When a retailer sells discounted cellphones to customers who also sign a carrier service contract, are the phones taxable 'promotional items' the retailer can't buy for resale?

Plain-English summary

An electronics retailer (The Stereo Advantage) sells cellular telephones and also acts as an authorized agent for a carrier (Buffalo Telephone Company, a.k.a. Cellular One), which both supplies the phones wholesale and pays the retailer commissions when customers activate service. Customers can buy a phone alone, buy a phone at a reduced price when they sign up for carrier service through the retailer, or sign up for service without buying a phone. The retailer earns the same activation commission whether or not a phone is bought, and forfeits it if the customer breaks a one-year service contract. About 9% of the phones came from the carrier and sold for under $49, but the retailer's overall cellular department is profitable when discounts, commissions, and service fees are counted together.

The retailer asked whether those discounted phones are "promotional items" that it cannot buy for resale — which would make the phones taxable to the retailer at the time it purchases them, rather than resold tax-free.

The Department said no — the phones are purchased for resale. Under 20 NYCRR § 526.6(c)(4), property is treated as not purchased for resale in three situations: (a) it's given away free for promotion/advertising; (b) it's sold for a minimal charge that doesn't reflect its true cost; or (c) it's a promotional item not ordinarily sold in the business. Categories (a) and (c) plainly don't fit — the retailer doesn't give phones away and cellphones are exactly what it sells. And category (b) doesn't fit either: what the retailer is really selling is a combination of a phone and a service contract whose total selling price yields a gross profit. So the discounted phones are not promotional property sold below cost; they are bought for resale (exclusion under § 526.6(c)(1)), meaning the retailer buys them tax-free and collects tax on the retail sale to the customer.

What this means for you

Retailers who discount hardware to drive service sign-ups

A steep discount on a phone (or similar device) doesn't automatically convert it into a taxable "promotional giveaway." The Department looks at the whole bundled transaction: if you're genuinely selling the item — even below its standalone cost — as part of a package (hardware plus a commissionable service contract) that turns an overall profit, the item is bought for resale, not promotional property. Buy it with a resale certificate and charge tax on the customer's purchase price.

The line to watch

The taxable "promotional item" categories in § 526.6(c)(4) are for things you give away or sell for a token, cost-less charge as advertising, or that you don't ordinarily sell. A product that is your actual stock-in-trade, sold at a real (even discounted) price within a profitable package, sits on the resale side of the line.

Accountants and tax professionals

This opinion turns on characterizing the transaction as the sale of a phone-plus-service package rather than a below-cost promotional phone. The commissions and service revenue are part of the economic substance the Department credited in finding an overall profit, defeating the § 526.6(c)(4)(ii) "minimal charge not reflecting true cost" category.

Common questions

Q: If I sell a phone below cost to get a customer to sign a service contract, is it a taxable promotional item?
A: Not on these facts. The Department viewed the deal as selling a phone-plus-service package that turns an overall profit, so the phone is purchased for resale — not a promotional item sold below cost.

Q: What are the "promotional item" categories that block resale treatment?
A: Under 20 NYCRR § 526.6(c)(4), property given away free for promotion, sold for a minimal charge not reflecting its true cost, or not ordinarily sold in the business is treated as not purchased for resale.

Q: So do I pay sales tax when I buy the phones from the carrier?
A: No. Because the phones are purchased for resale under § 526.6(c)(1), you buy them tax-free with a resale certificate and collect tax on the retail sale to your customer.

Q: Did the under-$49 sale price of some phones matter?
A: The Department noted only about 9% of phones came from the carrier and sold for under $49, but concluded the overall package was profitable, so the below-cost price on some units didn't make them promotional property.

Q: Can another retailer rely on this opinion?
A: No. An advisory opinion binds the Department only as to the petitioner and the facts described; another taxpayer with different facts cannot rely on it.

Citations and references

Statutes and authorities:

• 20 NYCRR § 526.6(c)(1) (resale exclusion — property purchased for resale is not taxed until transferred to the customer)
• 20 NYCRR § 526.6(c)(4) (property given away, sold for a minimal charge below true cost, or not ordinarily sold is not purchased for resale)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a93_6s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (6)S
Sales Tax
January 7, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S910913A

On September 13, 1991 a Petition for Advisory Opinion was received from Anthony J.
Ragusa, Jr. d/b/a The Stereo Advantage, 5195 Main Street, Williamsville, New York 14221.
The issue raised by Petitioner, Anthony J. Ragusa, Jr. d/b/a The Stereo Advantage, is whether
Petitioner's sale of certain cellular telephones are the sale of promotional items which may not be
purchased for resale under Section 526.6(b)(4) of the Sales and Use Tax Regulations.
Petitioner is a retail establishment which sells electronic equipment, including cellular
telephones. As a retailer, Petitioner does not pay sales tax on cellular telephones purchased for
purpose of resale. Petitioner does charge sales tax on the retail price of the cellular phones sold to
customers.
A cellular telephone is of no use to a purchaser unless the purchaser contracts for telephone
service from a cellular telephone carrier. Although cellular telephone carriers generally sell
telephone equipment and provide telephone service, retail establishments such as Petitioner do not
provide telephone service. However, Petitioner is an authorized agent of a telephone service carrier
and can offer service contracts to customers in that capacity. The options to a customer of Petitioner
are (a) the customer may purchase a telephone from Petitioner; (b) the customer may purchase a
telephone and contract for telephone service through Petitioner in its capacity as agent for the carrier;
or (c) the customer may contract for service through Petitioner in its capacity as agent for the carrier,
without the purchase of a telephone.
One such service carrier, Buffalo Telephone Company (also know as Cellular One), has
approached retail establishments such as Petitioner and asked them to offer service contacts with
Buffalo Telephone Company. The service carrier is also a wholesale supplier of cellular telephones
to Petitioner. Petitioner is compensated by the service carrier through a variety of programs which
include: (a) reduced prices on cellular telephones; (b) a commission on activation of service
contracts; (c) participation in advertising costs; and (d) incentive discounts. Petitioner offers to its
customers pricing programs for the retail purchase of telephones, which include a reduced price for
the telephone when the customer contracts for carrier service through Petitioner as agent. The
commission paid to Petitioner by the carrier is payable only if the customer contracts for one full year
of service. In the event that the customer defaults on the one year contract obligation to the carrier,
Petitioner forfeits the commission to the carrier. Nevertheless, the price of the telephone to the
customer under such circumstances is not modified. The amount of the commission paid by the
carrier is the same commission whether or not the customer purchases a telephone, and that
commission is forfeited as well if the customer defaults on the one year service contract with the
carrier.

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Sales Tax
January 7, 1993
Of Petitioner's telephone business, only 9% of the telephones sold were purchased from
Buffalo Telephone Company and sold for less than $49. However, in each case Petitioner profits
from the overall package transaction. Even though a customer may receive a reduced price for a
telephone, Petitioner's overall cellular telephone department is profitable due to discounts and
commissions from the service carrier and charges to the customer for installation and service. The
cost of the telephone, commissions earned, installation fees and service fees are viewed as a whole
by Petitioner in determining its pricing and retail strategy for cellular telephones. Competition from
similar retailers also will dictate pricing strategies.
Buffalo Telephone Company has no control over the price at which Petitioner sells its
telephone equipment. Petitioner receives the same commission from Buffalo Telephone Company
whether or not a telephone is purchased and regardless of the retail price charged to the customer for
the telephone. Competition with other retail sellers of telephone equipment is an important factor
in Petitioner's pricing strategies. For example, Buffalo Telephone Company itself discounts its
telephone equipment significantly when the purchaser also buys telephone service.
Section 526.6(c) of the Sales and Use Tax Regulations define the resale exclusion as follows:
(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 on
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.
*

*

*

(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.
(iii) A resale certificate may not be used by the person making the purchases
described in subparagraphs (i) and (ii) of this paragraph for such purchases.

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Sales Tax
January 7, 1993
Example 2:

A bank has purchased premiums which will be given to depositors
upon the opening of an account in a new branch. As the bank is not
in the business of selling such items, and as it in fact does not sell
such items to its customers, the sale to the bank of such items of
tangible personal property is a retail sale which is taxable at the time
of purchase. The bank has not purchased these items for resale.

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 526.6(c)(4) of the Sales and Use Tax Regulations sets forth three sets of
circumstances under which purchases of tangible personal property will not be considered to have
been purchased for resale. The categories are:
a)

Property which is purchased and given away without charge for promotional
or advertising purposes.

b)

Property which is purchased for promotional or advertising purposes and sold
for a minimal charge which does not reflect its true cost, and

c)

Property which is purchased for promotional or advertising purposes and is
not ordinarily sold by that person in the operation of his business.

Categories "a" and "c" above are clearly inapplicable to Petitioner in the instant case since
Petitioner does not give away cellular telephones which is the product sold by Petitioner in the
ordinary operation of his business.
In the instant case the thing being sold by Petitioner to its customers is a combination of a
cellular telephone and a service contract for telephone services, the total selling price of which yields
a gross profit to Petitioner.
Therefore, the purchase of cellular telephones by Petitioner from Buffalo Telephone
Company for resale to its customers at a discount when purchased by the customers in conjunction
with the purchase of a service contract for telephone service upon which Petitioner receives
commissions does not constitute property purchased for promotional or advertising purposes and
sold for a minimal charge which does not reflect its true cost and thus does not come within the
circumstances indicated in category "b"

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TSB-A-93 (6)S
Sales Tax
January 7, 1993
Accordingly, the purchase of cellular telephones by Petitioner from Buffalo Telephone
Company under the circumstances described above does not fall within the exclusions provided by
Section 526.6(c)(4) of the Sales and Use Tax Regulations and thus are not subject to the imposition
of sales tax, in accordance with the provisions of Section 526.6(c)(1) of said regulations.

DATED: January 7, 1993

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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