A company operates private phone systems in office buildings and hotels, buying telecom service wholesale and reselling it to tenants/guests -- plus charging separately for wiring, phone jacks, moving/installing phones, and equipment maintenance. Which of these charges are taxable, which can be bought tax-free for resale, and does bundling vs itemizing change anything?

Plain-English summary

A tax practitioner asked on behalf of a client that runs private telephone systems inside office buildings and hotel complexes — the client buys local and long-distance telecom service wholesale and resells it to the buildings' tenants and hotel guests, while also charging separately for things like wiring, phone jacks, moving phones, and equipment maintenance.

Reselling telecom service. The client must collect sales tax on its ENTIRE charge to tenants/guests for the telecommunications service it resells (local sales tax specifically doesn't apply to interstate long-distance service). To avoid double taxation up the chain, the client can buy the underlying telecom service it resells — and any equipment it hands over to a customer's care, custody, and control as an integral part of that service — tax-free from its own supplier using a resale certificate.

Bundling vs. itemizing charges. Under Tax Code §§ 151.007(b) and 151.025(c), the rule cuts both ways: charges that are genuinely PART of the taxable telecom service can't be separately itemized just to dodge tax on them, but charges that are truly UNRELATED to providing the telecom service must be separately stated on the bill, or they get swept into the taxable telecom charge by default.

Installation, moving, and maintenance charges — three different results:

• Running NEW wiring and installing phone jacks in an EXISTING building is taxed as real property remodeling.
• MOVING or installing telephones as part of delivering the telecom service is taxed as part of the telecommunications service itself.
• MAINTENANCE of the telecom equipment is taxed as maintenance of tangible personal property.

Note on obsolete TIF language: the original letter also said the client would owe the Telecommunications Infrastructure Fund (TIF) assessment on its telecom revenue. That assessment was fully repealed effective September 1, 2008 — this portion of the 1998 letter no longer reflects current law, even though the document isn't individually flagged as superseded.

What this means for you

Private telephone system operators in office buildings, hotels, or similar complexes

Track your different charge types separately: telecom service resale, new wiring/jack installation, phone moves, and equipment maintenance are each taxed under a different theory (telecom-service tax, real-property-remodeling tax, or TPP-maintenance tax) — lumping them together risks under- or over-collecting.

Businesses reselling telecom service generally

You can buy the wholesale telecom service (and equipment transferred as part of delivering it) tax-free via resale certificate — but remember the itemization rule: charges unrelated to the telecom service must be broken out separately on your invoices, or they risk being swept into the taxable telecom charge.

Common questions

Q: Can I avoid tax on part of my telecom service charge just by billing it as a separate line item?
A: Not per this letter — charges that are genuinely part of the taxable telecom service can't be separately stated just to avoid tax; only charges truly unrelated to that service need (and get) separate itemization.

Q: Is installing new wiring and phone jacks in an existing building taxed the same as moving an existing phone?
A: No, per this letter — new wiring/jack installation is taxed as real property remodeling, while moving/installing phones as part of the telecom service is taxed as part of that service instead.

Q: Is the Telecommunications Infrastructure Fund assessment mentioned in this letter still owed today?
A: No — it was repealed effective September 1, 2008, so that part of this 2000 letter's answer is now obsolete.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.007(b) (bundled service charges included in taxable sales price)
• Tex. Tax Code § 151.025(c) (separate statement required for nontaxable charges)
• 34 Tex. Admin. Code Rule 3.344 (Telecommunications Services)
• 34 Tex. Admin. Code Rule 3.285 (Resale Certificates; Sales for Resale)
• 34 Tex. Admin. Code Rule 3.1101 (Telecommunications Infrastructure Fund assessment — repealed 2008)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200003151L

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

March 28, 2000

Dear **:

You have a client that operates private telephone systems in office buildings
and hotel real estate complex's. The client buys local and long distance
telecommunications service and resells it to tenants and guests.

The client must collect sales tax from the tenants and guests on its total
charge for telecommunications services. The client will also be responsible to
remit the Telecommunications Infrastructure Fund assessment on its
telecommunications revenue on which it is responsible to collect and remit
sales tax. I am enclosing Rule 3.344 regarding telecommunications services and
Rule 3.1101 regarding the telecommunications Infrastructure Fund assessment.
Please note that local sales tax is not due on interstate long distance
telecommunications services.

The client may purchase tax free for resale, telecommunications services that
it resells to its customers. It may also purchase tax free for resale tangible
property that it transfers to its customer's care, custody, and control as an
integral part of its service or that it sells or rents to its customers.

Under Tax Code 151.007 (b), the total amount for which a taxable item is sold,
leased, or rented includes a service that is part of the sale. Under Tax Code
151.025 (c), a seller of telecommunications services must separate charges for
those services from charges for items not subject to the taxes imposed by this
chapter on all bills or invoices. The effect of these two subsections is that
services that are part of the sale may not be separately stated to avoid
taxation while charges that are totally unrelated to the provision of
telecommunications services must be separately stated to the customer or they
are subject to sales tax.

Charges for running new wiring and installing phone jacks in existing buildings
are subject to sales tax as real property remodeling. Charges for moving or
installing telephones as part of the provision of telecommunications service
are tax as services in connection with the telecommunications service. Charges
for maintenance of telecommunications equipment are subject to sales tax as
maintenance of tangible personal property.

I hope this information is helpful. This opinion is rendered based on the
information you provided. Other facts, though similar, may yield different
results.

You may call me toll-free at 1-800-531-5441, ext. 3-4680. The direct line is
(512) 463-4680. You may also write to Tax Policy, Comptroller of Public
Accounts. The e-mail address is [email protected].

Sincerely,

Al Van Allen
Tax Policy Division