If a cellular phone company gives away a free phone to a customer who donates to charity, does the company owe sales or use tax on that phone?

Subject

Cellular Phone — Given Away With Donation To Charity Or Exempt Org — Promotion By Service Provider Vs. Dealer/Retailer

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1265E14

Plain-English Summary

This 1993 memo from the Comptroller's Tax Policy Division answers two related questions about cellular phone give-aways tied to a donation to a charity. The letter draws a sharp line based on who is doing the giving away — a cellular phone service provider, or a cellular phone seller (dealer/retailer).

Service provider giveaway: If a cellular phone service "provider" gives a subscriber a phone for free as part of the cellular phone service, because the subscriber made a donation to a charity, the company is not liable for tax on the phone. The letter explains why: the phone could have been purchased under a resale certificate and given away for no reason at all, with the same tax-free result. In other words, tying the giveaway to a charitable donation doesn't change the outcome — the provider was already free to give the phone away tax-free as a giveaway tied to the taxable service it sells.

Seller/dealer giveaway: On the other hand, if a cellular phone "seller" gives a person a phone because that person made a donation to a charity, the seller must pay tax on the acquisition cost of the phone. The letter gives two reasons: the phone is not being given to an exempt entity (it's going to an individual donor, not the charity itself), and the phone is not being provided as part of a taxable service (unlike the service provider's giveaway, which is bundled with the ongoing taxable cellular service).

The memo notes it supersedes or relates to a previous ruling, Accession Number 9308171L.1 and/or 9308171L, indicating the Comptroller had addressed a similar or related fact pattern before.

What This Means For You

If you're a cellular service provider running a promotion: Giving away phones for free as part of your bundled taxable service — even when the giveaway is conditioned on the customer making a charitable donation — does not create a separate tax liability on the phone. The letter treats this the same as any other no-reason giveaway by a service provider that purchased the phone under a resale certificate.

If you're a phone seller/dealer running a similar promotion: Do not assume the same tax-free treatment applies to you. Under this letter, a seller who gives away a phone tied to a customer's charitable donation owes use tax on the phone's acquisition cost, because the giveaway isn't bundled with a taxable service the way a provider's giveaway is, and the recipient (an individual) isn't itself a tax-exempt entity.

If you're structuring a charity promotion involving free merchandise: The identity of the giver (service provider vs. retailer/seller) and whether the item is bundled into an ongoing taxable service are the deciding factors in this letter — not the charitable nature of the underlying transaction.

Q&A

Q: Does a cellular phone service provider owe tax when it gives away a free phone tied to a customer's charity donation?
A: No. The letter states the company is not liable for tax on the phone, because it could have been purchased under a resale certificate and given away without any reason at all, with the same result.

Q: Does a cellular phone seller/dealer owe tax when it gives away a free phone tied to a customer's charity donation?
A: Yes. The letter states the seller must pay tax on the acquisition cost of the phone.

Q: Why does the seller owe tax while the service provider does not, according to the letter?
A: The letter gives two reasons for the seller's liability: the phone is not given to an exempt entity, and it is not provided as part of a taxable service — unlike the provider's giveaway, which is part of the taxable cellular service.

Q: Does it matter that the giveaway is tied to a donation to a charity rather than being unconditional?
A: For the service provider scenario, no — the letter says the same tax-free result would occur even if the phone were given away "without a reason." The letter does not state that the charitable tie-in itself changes the tax result in either scenario.

Q: Is this letter related to any earlier Comptroller ruling?
A: Yes. The letter notes "Previous Accession Number 9308171L.1 and/or 9308171L" at the end, referencing an earlier, related ruling.

Original ruling text

Date: October 22, 1993

To: Al Van Allen and Adina Whittemore

From: Wade Anderson

Re: Cellular Phone/Donation to Charity

You all have asked two questions involving cellular phone give-a-ways
when there has been a donation to a charity.

My answers are as follows:

If a cellular phone service "provider" gives a subscriber a cellular
phone free as part of the cellular phone service because the
subscriber made a donation to a charity, the company is not liable
for tax on the phone. The phone could have been purchased under a
resale certificate and given away without a reason with the same
result.

On the other hand, if a cellular phone "seller" gives a person a
cellular phone because they made a donation to a charity, the
seller must pay tax on the acquisition cost of the phone. The phone
is not given to an exempt entity, and it is not provided as part of
a taxable service.

NOTE: Previous Accession Number 9308171L.1 and/or 9308171L