For Texas franchise tax apportionment, is a wholesale wireless reseller's revenue from selling voice/data services to a mobile virtual network operator sourced as an intangible asset (to the buyer's location) or as telecommunications/internet services (to where the service is performed)?

Plain-English summary

Note: this ruling's specific rule citations for internet access sourcing are outdated — see the alert above.

A Texas-based wholesale wireless reseller buys voice, data (including internet access), roaming, and other wireless services from telecommunication carriers under a supply agreement, then resells those same services to a mobile virtual network operator (Retailer), who rebrands and resells them to its own end customers. The reseller doesn't process the retailer's customer billing or perform any billing service itself — it just passes along usage data. It asked whether its resale receipts should be apportioned as the sale of an intangible asset (sourced to the buyer's legal domicile) or some other way.

The Comptroller ruled the reseller is selling internet access services and wireless telecommunications services, not an intangible asset — so its receipts get the telecom/internet-specific sourcing rules, not intangible-asset sourcing:

• Internet access receipts are Texas receipts when the access is provided (earned) in Texas.
• Wireless voice call receipts are Texas receipts only when the call both originates and terminates in Texas — calls that cross the state line either way are not Texas receipts.
• Other telecommunications services (SMS, caller-ID, call waiting, voicemail) are Texas receipts if the service is performed in Texas.

The Comptroller distinguished the taxpayer's cited precedent (a 2013 decision about whether a prepaid calling card is tangible personal property for the cost-of-goods-sold deduction — a different question) and instead relied on a more recent, more directly on-point set of decisions holding that reselling prepaid calling cards is reselling a telecommunications service, sourced under the telecom-specific rule, not sold as an intangible right. The same logic applied here: reselling wireless voice/data service, even without owning any network infrastructure, is reselling a telecommunications service.

What this means for you

Wireless resellers and mobile virtual network enablers (MVNEs)

Don't assume that because you don't own network infrastructure, or because you're "just reselling," your receipts get intangible-asset sourcing (which would source everything to the buyer's location). Texas treats a resale of telecom/internet services as still being a sale of telecom/internet services for apportionment — with all the origination/termination/performance-location sourcing complexity that implies.

Companies relying on this ruling's specific rule citations

Update your citations: the internet access sourcing rule this ruling calls "Rule 3.591(e)(12)" is now at Rule 3.591(e)(26) as of a January 2021 renumbering, and the current (e)(13) covers something different (internet hosting). The underlying sourcing principle (internet access sourced to where access is provided) should still hold, but verify against the current rule text.

Accountants and tax professionals

This ruling is useful for the general principle that "reselling a service is still selling that service" for apportionment purposes (as opposed to somehow converting into an intangible-asset sale) — supported by the Comptroller's own contrast between an older, narrower 2013 COGS decision and newer decisions squarely addressing apportionment of resold telecom services.

Common questions

Q: If a company resells telecommunications services it doesn't produce itself, does that change how its receipts are apportioned?
A: No — per this ruling, reselling telecom/internet services is still selling telecom/internet services for apportionment purposes, not a sale of an intangible asset sourced to the buyer's location.

Q: Are receipts from a wireless call sourced to Texas if the call starts in Texas but ends elsewhere?
A: No — per Rule 3.591(e)(30)(A)-(B), voice call receipts are Texas receipts only if the call both originates AND terminates in Texas; calls crossing the state line either direction are not Texas receipts.

Q: Is the internet-access sourcing rule cited in this 2018 ruling still numbered the same way today?
A: No — effective 1/24/2021, that content moved from Rule 3.591(e)(12) to Rule 3.591(e)(26); the current (e)(13) covers internet hosting instead.

Citations and references

Statutes and rules:

• Tex. Tax Code § 171.001 (Tax Imposed)
• Tex. Tax Code § 171.106 (Apportionment of Margin to this State)
• 34 Tex. Admin. Code Rule 3.591(e)(26) (Margin: Apportionment — default services sourcing)
• 34 Tex. Admin. Code Rule 3.591(e)(12) (pre-2021 numbering — internet access; now at (e)(26))
• 34 Tex. Admin. Code Rule 3.591(e)(30)(A)-(C) (Margin: Apportionment — telecommunications services)

Cited prior guidance:

• Comptroller's Decision No. 108,113 (2013) — distinguished; addressed COGS classification of prepaid calling cards, not apportionment sourcing
• Comptroller's Decision Nos. 111,864-111,869 (2016) — controlling precedent: resale of prepaid calling cards is resale of a telecommunications service, sourced under the telecom rule

Superseding rule change (flagged in the STAR document itself):

• 34 Tex. Admin. Code Rule 3.591(e)(12)/(e)(26) renumbering, effective 01/24/2021

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MAR
• Opinion: https://star.comptroller.texas.gov/view/201802030L

Original ruling text

ALERT: References relating to internet access services made in Rule 3.591(e)(12) have been moved to Rule 3.591(e)(26) as amended effective 01/24/2021. The amended Rule 3.591(e)(13) (formerly (e)(12)) now addresses internet hosting services.

February 12, 2018

RE: Private Letter Ruling No. 150150546

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated November 11, 2014, and your supplemental submissions dated August 26, 2015, and July 18, 2016. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance, for franchise tax apportionment purposes, on the sourcing of revenue from **’s (Taxpayer’s) sales of wireless voice and data services to ** (Retailer).

Facts Presented

The facts below are derived from your initial request and the supplemental information you provided, including a representative Wholesale Supply Agreement between Taxpayer and a wireless telecommunication carrier, and a Resale Agreement between Taxpayer and Retailer.

Taxpayer is a Delaware Limited Liability Company located in Texas. It has no employees or other locations outside the state.

Taxpayer neither owns nor operates a local exchange network in Texas. Taxpayer contracts with wireless telecommunication carriers to buy and resell voice and data services using the carriers’ network infrastructure. Taxpayer purchases the following: Voice Service, including in-network calls, long-distance calls, and international calls; Short Message Service; Data Service, which includes Internet access; Roaming Service; Other Services, specifically caller-id and call waiting; and Voicemail Services.

Taxpayer sells the wireless voice and data services it acquires to Retailer, a mobile virtual network operator domiciled outside of Texas. Retailer rebrands and resells the services to its own customers. The Resale Agreement between Taxpayer and Retailer does not define voice services. It defines data services as “(i) Short Messaging Service or SMS; (ii) browsing the Internet using a browser- enabled, data-compatible handset; or (iii) using an appropriately enabled data-compatible handset and data connection device.”

Taxpayer receives invoices from wireless telecommunication carriers for the wireless voice and data services it purchases. These invoices show detailed usage information for Retailer’s customers. Under the terms of the Resale Agreement with Retailer, when Taxpayer receives a carrier’s invoice, it shares the detailed usage information with Retailer. Retailer then uses this information to bill its customers. Taxpayer does not process Retailer’s customer information or perform a billing service.

Question, Ruling, and Analysis

Our restatement of your question is below, followed by our response and analysis.

Question: Is Taxpayer’s sale of wireless voice and data services to Retailer, who resells the services, a sale of an intangible asset sourced to the legal domicile of the purchaser and apportioned based on Rule 3.591(e)(21)(B) for Texas Franchise Tax purposes?

Ruling: Taxpayer’s sale of wireless voice and data services to Retailer is a sale of internet access services and wireless telecommunication services, not the sale of an intangible asset. The receipts from the sale of an internet access service are apportioned to Texas when the receipts are earned from providing access to the internet in Texas. Rule 3.591(e)(12). The receipts from the sale of wireless voice services are apportioned to Texas when the wireless voice service both originates and terminates in Texas. Rule 3.591(e)(30)(A). The receipts from other telecommunication services are apportioned to Texas when the services are performed in Texas. Rule 3.591(e)(30)(C).

Analysis:

The franchise tax applies to each taxable entity doing business in Texas or organized in Texas. Section 171.001 (Tax Imposed). The tax is imposed on the portion of the entity’s receipts attributable to business done in Texas. Section 171.106 (Apportionment of Margin to this State).

Receipts from the sale of services are sourced to the location where the service is performed, unless a more specific sourcing rule applies. Rule 3.591(e)(26). Under Rule 3.591(e)(12), receipts from internet access fees charged to access the internet in Texas are Texas receipts. Receipts from the telephone calls that both originate and terminate in Texas are Texas receipts. Rule 3.591(e)(30)(A). Receipts from telephone calls that originate in Texas but terminate outside of Texas, or that originate outside of Texas but terminate in Texas, are not Texas receipts. Rule 3.591(e)(30)(B). Receipts from other telecommunication services are Texas receipts if the service is performed in Texas. Rule 3.591(e)(30)(C).

Taxpayer asserts that the sale of wireless voice and data services is the sale of an intangible. Taxpayer cites Comptroller’s Decision No. 108,113 (2013) for support. That decision considers whether a prepaid calling card is tangible personal property for purposes of calculating the cost of goods sold deduction. It does not address the proper sourcing of receipts from prepaid calling cards for apportionment purposes.

Comptroller’s Decision Nos. 111,864 - 111,869 (2016) address how to apportion receipts from the sale of prepaid calling cards. Specifically, the decision considers whether receipts from sales of prepaid calling cards are apportioned as receipts from the sale of a service or receipts from the sale of an intangible. In this more recent decision, the Administrative Law Judge (ALJ) notes the following in regard to Comptroller’s Decision No. 108,113:

The 2013 decision state[s] that a prepaid calling card is an intangible, but…also state[s] or describe[s] how the sale is also a telecommunication service (which, based on the ordinary meaning of the term ‘service,’ is also a thing that is not tangible). The salient point for the instant matter is that the questions presented in [Comptroller’s Decision No. 108,113] could be resolved without distinguishing an intangible and a service. That is not true of the issue presented in this case….

The ALJ concludes:

For purposes of Texas franchise tax, the sale of a prepaid calling card is the sale or resale of a telecommunication service and revenue from the sale of such cards should be sourced accordingly [under Rule 3.591(e)(30)].

Just as the seller of prepaid calling cards is selling a telecommunication service and not an intangible right to access a service, Taxpayer is also selling telecommunication services to Retailer. Taxpayer’s contracts support this conclusion. Both Taxpayer’s Wholesale Supply Agreement with the wireless telecommunication carrier to purchase and distribute services, and its Resale Agreement with Retailer to sell wireless voice and data services, demonstrate that Taxpayer’s receipts are from the resale of services. Therefore, Taxpayer’s receipts from the sale of its services must also be apportioned in accordance with Rule 3.591(e)(12) and (30). Taxpayer will have Texas receipts if Taxpayer provides access to the Internet in Texas, provides telephone calls that originate and terminate in Texas, or performs other telecommunications services in Texas.

Although the heading of subsection (e)(30) of Rule 3.591 refers to “telephone companies,” and Taxpayer is not a telephone company, Taxpayer nonetheless sells the same kind of telecommunication services described in that subsection. We intend to propose amendments to the heading of Rule 3.591(e)(30) to reflect its application to all entities that sell telecommunication services.

Comptroller’s Decisions cited are on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling #150150546.

Sincerely,

Tax Policy Division – Direct Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1 Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.