Is a data-transmission service taxable as telephone/telegraph service, and must the provider charge tax on the receivers it sells and installs?

Plain-English summary

Peat Marwick Main & Co. asked, on behalf of a client it called "XYZ Corporation," how New York sales tax applies to a data-transmission business. XYZ (based in California) moves data over dedicated telephone lines and leased FM-radio sidebands to receivers located across the country. It also sells the receivers — stand-alone units or a computer board placed in the customer's own PC — both through its own sales force and through another company ("B Corporation"), and it installs equipment. XYZ provides no database and does nothing but transmit data.

The Department addressed two things:

1. The data-transmission service — taxable telephony/telegraphy (intrastate).

• Tax Law § 1105(b) taxes telephony and telegraphy and telephone/telegraph service, defined by regulation as intrastate communication using devices that employ the principles of telephony/telegraphy — i.e., transmitting sound, sound reproduction, or coded or other signals (the regulation's examples include dispatch, paging, message-switching, and facsimile).
• XYZ's transmission service falls within that definition, so it is taxable under § 1105(b).
• Interstate and international telephony/telegraphy are exempt from § 1105(b).

2. The receivers — taxable sales and installation, unless sold for resale.

• The receivers are tangible personal property (Tax Law § 1105(a)). XYZ solicits business and makes sales in New York, so it is a "vendor" (20 NYCRR § 526.10(a)(3)) that must collect sales tax on the retail sale and the installation of its equipment (installation is taxable under Tax Law § 1105(c)(3)).
• Exception — sales for resale. Where XYZ sells receivers for resale to "B Corporation," that sale is excluded (20 NYCRR § 526.6(c), with a proper resale certificate), and B Corporation is the one required to collect the tax when it resells.

What this means for you

"It's just data over the air" can still be taxable telephone/telegraph service. New York's § 1105(b) reaches any apparatus transmitting sound or coded/other signals — not just voice calls. A data-transmission service using phone lines and radio sidebands is taxable telephony/telegraphy for its intrastate traffic.

But interstate transmission is exempt. The same statute carves out interstate and international telephony/telegraphy. A provider serving customers in many states needs to separate intrastate (taxable) from interstate (exempt) traffic.

Selling and installing the hardware is a separate taxable event. The equipment is tangible personal property; the provider is a vendor who must collect tax on both the sale and the installation — unless it's a sale for resale documented with a resale certificate, in which case the reseller collects tax downstream.

Common questions

Q: We only transmit data — no database, no content. Is that still a taxable telephone service?
A: Yes for intrastate transmission. § 1105(b) taxes devices employing the principles of telephony/telegraphy to transmit coded or other signals, which covers data transmission. Interstate and international transmission is exempt.

Q: Do we charge tax when we install the receiver, or only when we sell it?
A: Both. Installing tangible personal property is itself taxable under § 1105(c)(3), and the sale of the receiver is taxable under § 1105(a). As the vendor, you collect on both.

Q: We sell some receivers to another company that resells them. Do we still collect tax?
A: No — a sale for resale is excluded under 20 NYCRR § 526.6(c) if you take a proper resale certificate. The reseller (here, "B Corporation") collects the tax when it sells to the end customer.

Citations and references

Statute and regulation:

• Tax Law § 1105(b) — imposes tax on receipts from telephony and telegraphy and telephone/telegraph service (intrastate communication using devices employing the principles of telephony/telegraphy); interstate and international service is excepted
• Tax Law § 1105(a) — imposes tax on receipts from every retail sale of tangible personal property
• Tax Law § 1105(c)(3) — imposes tax on installing tangible personal property (and maintaining, servicing, or repairing it)
• 20 NYCRR § 526.10(a)(3) — defines "vendor," including a person who solicits business through employees/agents/advertising and makes sales of tangible personal property to persons in New York
• 20 NYCRR § 526.6(c) — excludes a sale for resale where the seller obtains a properly completed resale certificate from the customer

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_47s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-88 (47)S
Sales Tax
September 13, 1988

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S880225C

On February 25, 1988, a petition for Advisory Opinion was received from Peat Marwick
Main & Co., 345 Park Avenue, New York, NY 10154.
Petitioner asks the sales tax implications to the following situation:
XYZ Corporation is a California based provider of data transmission
services. The company uses dedicated telephone lines and sideband
radio waves to transmit data. An individual uses the transmission
service by transmitting data to the host computer, located in
California, via dedicated telephone lines (800 number). The host
computer transmits the data via dedicated telephone lines to radio
station towers that contain telecommunications equipment owned by
XYZ Corporation. The radio station tower transmits the data over
FM radio airwaves to receivers located throughout the country.
Petitioner does not provide a data base or perform any service other
than that of data transmission.
XYZ Corporation offers its data transmission services to customers
located within and without California. XYZ Corporation leases the
sideband of the FM radio wave in various radio stations.
XYZ Corporation uses its own sales force to sell both the data
transmission service and receivers. Sales of the receivers are also
made through B Corporation. The receiver can consist of a stand
alone unit containing a computer board or just a computer board that
is placed into the customer's own personal computer. XYZ
Corporation is also involved in installing computer equipment and
antennas at various locations and could be involved in third-party
leasing agreements.
XYZ Corporation will initially be providing services to customers
located in the following cities: San Francisco, San Jose, San Mateo,
Los Angeles, Boston, Dallas, New York, Chicago, St. Louis,
Cleveland, Atlanta, Houston, Washington and Philadelphia. XYZ
Corporation will own telecommunications equipment in each of these
cities.
Data Transmission Services
Section 1105(b) of the Tax Law imposes a tax upon "[T]he receipts from every sale,...of
telephony and telegraphy and telephone and telegraph service of whatever nature except interstate
and international telephony and telegraphy and telephone and telegraph service." The sales and use
TP-9 (9/88)

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TSB-A-88 (47)S
Sales Tax
September 13, 1988
tax regulations define telephony and telegraphy as follows:
(d) Telephony and telegraphy; telephone and telegraph service. (1) The provisions of section
1105(b) of the Tax Law with respect to telephony and telegraphy and telephone and telegraph service
impose a tax on receipts from intrastate communication by means of devices employing the
principles of telephony and telegraphy.
(2) The term telephony and telegraphy includes use or operation of any apparatus for
transmission of sound, sound reproduction or coded or other signals.
Example 1:

Dispatch services, commonly used by taxicab companies, trucking firms and
similar operations, which provide two-way voice communication between a
base location and mobile units or between mobile units are considered
telephony even though the base and mobile units are not interconnected with
a telephone system.

Example 2:

Paging service which is a one-way transmission of communication by signal
or voice or both signal and voice from a base unit to a mobile unit is
considered telephony.

Example 3:

Message switching services, transmitted to a computer over lines leased from
a communication carrier are telegraph services subject to the tax imposed
under section 1105(b) of the Tax Law.

Example 4:

Facsimile transmission services are telegraph services subject to the tax
imposed under section 1105(b) of the Tax Law.

Example 5:

The use of a teletypewriter is a telegraph service subject to tax imposed under
section 1105(b) of the Tax Law.

Petitioner's transmission services falls within the definition of telephony or telegraphy as
stated above. As such, the transmission services are subject to tax under §1105(b) of the Tax Law.
Of course, interstate and international telephony and telegraphy are exempt from the tax imposed
under section 1105(b) of the Tax Law.
Sale of Transmission Receivers
Section 1105(a) of the Tax Law imposes a tax upon the receipts from every retail sale of
tangible personal property..."
Section 526.10(a)(3) of the sales tax regulations defines vendor as "a person who solicits
business either by or through employees, independent contractors, agents or other representatives
and by distribution of catalogs or other advertising matter and by reason thereof makes sales to
persons within the State of tangible personal property.

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TSB-A-88 (47)S
Sales Tax
September 13, 1988
Section 1105(c)(3) imposes a tax upon "Installing tangible personal property,...or
maintaining, servicing or repairing tangible personal property...".
Section 526.6(c) excludes a sale for resale from the imposition of the sales tax provided the
seller obtains a properly completed resale certificate from his customer.
Based upon the above, "XYZ Corp" is a vendor who is required to collect the sales tax on
the sale and installation of its equipment except where it makes sales for resale to "B Corp." in which
case "B Corp." is required to collect the tax.

DATED: September 13, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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