A hotel resells telecommunications services to guests (marking up local and long-distance calls) but also uses the same trunk lines and phone equipment for its own business calls. Can the hotel buy the phone lines and equipment tax-free with a resale certificate, or get a refund of the sales tax it already paid?

Plain-English summary

A Texas hotel resells telecommunications services to its guests: it marks up long-distance calls by 42% and charges $.50 per local call, collecting sales tax on those charges and tracking the telecom revenue as a separate profit center. To provide phone service, the hotel buys three things and pays sales tax on all three: (1) long-distance carrier charges, (2) local service provider charges, and (3) leased telephone equipment. Charges for local service and equipment leasing are allocated between hotel business use and guest use; long-distance charges are tracked in separate accounts for guest use versus hotel use. The hotel asked whether it's owed a refund of the sales tax it paid on these three cost components, since it's already collecting sales tax on the full telecom revenue it earns from guests.

The Comptroller's answer distinguishes trunk line service from equipment:

Trunk lines (long distance and local service): If telecommunications services are purchased for resale, the buyer may give the seller a resale certificate instead of paying tax. But a hotel cannot issue a resale certificate in good faith for trunk line service that it also uses for its own business calls — resale certificates may be issued only for lines dedicated to reselling telecommunications service to guests. If the hotel already paid Texas sales or use tax to the carrier or supplier on services that were in fact resold, it may take a credit on its sales tax return, but only if it can document the resale (the letter points to Rule 3.338).

Leased telephone equipment: No refund or credit is available here. Under Tax Code Section 151.302(b), tangible personal property used to perform a taxable service is not considered resold unless care, custody, and control of the property transfers to the purchaser of the service. A guest picking up the handset and dialing a number doesn't have the right to move, relocate, or operate the equipment, so custody and control never transfer. Even if a guest were found to have care, custody, and control of the phone unit itself, the exemption would still be at risk because the unit isn't used exclusively to provide taxable telecommunications service — hotels typically don't charge guests for intrahotel calls, so the hotel would have to accrue use tax on the fair market rental value of the phones for the periods of that non-taxable (intrahotel) use.

What this means for you

Hotels and other resellers of telecommunications service

Don't issue a resale certificate for trunk lines that do double duty for your own business calls — the Comptroller treats that as bad faith unless the line is dedicated solely to guest resale. If you're mixing hotel and guest use on the same line, expect to pay tax on the underlying purchase and instead seek a credit (with documentation) for the portion actually resold, rather than trying to buy the service tax-free up front.

Hotels leasing phone equipment

Don't expect a refund or resale exemption on leased telephone equipment. Because guests never get care, custody, and control of the physical phone, tax code section 151.302(b) treats the hotel — not the guest — as the equipment's user, so tax stays owed on the lease payments.

Telecom providers serving hotels

Providers can accept a resale certificate from a hotel only for lines genuinely dedicated to guest resale; a mixed-use trunk line is not a proper resale-certificate transaction from the provider's side either.

Accountants and tax professionals

This letter is a useful illustration of the "dedicated use" requirement for telecom resale certificates and of how Section 151.302(b)'s custody-and-control test applies to hotel phone equipment leases, including the intrahotel-call wrinkle that can still create use tax exposure even in a hypothetical where guests are treated as having custody of the unit.

Common questions

Q: Can a hotel give its telecom carrier a resale certificate for trunk lines it uses for both guest and hotel business calls?
A: No. A resale certificate can only be issued in good faith for lines dedicated to reselling telecommunications service to guests, not for lines the hotel also uses for its own business calls.

Q: If the hotel already paid sales tax on resold telecommunications services, can it get that money back?
A: Yes, potentially as a credit (not necessarily a refund) on its sales tax return — but only for the portion actually resold, and only if the hotel can document the resale, referencing Rule 3.338.

Q: Is the hotel entitled to a refund or credit on sales tax paid for its leased telephone equipment?
A: No. Under Tax Code Section 151.302(b), the equipment is not considered resold because the hotel never transfers care, custody, and control of the equipment to guests — a guest merely lifting the handset and dialing doesn't count.

Q: What if a guest were found to have care, custody, and control of the phone itself — would that change the answer?
A: The letter says the exemption would still be in jeopardy, because the phone isn't used exclusively for taxable telecommunications services (hotels don't normally charge for intrahotel calls), which would require the hotel to accrue use tax on the fair market rental value of the phones for the periods of that non-taxable use.

Q: Can another hotel with a similar setup rely on this letter?
A: No. This opinion is based on the facts presented to the Comptroller, and other facts, though similar, may yield different results; STAR letters can only be relied upon by the taxpayer to whom they were issued.

Citations and references

• Tex. Tax Code § 151.302(b) — tangible personal property used to perform a taxable service is not considered resold unless care, custody, and control of the property transfers to the purchaser of the service.
• Comptroller Rule 3.338 (referenced in the letter regarding documentation needed to claim a resale credit).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1185B08

Original ruling text

July 17, 1992

Dear **:

Thank you for your recent letter which is restated in part with responses
below.

A hotel located in Texas resells telecommunication services to its hotel
guests. The company determines the cost of the telecommunication services
utilizing three components. These components are:

1. Charges from the long distance carrier.
2. Charges from the local service provider.
3. Charges for leasing telephone equipment.

The hotel pays sales tax on each of these components to the vendors. An
allocation between hotel use and guest use is done for items two and three.
Separate accounts for guest use and hotel use are maintained for item one.

The hotel resells telecommunication services to its guests. The hotel charges
$.50 for each local call, and marks up the long distance 42%. Sales tax is
added to these charges. The income from telecommunication services is accounted
for as a separate profit center on the income statements.

Question: Is the taxpayer due a refund of sales tax paid on the three cost
components, since sales tax is being collected on the total revenue earned from
telecommunications?

Response: If telecommunications services are purchased for resale, the buyer
may give the seller a resale certificate in lieu of tax. But, a hotel could not
issue a resale certificate in good faith for trunk line service if the hotel
also uses the service for its business calls. Resale certificates should only
be issued to telecommunications providers for lines that are dedicated for
sales of telecommunications service to guests.

If Texas sales and use Taxes were paid to the carrier or supplier on
telecommunications services which were resold, the hotel may take a credit on
its sales tax return. The hotel must be able to document the resale of the
service. Please refer to the enclosed Rule 3.338.

The hotel is not entitled to a sales tax refund or credit on the telephone
equipment lease payments. Tax Code Section 151.302(b) states:

k) Tangible personal property used to perform a taxable service is not
considered resold unless the care, custody, and control of the tangible
personal property is transferred to the purchaser of the service.

While it is true that the hotel is performing a taxable service, it is not
transferring care, custody, and control of the equipment to the purchaser of
the service. And, while a guest may be able to lift the handset and dial a
number, they do not have the right to move, relocate and operate the equipment.

In the event that a guest were found to have care, custody and control of the
basic telephone unit itself, the exemption would still be in jeopardy because
the unit is not exclusively used to provide taxable telecommunications
services. Hotels do not normally charge guests for intrahotel calls. That means
if the hotel were allowed to buy the basic telephone units tax free on a resale
certificate, it would still have to account for the intrahotel usage. It would
then have to accrue use tax on the fair market rental value of the phones for
the period of divergent use each reporting period.

This opinion is based on the facts you presented. Other facts, though similar,
may yield different results.

If you have questions or need more information, please call or write. You may
reach me by calling toll free, (800) 531-5441. My direct line number is (512)
463-4680. The number for FAX transmissions is (512) 475-0900. You may write to
me in care of Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division