When a cellular phone retailer sells or gives away phones at a reduced price (or free) bundled with a carrier service contract, is its original purchase of those phones still tax-exempt as a purchase for resale -- and what about the retailer's commissions, installation fees, and activation fees?

Subject

Whether there is any sales or use tax due on the original purchase of cellular telephones by XYZ which will ultimately be transferred as part of a cellular telephone service.

What this means for you

A retailer (called "XYZ" in the opinion, requested through its accountants KPMG Peat Marwick) sells cellular phones and, as an authorized agent of a telephone carrier, also signs customers up for cellular service contracts. Customers can buy just a phone, buy a phone plus a service contract through XYZ, or sign up for service alone with no phone. When a customer bundles a phone with a service contract, XYZ often prices the phone at a reduced rate or gives it away free -- but XYZ still profits, since it earns a commission from the carrier for every activated service contract and separately charges installation/activation fees.

The opinion addressed five linked questions. First, since XYZ doesn't pay sales tax on phones it buys to resell, does bundling a phone free or cheap with a service plan change that? New York's regulations only strip the resale exclusion from a purchase when the item is (a) given away purely for promotion/advertising, (b) sold for a token amount not reflecting true cost, or (c) not something the buyer ordinarily sells. None applied here: XYZ isn't giving phones away as pure advertising -- it's using them to drive commission-earning service contracts, factoring the phone's cost, expected commission, and fees into one overall pricing strategy, and cellular phones are XYZ's ordinary business. So the phones remain tax-exempt purchases for resale no matter how they're ultimately priced to the customer. Second, XYZ's carrier commissions for signing up customers aren't taxed at all. Third, XYZ must collect sales tax on its full charges to customers for the cellular telephone service itself -- including any installation and activation fees it bills on the carrier's behalf -- because those fees are treated as just another component of the taxable telephone-service charge, not a separate exempt item.

Q&A

Q: We sell electronics/equipment and give some away free or cheap when bundled with a service contract we broker for commission -- do we owe tax on our own wholesale purchase of that equipment?
A: Not under this opinion's reasoning, as long as you ordinarily sell that item in your business and your pricing/commission strategy reflects real economics (not a token promotional giveaway) -- the purchase stays exempt as a purchase for resale under 20 NYCRR § 526.6(c)(4)'s promotional-exception test.

Q: Do we owe sales tax on the commission we earn from a carrier or service provider for signing up a customer?
A: No -- this opinion held the commission itself isn't subject to sales or use tax.

Q: What about installation and activation fees we bill to customers on a carrier's behalf?
A: Those ARE taxable -- the opinion treats them as part of the total, taxable charge for telephone service under Tax Law § 1105(b), not a separate exempt line item.

Citations

• Tax Law § 1101(b)(4) -- defines "retail sale," excluding sales for resale.
• 20 NYCRR § 526.6(c)(4) -- lists the three circumstances (pure promotional giveaway, token-price sale, or item not ordinarily sold) that strip the resale exclusion from a purchase.
• Tax Law § 1105(b) -- imposes sales tax on telephone/telecommunication service receipts, including installation and activation fees as components of that charge.
• Anthony J. Ragusa, Jr. d/b/a The Stereo Advantage, Adv Op Comm T&F, January 7, 1993, TSB-A-93(b)(S) -- prior opinion applied on the resale-exclusion promotional-exception test.
• KPMG Peat Marwick, Adv Op Comm T&F, May 3, 1994, TSB-A-94(23)S -- an earlier related opinion for the same requester on similar cellular-phone resale facts.
• Rochester Telephone Corporation, Advisory Op, Comm of T&F, December 9, 1987, TSB-A-87(1) -- installation/activation-type charges as part of taxable telephone service.
• Cellular Telephone Company, Advisory Op, Comm of T&F, October 11, 1989, TSB-A-89(38)S -- same point, applied to cellular service specifically.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a94_51s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (51)S
Sales Tax
December 20, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940722A

On July 22, 1994 a Petition for Advisory Opinion was received from KPMG Peat Marwick,
345 Park Avenue, New York, NY 10154.
The issues raised by Petitioner, KPMG Peat Marwick, are:

1. Whether there is any sales or use tax due on the original purchase of cellular telephones
   by XYZ which will ultimately be transferred as part of a cellular telephone service.
2. Whether XYZ's purchase of cellular telephones should be treated as items for promotion
   or advertising purposes when the telephones are offered at a reduced price or at no charge to XYZ's
   customers, whereby the purchase of the telephones would be subject to tax as a retail sale and not
   excluded from tax as a sale for resale as set forth in Section 526.6(c)(4) of the New York State Sales
   and Use Tax Regulations.
3. What is the correct tax base on the cellular telephones which may be sold by XYZ to its
   customers at a reduced price or at no charge in conjunction with a contract providing for telephone
   carrier services.
4. Whether the commission received by XYZ from the telephone carrier for securing a
   telephone service contract with its customers is subject to sales or use tax.
5. Whether the telephone installation and activation fees charged to customers on behalf of
   a telephone carrier are subject to sales or use tax.
   XYZ, Inc. (hereinafter "XYZ" or "the Company") is a retail establishment which sells
   electronic equipment, including cellular telephones (or "telephones"). As a retailer, XYZ does not
   pay sales tax on its purchases of cellular telephones since the telephones are for resale, but charges
   sales tax on the retail price of the telephones sold by XYZ to its customers.
   Along with the purchase of a cellular telephone, the customer would need to contract for
   telephone service from a cellular telephone carrier (or "telephone carrier"). XYZ is an authorized
   agent of a telephone carrier and can offer service contracts to its customers.
   Further, customers of XYZ have several options which include (a) the customer may
   purchase a telephone from XYZ; (b) the customer may purchase a telephone from XYZ and contract
   for telephone service through XYZ in its capacity as an agent for the telephone carrier;

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and (c) the customer may contract for telephone service through XYZ in its capacity as an agent for
the telephone carrier, without the purchase of a telephone.
As a result, XYZ offers to its customers pricing programs for the retail purchase of
telephones, which may include a reduced price or no charge for the telephone to the customer under
circumstances whereby the customer contracts for the telephone service through XYZ as an agent
for the cellular telephone carrier. XYZ is compensated by the telephone carrier through a
commission received upon activation of the service contract and will receive this commission
regardless of whether XYZ offers the telephone to the customer at the full retail selling price, at a
reduced price, or at no charge.
Although a customer may receive the telephone for a reduced price or at no charge as part
of contracting with the telephone carrier, XYZ receives profits due to the commissions received from
the telephone carrier for securing a telephone service contract with its customers and charges to its
customers for installation and activation of the telephone service ("activation"). The cost of the
telephone, commissions earned, installation and activation fees are viewed as a whole by XYZ in
determining its pricing and retail strategy for cellular telephones.
Section 1101 of the Tax Law states, in part:
Definitions.-- ... (b) 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:
(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....
Section 526.6 of the New York State Sales and Use Tax Regulations states, in part:
Retail sale. [Tax Law, §1101(b)(4)] (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.
*
*
*
(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.

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(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.
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 catalog.

Section 526.6(c)(4) of the Sales and Use Tax Regulations sets forth specific criterion under
which purchases of tangible personal property will not be considered to have been purchased for
resale. The specific criterion 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; or
c) Property which is purchased for promotional or advertising purposes and is not
ordinarily sold by that person in the operation of his business.
In the instant matter criteria "a", above, is not applicable since XYZ does not give away
cellular telephones without charge for promotional or advertising purposes. Criteria "b" does not
apply since XYZ's purchases of cellular telephones for resale to customers at a reduced price or for
inclusion at no charge to the customer in conjunction with the customer's purchase of a contract for
cellular telephone services for which XYZ receives commissions and in which the cost of the
telephone, commissions to be earned, installation and service fees are the basis for XYZ in
determining its pricing are not considered to be purchases of property for promotional or advertising
purposes and are not considered to be sold for a minimal charge which does not reflect its true cost.
Criteria "c" does not apply since XYZ ordinarily sells cellular telephones in the operation of its
business.

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Accordingly, XYZ's original purchase of cellular telephones are considered to be purchases
for resale purposes regardless of whether the telephones are sold individually or transferred in
conjunction with the sale of a cellular telephone service. Anthony J. Ragusa, Jr. d/b/a The Stereo
Advantage, Adv Op Comm T&F, January 7, 1993, TSB-A-93(b)(S); KPMG Peat Marwick, Adv Op
Comm T&F, May 3, 1994, TSB-A-94(23)S.
XYZ's purchases of cellular telephones are not considered to be purchases of items for
promotional or advertising purposes when offered to the customer at a reduced price or when offered
at no charge to the customer when such offering is in conjunction with the sale of a contract for
cellular telephone service. Anthony J. Ragusa, Jr. d/b/a The Stereo Advantage, supra; KPMG Peat
Marwick, supra.
XYZ must collect the tax imposed under Section 1105(b) of the Tax Law on the total receipts
from the sale of the cellular telephone service to a customer, including any installation or activation
fees or other charges billed to the customer on behalf of a telephone carrier. Installation fees and
activation fees are considered to be nothing more than an adjunct or component of the charges for
cellular telephone service. These services are part and parcel of basic telephone service supplied by
the telephone carrier. Rochester Telephone Corporation, Advisory Op, Comm of T & F, December
9, 1987 TSB-A-87(1), Cellular Telephone Company, Advisory Op, Comm of T & F, October 11,
1989 TSB-A-89(38)S.
The sales commission received by XYZ from the telephone carrier for securing a cellar
telephone service contract with the telephone carrier's customer will not be subject to sales or use
tax.

DATED: December 20, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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