipment discounts to be funded by those commissions, and timed to coincide with a service contract, doesn't by itself convert a genuine resale-inventory purchase into something else; you can still buy inventory tax-free for resale as long as you're making real, non-token sales of your ordinary product in the ordinary course of business.

Retailers offering deep discounts tied to a separate contract or service purchase

The key factors that preserved this retailer's tax-free purchase-for-resale status: the discounted item and the "required" companion purchase (the service contract) are each separately available on their own; the retailer wasn't giving the item away for free or selling it at a token price; and the item is something the retailer ordinarily sells in its business. If any of those isn't true — free giveaways, throwaway pricing, or items outside your normal product line — your tax-free resale purchase could be disqualified.

Businesses in a commission-funded pricing arrangement with an affiliate

Even where a deep discount is entirely funded by a commission from an affiliate, sales tax still applies to whatever price is actually charged to the end customer — the commission funding source doesn't reduce the taxable receipt on the equipment sale itself.

Common questions

Q: Are sales commissions paid between affiliated companies taxable in New York?
A: No — a commission paid to a sales agent for securing or renewing a contract isn't a sale of property or an enumerated taxable service, so it isn't subject to sales tax.

Q: If we fund a steep equipment discount using commissions from a service-contract signup, do we lose our tax-free purchase-for-resale status on the equipment?
A: Not automatically — as long as the equipment and the underlying service are each separately available for sale (not artificially bundled into one inseparable transaction), and you're not giving the equipment away for free or selling it at a token price outside your normal business, you can still buy the equipment tax-free as inventory for resale.

Q: Do we still have to charge sales tax on a heavily discounted item?
A: Yes — sales tax applies to whatever price is actually charged to the customer, even if it's a steep discount subsidized by commission income from an affiliate.

Q: Does it matter that the customer keeps the discounted equipment even if they cancel the service contract early?
A: The ruling notes this fact but the core resale/tax analysis turns on the separateness and genuineness of the equipment sale itself, not on whether there's a contractual clawback right if the service contract is later canceled.

Citations and references

Statutes and rules:

• Tax Law § 1101(b)(2), (3), (4), (5) (purchaser, receipt, retail sale, sale/purchase)
• Tax Law § 1105(a), (b)(1)-(3) (retail sales tax; utility/telephone/mobile telecommunications service tax)
• 20 NYCRR 526.6(c)(1), (4) (resale exclusion; promotional-property carve-out)
• 20 NYCRR 527.2 (utility/telephone service tax imposition)
• TSB-M-02(4)C, (6)S (mobile telecommunications service tax amendments)

Prior advisory opinions relied on:

• William H. Wishinsky, PC, TSB-A-01(22)S; KPMG Peat Marwick, TSB-A-94(51)S (sales commissions not taxable)
• Anthony J. Ragusa, Jr. d/b/a The Stereo Advantage, TSB-A-93(6)S; KPMG Peat Marwick, TSB-A-94(23)S (discounted bundled equipment remains a resale purchase)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a05_4s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-05(4)S
Sales Tax
February 2, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S031202B

On December 2, 2003, the Department of Taxation and Finance received a Petition for
Advisory Opinion from PricewaterhouseCoopers LLP, 1301 Avenue of the Americas,
New York, New York, 10019.
The issues raised by Petitioner, PricewaterhouseCoopers LLP, are:
(1) Whether commissions paid by a mobile telephone service provider to a seller
of mobile telecommunications equipment (mobile telephones and mobile
telephone accessories) for establishing and renewing contracts for the provision of
mobile telecommunications service by the provider to customers are subject to
New York State and local sales taxes.

(2) Whether a seller of mobile telecommunications equipment may purchase such
equipment for resale when the equipment is sold at a discount to customers in
conjunction with the establishment or renewal of a contract for mobile
telecommunications service between the customer and the mobile telephone
service provider.
Petitioner submits the following facts as the basis for this Advisory Opinion.
A mobile telephone service provider (Service Co) provides mobile telecommunications
services in New York State. A seller of mobile telecommunications equipment (Salesco), which
is an affiliate of Service Co, will sell mobile telephone equipment (Equipment) in New York.
The Equipment consists of mobile telephones and mobile telephone accessories.
Salesco is not a provider or reseller of telecommunications service. However, Salesco
acts as a commissioned salesperson and agent of Service Co for the purpose of finding
purchasers of Service Co’s telecommunications service. Salesco earns a commission from
Service Co for establishing or renewing contracts for the provision of mobile
telecommunications service between Service Co and customers. Salesco will, among other
regular sales of Equipment, sell Equipment concurrently with the establishment or renewal of a
contract for mobile telecommunications service between Service Co and the Equipment
purchaser. Establishment or renewal of the service contract will also be made by employees of
Service Co or an affiliate of Service Co at retail outlets maintained by Service Co or its affiliate.
In order to encourage the establishment or continuation of these contracts, Equipment will be
sold by Salesco to such customers at a discounted price. The discounted price is typically more

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than half the wholesale price paid for the Equipment by Salesco. Sales tax is collected by
Salesco on the amounts charged the customer for the Equipment.
Salesco will use a portion of the commission fee paid by Service Co to “fund” the
discounted cost for the Equipment sold to customers. If the Equipment is damaged or defective,
the customer’s recourse and remedy for repair or replacement is through Salesco (which might
ultimately process the problem through the distributor or manufacturer of the equipment). If the
customer terminates the contract early or otherwise defaults on the contract for the provision of
mobile telecommunications service, Service Co may be entitled to damages arising from the
early termination or default. However, regardless of whatever damages the customer may owe
Service Co occasioned by the early termination or default of the service contract, the customer
retains possession and ownership of the Equipment. In the event of a default on the service
contract, neither Salesco nor Service Co is contractually entitled to damages or recoupment of
the discount in the purchase price for the Equipment though such price was premised upon the
establishment or renewal of the service contract.
Applicable law and regulations
Section 1101(b) of the Tax Law provides, 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:
*

*

*

(2) Purchaser. A person who purchases property or to whom are rendered
services, the receipts from which are taxable under this article, including a mobile
telecommunications customer.
(3) Receipt. The amount of the sale price of any property and the charge for any
service taxable under this article, including gas and gas service and electricity and electric
service of whatever nature, valued in money, whether received in money or otherwise . . .
(4) Retail sale. (i) A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical component part of tangible
personal property, or (B) for use by that person in performing the services subject to tax
under paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven hundred
five where the property so sold becomes a physical component part of the property upon
which the services are performed or where the property so sold is later actually
transferred to the purchaser of the service in conjunction with the performance of the
service subject to tax. . . .

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(5) Sale, selling or purchase. Any transfer of title or possession or both, exchange
or barter, rental, lease or license to use or consume . . . conditional or otherwise, in any
manner or by any means whatsoever for a consideration, or any agreement therefor,
including the rendering of any service, taxable under this article, for a consideration or
any agreement therefor.
Section 1105(a) of the Tax Law provides, in part:
On and after June first, nineteen hundred seventy-one, there is hereby imposed
and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
(b) (1) The receipts from every sale, other than sales for resale, of the following:
(A) gas, electricity, refrigeration and steam, and gas, electric, refrigeration and steam
service of whatever nature; (B) telephony and telegraphy and telephone and telegraph
service of whatever nature except interstate and international telephony and telegraphy
and telephone and telegraph service and except any telecommunications service the
receipts from the sale of which are subject to tax under paragraph two of this subdivision;
(C) a telephone answering service; and (D) a prepaid telephone calling service.
(2) The receipts from every sale of mobile telecommunications service provided
by a home service provider, other than sales for resale, that are voice services, or any
other services that are taxable under subparagraph (B) of paragraph one of this
subdivision, sold for a fixed periodic charge (not separately stated), whether or not sold
with other services.
(3) The tax imposed pursuant to this subdivision is imposed on receipts from
charges for intrastate mobile telecommunications service of whatever nature in any state
if the mobile telecommunications customer's place of primary use is in this state.
Section 526.6 of the Sales and Use Tax Regulations provides, in part:
Retail sale (a) The term retail sale or sale at retail means the sale of tangible
personal property to any person for any purpose, except as specifically excluded.
*

*

*

(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.

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*

*

*

(4)(i) Tangible personal property which is purchased and given away without
charge, for promotion or advertising purposes is not purchased for resale. It is a retail sale
to the purchaser thereof, and is not a sale to the recipient of the property.
(ii) Tangible personal property which is purchased for promotional or advertising
purposes and sold for a minimal charge which does not reflect its true cost, or which is
not ordinarily sold by that person in the operation of his business, is a retail sale to the
purchaser thereof, and not a sale to the recipient of the property.
*

*

*

Example 3: A vendor purchases catalogs and distributes them to his potential
customers for a minimal charge, which does not reflect the cost to him. He is the retail
purchaser of the catalog, and is required to pay the tax thereon. He cannot charge his
customer tax on the charge for the catalog.
Section 527.2 of the Sales and Use Tax Regulations provides, in part:
Sale of utility and similar services.
(a) Imposition. (1) Section 1105(b) of the Tax Law imposes a tax on the receipts
from every sale . . . of . . . (ii) telephony and telegraphy and telephone and telegraph
service of whatever nature, except interstate and international telephony and telegraphy
and telephone and telegraph service.
(2) Although this tax is generally known as the "consumer's utility tax," the
intention of the statute is to tax the enumerated sales and services whether or not rendered
by a company subject to regulation as a utility company. The words "of whatever nature"
indicate that a broad construction is to be given the terms describing the items taxed. The
inclusion of the word "service" indicates an intent to tax, under this provision, items that
are furnished as a continuous supply while the vendor-vendee relationship exists.
Opinion
Salesco, an affiliate of Service Co, will sell Equipment in New York. Service Co
provides mobile telecommunications services in New York State. Salesco is not a provider or
reseller of telecommunications service. However, Salesco is a commissioned sales agent of
Service Co for the purpose of finding purchasers of Service Co’s telecommunications service.
Salesco earns a commission from Service Co for establishing or renewing contracts for the
provision of mobile telecommunications service between Service Co and customers. Sales
commissions received by a sales agent from its supplier are not receipts from the sale of an
enumerated taxable service under section 1105 of the Tax Law. Moreover, the sales

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commissions do not constitute receipts from a retail sale of tangible personal property under
section 1105(a) of the Tax Law. Accordingly, the commissions paid by Service Co to Salesco
for the establishment or renewal of mobile telecommunications service contracts between
Service Co and customers are not receipts from a taxable sale of tangible personal property
or services. Salesco is not required to collect State and local sales taxes from Service Co
on such commissions. See William H. Wishinsky, PC, Adv Op Comm T&F, July 31, 2001,
TSB-A-01(22)S; KPMG Peat Marwick, Adv Op Comm T&F, December 20, 1994,
TSB-A-94(51)S.
Salesco sells Equipment to customers. These sales are often concurrent with the
establishment or renewal of a contract for mobile telecommunications service between Service
Co and the customer. Customers cannot effectively utilize the mobile telecommunications
service they purchase without the requisite equipment needed to initiate and/or receive such
communications. To encourage the initial sale or continuation of these contracts for
telecommunications service, Salesco will sell Equipment to such customers at a discounted price.
Salesco expects to fund the discounts with the commissions paid by Service Co to Salesco. The
telecommunications service and Equipment are separately available for sale and have been sold
as such. Therefore, the sales of telecommunications service and sale of Equipment are not
integrated so as to make the transactions inseparable, even though the Equipment is not offered
at the discounted price in the absence of the customer's purchase of the telecommunications
service.
Section 526.6(c)(4) of the Sales and Use Tax Regulations sets forth specific criteria under
which purchases of tangible personal property will not be considered to have been purchased for
resale. Property which is: (1) purchased and given away without charge for promotional or
advertising purposes; (2) purchased for promotional or advertising purposes and sold for a
minimal charge which does not reflect its true cost; or (3) which is purchased for promotional or
advertising purposes and is not ordinarily sold by that purchaser in the operation of its business,
is considered as having been purchased and consumed at retail. Purchases of such property are
thus not eligible for exemption from tax as purchases for resale.
In the instant case, Salesco is not giving the Equipment away “without charge” for
promotional or advertising purposes. Likewise, Salesco is not selling Equipment that it
purchased for promotional or advertising purposes for a minimal charge not reflective of its true
cost. Salesco receives commissions from Service Co, and the cost of the Equipment and the
commissions Salesco expects to earn are the basis used by Salesco in determining its pricing for
the Equipment. Salesco sells the equipment at a discount price which amount is generally
greater than 50% of the wholesale cost of the Equipment to Salesco. Lastly, Salesco ordinarily
sells Equipment in the operation of its business. The Equipment, therefore, is purchased by
Salesco for resale, albeit often at a reduced price in conjunction with a customer's purchase of a
contract for cellular telephone services which Salesco, as agent for Service Co, simultaneously
sells to the customer.

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Accordingly, Salesco’s original purchases of Equipment are considered to be purchases
for resale regardless of whether the Equipment is sold separately or in conjunction with the sale
of a contract for mobile telecommunications service. See Anthony J. Ragusa, Jr. d/b/a The
Stereo Advantage, Adv Op Comm T&F, January 7, 1993, TSB-A-93(6)S; KPMG Peat Marwick,
Adv Op Comm T&F, May 3, 1994, TSB-A-94(23)S; KPMG Peat Marwick, Adv Op Comm
T&F, December 20, 1994, TSB-A-94(51)S.
Salesco must collect sales tax on the charges to customers for the sale of the Equipment.
Service Co (and Salesco as agent for Service Co) must collect the tax imposed under section
1105(b) of the Tax Law on the receipts from the sale of mobile telecommunications service to
customers. (See Technical Services Bureau Memorandum entitled Amendments Affecting the
Application of the Sales and Use Tax and Excise Tax Imposed on Mobile Telecommunications
Service, July 30, 2002, TSB-M-02(4)C, (6)S, for discussion about the imposition and collection
of tax on mobile telecommunications services.)
Salesco’s sales of tangible personal property and Equipment which are not in conjunction
with or otherwise related to its sales of Service Co’s mobile telecommunications service
contracts, are also subject to sales tax.

DATED: February 2, 2005

NOTE:

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

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