Was a South Carolina Universal Service Fund surcharge passed through on a telephone bill subject to sales and use tax?

Plain-English summary

South Carolina Revenue Ruling #03-1 said a Universal Service Fund surcharge passed through by a telephone company was generally part of the company's taxable gross proceeds from communication services.

The surcharge reimbursed the telephone company for its required contribution to the state fund. The carrier could choose whether to recover that expense from customers. Because the surcharge was imposed on the carrier rather than directly on the customer, a passed-through amount became a receipt of the carrier and an expense recovery, not a tax or fee merely collected in trust for the government.

The ruling therefore treated the surcharge like the underlying telephone charge. If it related to taxable communication service, it was taxable. If a portion was based on exempt or nontaxable service—such as the examples of federal-government sales, long-distance charges, or specified access charges—that portion was not taxable.

RR 19-8 expressly superseded this ruling and provided later, broader surcharge guidance.

What this means for you

Telephone companies

Separately stating a provider expense did not remove it from gross proceeds. The tax treatment followed the underlying service to which the surcharge related.

Business and residential customers

The ruling did not treat every dollar of a mixed surcharge as taxable. Amounts attributable to exempt or nontaxable service followed that treatment.

Tax professionals

Use RR 19-8 for later provider-specific treatment. RR 03-1 is useful for the historical distinction between a provider expense passed through to customers and a charge imposed directly on customers.

Common questions

Q: Was the USF surcharge generally taxable?
A: Yes, when passed through by the telephone company on taxable communication service.

Q: Why was it included in gross proceeds?
A: The carrier owed the contribution and could choose to recover it, making the recovered surcharge a carrier receipt and expense recovery.

Q: Was the surcharge an exempt access charge?
A: No. The ruling distinguished the USF surcharge from customer-line and carrier-access charges.

Q: Is RR 03-1 current?
A: No. RR 19-8 expressly superseded it.

Citations and references

• S.C. Code Ann. §§ 12-36-910(B)(3) and 12-36-1310(B)(3) — taxable communication charges
• S.C. Code Ann. § 12-36-90 — gross proceeds
• S.C. Code Ann. § 12-36-2120 — exemptions discussed
• S.C. Code Ann. § 58-9-280 — South Carolina Universal Service Fund
• SC Revenue Ruling 19-8 — expressly superseded RR 03-1

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR03-1.pdf
• Official superseding RR 19-8 PDF: RR19-8.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC REVENUE RULING #03-1

SUBJECT:

Universal Service Fund Surcharge
(Sales and Use Tax)

EFFECTIVE DATE: November 1, 2003
SUPERSEDES:

All previous advisory opinions and any oral directives in conflict
herewith.

REFERENCES:

S. C. Code Ann. Section 12-36-910(B)(3) (Supp. 2001)
S. C. Code Ann. Section 12-36-1310(B)(3) (Supp. 2001)
S. C. Code Ann. Section 12-36-60 (2000)
S. C. Code Ann. Section 12-36-90 (2000 and Supp. 2001)
S. C. Code Ann. Section 58-9-280 (Supp. 2001)
S. C. Code Ann. Section 12-36-2120 (2000 and Supp 2001)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2001)
SC Revenue Procedural Bulletin #02-3

SCOPE:

The purpose of a Revenue Advisory Bulletin is to provide guidance to the
public and to Department personnel. It is a written statement issued to
apply principles of tax law to a specific set of facts or a general category
of taxpayers. A Revenue Advisory Bulletin does not have the force or
effect of law, and is not binding on the public. It is, however, the
Department’s position and is binding on agency personnel until
superseded or modified by a change in statute, regulation, court decision,
or advisory opinion.

Question:
Are Universal Service Fund surcharges billed by telephone companies to their customers subject
to the sales and use tax?
Conclusion:
Universal Service Fund surcharges billed by telephone companies to their customers are part of
the “gross proceeds accruing or proceeding from the charges for the ways or means for the
transmission of the voice or of messages” and therefore subject to the sales and use tax.

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However, any portion of the Universal Service Fund surcharge based on charges for telecommunication services that are exempt from the sales and use tax under Code Section 12-36-2120
(e.g., sales to the federal government, long distance charges, or certain access charges) or are
otherwise nontaxable, are a part of the gross proceeds accruing or proceeding from the charges
for an exempt service or a nontaxable charge and therefore not subject to the sales and use tax.
Facts:
Beginning October 1, 2001, telephone companies in South Carolina began adding to their
customers’ bills a Universal Service Fund (“USF”) surcharge of 2.13% of their charges for
telecommunication services. The surcharge reimburses the companies for the contributions they
must make to the USF maintained and administered by the South Carolina Public Service
Commission (“PSC”).
The purpose of the USF is to promote universal service by ensuring the continued availability of
basic local exchange service at affordable rates. The PSC distributes money from the USF to
companies whose cost of providing local exchange service exceeds the rates that those
companies are allowed to charge for that service.
The issue at hand is whether this surcharge is a part of the gross proceeds of the charges for
communication services and subject to the tax.
Discussion:
Code Sections 12-36-910(B)(3)(a) and 12-36-1310(B)(3) impose the sales and use tax upon:
the gross proceeds accruing or proceeding from the charges for the ways or means for the
transmission of the voice or of messages, including the charges for use of equipment
furnished by the seller or supplier of the ways or means for the transmission of the voice
or of messages …
In addition, Code Section 12-36-910(B)(3)(b), which concerns “bundled transactions” under the
sales tax law, states:
(i) for purposes of this item, a 'bundled transaction' means a transaction consisting of
distinct and identifiable properties or services, which are sold for one nonitemized price
but which are treated differently for tax purposes;
(ii) for bills rendered on or after January 1, 2004, that include telecommunications
services in a bundled transaction, if the nonitemized price is attributable to properties or
services that are taxable and nontaxable, the portion of the price attributable to any
nontaxable property or service is subject to tax unless the provider can reasonably identify
that portion from its books and records kept in the regular course of business for purposes
other than sales taxes.

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The term "tangible personal property," as used in Chapter 36, is defined at Code Section
12-36-60, in part, as "personal property which may be seen, weighed, measured, felt, touched or
which is in any other manner perceptible to the senses." The next sentence of that section reads
in part:
It also includes services and intangibles, including communications, laundry and related
services, furnishing of accommodations and sales of electricity, the sale or use of which
is subject to tax under this chapter ... (Emphasis added)
The Code does not provide definitions for various terms or phrases found in Code Sections
12-36-910(B)(3)(a) and 12-36-1310(B)(3); therefore, it is necessary to determine their "ordinary
and popular meaning." The Department, in interpreting Code Sections 12-36-910(B)(3)(a) and
12-36-1310(B)(3) (and their predecessors), has long used the definitions found in the Second
College Edition of the American Heritage Dictionary for defining these terms and phrases.
Substituting the definitions in the Second College Edition of the American Heritage Dictionary
for terms found in Sections 12-36-910(B)(3)(a) and 12-36-1310(B)(3), the literal meaning
becomes - the total amount of money derived, exclusive of deductions, from a commercial
venture and accruing or proceeding from charges for the manner, method or instruments for
sending a signal of the voice or of messages is subject to the sales and use tax. See SC Revenue
Ruling #89-14.
Furthermore, the definition of tangible personal property, as defined in Code Section 12-36-60,
includes services and intangibles "the sale or use of which is subject to tax under [Chapter 36].”
A service or intangible "the sale or use of which is subject to tax under [Chapter 36]" is
"communications." The Second College Edition of the American Heritage Dictionary defines
"communication,” in part, as "[t]he exchange of thoughts, messages or information, as by speech,
signals or writing." "Communications" is defined, in part, as, "a means of communicating esp.: a
system of sending and receiving messages, such as mail, telephone and television." As with the
above definitions, the Department has long used the definition found in the Second College
Edition of the American Heritage Dictionary for the term “communications.”
Based on the above discussion, it is the Department’s position that charges for the ways or means
of communication include charges for access to, or use of, a communication system (the manner,
method or instruments for sending or receiving a signal of the voice or of messages), whether
this charge is based on a fee per a specific time period or per transmission. This is further
supported by the definition of the terms "sale" and "purchase," which are defined in Code
Section 12-36-100 to include "a license to use or consume." Therefore, the gross proceeds
accruing or proceeding from the charges for access to, or use of, a telephone system is subject to
the tax.
To specifically address the application of the tax to the USF surcharge, we must look more
closely as to what is includable in “gross proceeds.”

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Code Section 12-36-90 defines "gross proceeds" and reads, in part:
Gross proceeds of sales, or any similar term, means the value proceeding or accruing from
the sale, lease, or rental of tangible personal property.
(1) The term includes:

(b) the proceeds from the sale of tangible personal property without any deduction
for:
(i) the cost of goods sold;
(ii) the cost of materials, labor, or service;
(iii) interest paid;
(iv) losses;
(v) transportation costs;
(vi) manufacturers or importers excise taxes imposed by the United States; or
(vii) any other expenses.
In Meyers Arnold v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E. 2d. 920 (1985),
the Court of Appeals, in interpreting the definition of "gross proceeds of sales" with respect to
lay away fees paid in conjunction with lay away sales, held:
Section 12-35-30 [now Section 12-36-90] defines gross proceeds of sales as "the value
proceeding or accruing from the sale of tangible personal property ... without any
deduction for service costs." But for the lay away sales, Meyers Arnold would not
receive the lay away fees. The fees are obviously rendered in making lay away sales. For
these reasons, this court holds the lay away fees are part of the gross proceeds of sales and
subject to the sales tax.
The Commissioners, in Decision S-D-174, held a property damage waiver fee charged by a
person engaged in the business of renting tangible personal property was subject to the sales tax.
The Commission, in citing Meyers Arnold v. South Carolina Tax Commission, supra, stated:
Just as in Meyers Arnold, supra, the service fee here is taxable. But for the lease of
tangible personal property, the taxpayer would not have received the fee. The fee is
obviously charged for the additional service of providing a lease of property free from
liability for damage. In the absence of such service, the lessee, under the taxpayer's lease
agreements, would be "liable for any loss, theft, damage or destruction of leased
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property." We find and conclude the fee for the property damage waiver is part of gross
proceeds of sale subject to tax.
In Decision S-D-127, the Commissioners held that "the amount in a lease contract equal to ad
valorem taxes which is paid annually by the lessee to the lessor is includable in gross proceeds of
sales."
The Department addressed a similar issue in SC Revenue Ruling #97-20 when determining if
certain local fee and taxes were includable in “gross proceeds” and subject to the sales tax. In
that advisory opinion the Department held:
Finally, the following additional issues must be considered when determining if local
fees and taxes are includable in “gross proceeds of sales” for purposes of the state sales
tax:
(1) Is the local government fee or tax imposed on the retailer or the consumer?
(2) Is the fee or tax, by state law, administered in the same manner as the state sales
and use tax?
With respect to the first issue, a distinction must be made between local fees or taxes that
are imposed upon the retailer and local fees or taxes that are imposed upon the customer.
With respect to fees and taxes imposed upon the customer, the retailer is merely a
collection agent for the local government that has enacted the fee or tax by ordinance.
As such, the fee or tax the retailer is required to collect and hold in trust for the local
government is not a receipt of the retailer. It is a receipt of the local government for
whom the retailer is the collection agent. Therefore, local fees and taxes imposed upon
the retailer's customers are not includable in "gross proceeds of sales."
A fee or tax imposed upon the retailer is a receipt of the retailer. The retailer has the
discretion to collect the fee or tax from his customer, but he is not required to do so. As
such, the fee or tax when collected is a receipt of the retailer. When paid to the local
government, the fee or tax is an expense of the retailer. Therefore, local fees and taxes
imposed upon the retailer are includable in "gross proceeds of sales."
Therefore, city and county fees and taxes, when imposed on the retailer, are part of gross
proceeds of sales and therefore subject to the sales tax. City and county fees and taxes,
when imposed on the consumer, are not a part of gross proceeds of sales and therefore
not subject to the sales tax.
With respect to the USF, Code Section 58-9-280 reads in part:
(E) In continuing South Carolina’s commitment to universally available basic local
exchange telephone service at affordable rates and to assist with the alignment of prices
and/or cost recovery with costs, and consistent with applicable federal policies, the
commission [PSC] shall establish a universal service fund (USF) for distribution to a
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carrier(s) of last resort. The commission shall issue its final order adopting such
guidelines as may be necessary for the funding and management of the USF within
twelve months of the effective date of this section except that the commission, upon
notice, may extend that period up to an additional ninety days. These guidelines must
not be inconsistent with applicable federal law and shall address, without limitation, the
following:
(1) The USF shall be administered by the commission or a third party designated by the
commission under guidelines to be adopted by the commission.
(2) The commission shall require all telecommunications companies providing
telecommunications services within South Carolina to contribute to the USF as
determined by the commission.
(3) The commission also shall require any company providing telecommunications
service to contribute to the USF if, after notice and opportunity for hearing, the
commission determines that the company is providing private local exchange services or
radio-based local exchange services in this State that compete with a local
telecommunications service provided in this State.
(4) The size of the USF shall be determined by the commission and shall be the sum of
the difference, for each carrier of last resort, between its costs of providing basic local
exchange services and the maximum amount it may charge for the services. The
commission may use estimates to establish the size of the USF on an annual basis,
provided it establishes a mechanism for adjusting any inaccuracies in the estimates.
(5) Monies in the USF shall be distributed to a carrier of last resort upon application and
demonstration of the amount of the difference between its cost of providing basic local
exchange services and the maximum amount it may charge for such services.
(6) The commission shall require any carrier of last resort seeking reimbursement from
the fund to file the information necessary to determine the costs of providing basic local
exchange telephone services. In the event that a carrier of last resort does not currently
conduct detailed cost studies relating to such services, the commission shall allow for an
appropriate surrogate for such study.
(7) The commission shall have the authority to make adjustments to the contribution or
distribution levels based on yearly reconciliations and to order further contributions or
distributions as needed.
(8) After notice and an opportunity for hearing to all affected carriers, the commission by
rule may expand the set of services within the definition of universal service based on a
finding that the uniform statewide demand for such additional service is such that
including the service within the definition of universal service will further the public
interest; provided, however, that before implementing any such finding, the commission
shall provide for recovery of unrecovered costs through the USF of such additional
service by the affected carrier of last resort.
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In Order No. 2001-1088 of the SC Public Service Commission, the administrator of the USF,
the Commission held the following in its “Guidelines for South Carolina Universal Service Fund
(USF)” (See Exhibit A of the order):

8. Recovery of USF Contributions
   • Contributions to the USF may be recovered through an explicit surcharge on
   retail customers’ bills. A carrier may choose not to recover it contribution.
   However, any carrier attempting to recover contributions to the State USF shall
   do so through the use of a uniform surcharge on end-user retail revenues. Any
   surcharge applied to end user retail revenues by the carrier shall not exceed the
   percentage assessed to the carrier, as determined by the Commission Staff.
   • The USF Administrator shall develop an explicit uniform retail surcharge
   percentage to be used as a USF contribution recovery mechanism. The USF
   surcharge may be applied to the retail revenue billed to all end users of
   telecommunications. The surcharge shall be updated at least annually and shall
   be applied in a manner consistent with the contributions collected by the
   Administrator, including periodic updates.
   Based on the above, the USF surcharge is a receipt of the retailer (telecommunications
   company). The retailer has the discretion to collect the USF surcharge from its customer, but the
   retailer is not required to do so. As such, the USF surcharge when collected is a receipt of the
   retailer. When paid to the PSC, the USF surcharge is an expense of the retailer. Therefore, the
   USF surcharge is includable in “gross proceeds of sales.”
   In addition, the USF surcharge is not an access charge. As stated in Code Section 58-9-280(E)
   the USF was established as part of “South Carolina’s commitment to universally available basic
   local exchange telephone service at affordable rates and to assist with the alignment of prices
   and/or cost recovery with costs.” The American National Standard for Telecommunications –
   Telecom Glossary 2000 (http://www.atis.org/tg2k/) defines the term “access charge” as:
9. A fee charged by a local exchange carrier for use of its local networks. [FCC] 2. A
   charge made by a local exchange carrier for use of its local exchange facilities for a
   purpose such as the origination or termination of traffic that is carried to or from a
   distant exchange by an interexchange carrier.
   Based on this definition, a “customer access line charge” exempt under Code Section 12-362120(11)(c) is generally defined as a line fee charged a customer by a local exchange carrier for
   use of its local networks. A “carrier access charge” exempt under Code Section 12-362120(11)(c) is generally defined as a charge made by a local exchange carrier to an
   interexchange carrier for use of its local exchange facilities for the origination or termination of
   traffic that is carried to or from a distant exchange by an interexchange carrier.
   The USF surcharge is not a charge by a local exchange carrier for use of its network or facilities.
   As stated above, the purpose of the USF is to ensure “universally available basic local exchange
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telephone service at affordable rates and to assist with the alignment of prices and/or cost
recovery with costs.” Also, unlike an access charge, the carrier does not retain the USF
surcharge. It is remitted to the PSC.
Therefore, the USF surcharge is not a customer access line charge or a carrier access charge and
is not exempt under the provisions of Code Section 12-36-2120(11)(c).
Furthermore, based on the provisions of Code Section 58-9-280 and Order No. 2001-1088 of the
SC Public Service Commission, the USF surcharge, by itself, is not a charge set by statute for a
governmental license or permit. Again, the purpose of the USF is to ensure “universally
available basic local exchange telephone service at affordable rates and to assist with the
alignment of prices and/or cost recovery with costs.”
In addition, neither the South Carolina Sales and Use Tax Code (Title 12, chapter 36) nor the
provisions of Code Section 58-9-280 provide a specific exemption from the sales and use tax for
the USF surcharge.
Finally, Code Section 12-36-2120 exempts from the sales and use tax certain sales that may
apply to charges by a telephone company to a customer. For example, Code Section 12-362120(2) exempts sales to the federal government and Code Section 12-36-2120(11) exempts toll
charges for the transmission of voice or messages between telephone exchanges (long distance)
and carrier access charges and customer access line charges established by the Federal
Communications Commission or the South Carolina Public Service Commission.
Therefore, Universal Service Fund surcharges billed by telephone companies to their customers
are part of the “gross proceeds accruing or proceeding from the charges for the ways or means
for the transmission of the voice or of messages” and therefore subject to the sales and use tax.
However, any portion of the Universal Service Fund surcharge based on charges for
telecommunication services that are exempt from the sales and use tax under Code Section 1236-2120 (e.g., sales to the federal government, long distance charges, or certain access charges)
or are otherwise nontaxable, are a part of the gross proceeds accruing or proceeding from the
charges for an exempt service or a nontaxable charge and therefore not subject to the sales and
use tax.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank
Burnet R. Maybank, Director
, 2003
July 2
Columbia, South Carolina

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