Are sales of PBX telephone equipment to businesses exempt as telephone central office equipment, and are the related service contracts taxable?

Plain-English summary

ITT Communications Equipment and Systems Division sells PBX (Private Branch Exchange) telephone equipment to private companies in New York for their internal communications, and separately sells maintenance and service contracts for that equipment. It asked whether the PBX sales are exempt as telephone central office equipment under § 1115(a)(12), and whether the service contracts are taxable.

The Department held the PBX sales are taxable, and the service contracts are taxable too.

• The exemption exists but is limited. Section 1115(a)(12) exempts "telephone central office equipment or station apparatus ... for use directly and predominantly in receiving at destination or initiating and switching telephone or telegraph communication." Where it applies, the exemption covers State and local sales/use tax except New York City's tax under § 1107.
• The key limit: who buys it. Under 20 NYCRR 528.13(f), such equipment is exempt only when purchased or leased by the vendor of the telephone/telegraph service for sale of that service. Equipment bought by a subscriber to the service — even if comparable to central office equipment — is not eligible. (Regulation example: a telephone company's switchboards are exempt; an airline's call-switching consoles are not.)
• Why ITT's sales don't qualify. Although the PBX equipment is physically identical to telephone central office equipment, ITT sells it to end-user businesses, not to a telephone-service provider selling service. So it isn't exempt, and the receipts are taxable under § 1105(a).
• The service contracts are taxable. Section 1105(c)(3) taxes installing, maintaining, servicing or repairing tangible personal property not held for sale, and § 1105(c)(5) taxes those services on real property. The regulation makes it explicit: "the purchase of a maintenance or service contract is a taxable transaction" (20 NYCRR 527.5(c)(1)). So the maintenance and service contract receipts are taxable under § 1105(c)(3) or (5).

What this means for you

The central-office-equipment exemption follows the buyer, not the hardware. Identical equipment can be exempt or taxable depending on who purchases it: a telephone/telegraph service provider buying to provide service gets the exemption; a business buying the same gear for its own internal phone system does not. If you sell PBX or comparable equipment to end-user companies, treat those sales as taxable.

Maintenance and service contracts are their own taxable item. Separately selling a maintenance or service contract doesn't make it exempt — the purchase of the contract is itself a taxable transaction under 20 NYCRR 527.5(c)(1), whether it covers tangible personal property or real property.

Remember the New York City wrinkle. Even where § 1115(a)(12) applies, it doesn't reach New York City's sales and use tax under § 1107. That carve-out matters for equipment used in the City.

Common questions

Q: Our PBX gear is the same as phone-company central office equipment — why isn't it exempt?
A: Because § 1115(a)(12), as applied by 20 NYCRR 528.13(f), exempts the equipment only when a telephone/telegraph service vendor buys it to provide service. Sold to a business subscriber for its own use, it's taxable even though it's physically identical.

Q: Who does qualify for the exemption?
A: A telephone or telegraph company purchasing or leasing central office equipment or station apparatus to provide its communication service for sale. A subscriber buying comparable equipment for its own operations does not qualify.

Q: Are the maintenance and service contracts taxable?
A: Yes. The purchase of a maintenance or service contract is a taxable transaction under 20 NYCRR 527.5(c)(1), taxed under § 1105(c)(3) (tangible personal property) or § 1105(c)(5) (real property).

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — imposes sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1115(a)(12) — exempts telephone central office equipment and station apparatus used directly and predominantly in receiving, initiating and switching telephone/telegraph communication
• Tax Law § 1105(c)(3) — taxes installing/maintaining/servicing/repairing tangible personal property not held for sale
• Tax Law § 1105(c)(5) — taxes maintaining/servicing/repairing real property
• Tax Law § 1107 — New York City sales and use taxes (not reached by the § 1115(a)(12) exemption)
• 20 NYCRR 528.13 — telephone/telegraph equipment exemption; exempt only when bought by the service vendor for sale of service
• 20 NYCRR 527.5(c)(1) — the purchase of a maintenance or service contract is a taxable transaction

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h81_118s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(118)S
Sales Tax
June 12, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S800617A

On June 17, 1980 a Petition for Advisory Opinion was received from ITT
Communications Equipment and Systems Division, a division of International
Telephone and Telegraph Corporation, 320 Park Avenue, New York, New York 10022.
The issues raised are whether Petitioner's sales of certain telephone
equipment constitute sales of telephone central office equipment, whether such
sales are exempt from the sales and use taxes imposed under Article 28 of the Tax
Law pursuant to Section 1115(a)(12) thereof, and whether maintenance and service
contracts relating to the equipment sold by Petitioner are exempt from sales and
use tax.
Petitioner states that it sells PBX (Private Branch Exchange) telephone
central office communications and related equipment to private companies, located
within New York State, for use in internal communications. Petitioner states that
the PBX equipment "involves telephone interoffice communications equipment which
directly interconnects with American Telephone and Telegraph telephone lines and
equipment. As such, such PBX equipment is certainly comparable to telephone
equipment used directly in receiving, initiating and switching telephone
communications." Petitioner provides, separate and apart from the sale of the
telecommuncations equipment, separate service and maintenance contracts relating
to such equipment.
Section 1105(a) of the Tax Law imposes a tax on the receipts from "...every
retail sale of tangible personal property, except as otherwise provided in this
article." Section 1115(a)(12) provides for an exemption from such imposition of
tax with respect to "...telephone central office equipment or station apparatus
or comparable telegraph equipment for use directly and predominantly in receiving
at
destination
or
initiating
and
switching
telephone
or
telegraph
communication...." This exemption is applicable to both State and local sales and
use taxes, with the exception of New York City's sales and use taxes, imposed
under section 1107 of the Tax Law.
The meaning and intent of section 1115(a)(12) of the Tax Law, quoted above,
are elucidated in the Sales and Use Tax Regulations, as follows:
"(f) Telephone and telegraph equipment. (1) Telephone and telegraph central
office equipment and station apparatus, used directly and predominantly in
receiving at destination, initiating or switching telephone and telegraph
communication is exempt, when such equipment and apparatus is purchased or leased
by the vendor of such service for sale.
(2) The purchase or lease of equipment by a person subscribing to a
telephone or telegraph service, which is comparable to telephone or telegraph
central office equipment or station apparatus is not eligible for the exemption.
Example 1:

TP-8 (4/80)

A telephone company purchases switchboards and hand sets
for installation at a subscriber's premises. Such
purchases are exempt.

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

2
TSB-H-81(118)S
Sales Tax
June 12, 1981

Example 2:

An airline company purchases consoles which initiate,
receive and switch telephone calls which are sent over
telephone company lines. The consoles are not exempt, as
they were not purchased by a telephone company in
connection with a telephone service for sale." 20 NYCRR
528.13.

In accordance with the foregoing, the equipment at issue herein, while
physically identical with "telephone central office equipment or station
apparatus," is not itself "telephone central office equipment or station
apparatus" within the meaning of section 1115(a)(12) of the Tax Law because such
equipment or apparatus was not "purchased or leased by the vendor of.
..[telephone and telegraph] service for sales." 20 NYCRR 528.13(f)(1), quoted
supra. Accordingly, the receipts from Petitioner's sales are not and were not
exempt from the tax imposed under section 1105(a) of the Tax Law by reason of the
provisions of section 1115(a)(12) of the Tax Law.
Petitioner inquires as to the taxability of the receipts from the sale of
maintenance and service contracts relating to the equipment in question. Section
1105(c) of the Tax Law imposes a tax on the receipts from the sale of certain
services, including the following:
"(3)

Installing tangible personal property, or maintaining, servicing or
repairing tangible personal property not held for sale in the
regular course of business....

...
(5)

Maintaining, servicing or repairing real property, property or
land...."

The applicability of these provisions to receipts from the sale of
maintenance and service contracts is rendered explicit in the Sales and Use Tax
Regulations, where it is provided that the "...purchase of a maintenance or
service contract is a taxable transaction." 20 NYCRR 527.5(c)(1). Although this
cited regulation is contained in a section relating to tangible personal property
it is equally applicable to contracts (not otherwise exempt) for the maintenance
and repair of real property, property or land. Accordingly, receipts from the
sale of the subject maintenance and service contracts are and were subject to
tax, under either section 1105(c)(3) or (5) of the Tax Law.

DATED: May 28, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau