Is telecommunications service sold between related corporate affiliates exempt from Texas sales tax under the intercorporate services exemption?

Plain-English summary

A taxpayer emailed asking whether telecommunications services sold between related corporate affiliates would be subject to sales tax, franchise tax, and other applicable taxes, given the existence of an "intercorporate services" exemption in Tax Code Section 151.346(a).

The Comptroller's answer: sales tax is still due on telecommunications service charges even when the provider and customer are related corporate affiliates. Texas began taxing telecommunications services in 1985. Tax Code Section 151.346(c) specifically carves out of the intercorporate services exemption any service that would have been subject to sales tax under the Tax Code as it existed on September 1, 1987 — and telecommunications service, already taxable since 1985, falls squarely into that carve-out. So being provided between related affiliates doesn't exempt telecommunications charges the way it might exempt other kinds of intercorporate services.

The letter also notes that the TIF (telecommunications infrastructure fund) assessment tracks the sales tax result: wherever Texas sales tax is due on the telecommunications charge, the TIF assessment is due too. The Comptroller separately forwarded the franchise-tax portion of the question to the Franchise Tax Section for a response under separate cover, so this letter addresses only the sales-tax side.

What this means for you

Corporate groups with intercompany telecommunications arrangements

Don't assume the intercorporate services exemption shelters intercompany telecom charges just because it covers other services between related affiliates. Telecommunications services have been taxable since 1985, predating the September 1, 1987 cutoff in Section 151.346(c), so they're excluded from that exemption regardless of the corporate relationship.

Accountants and tax professionals structuring intercompany service agreements

Section 151.346(c)'s cutoff date is the key mechanism here — any service that was already taxable as of September 1, 1987 stays outside the intercorporate exemption no matter how related the entities are. Check a specific service's taxability history against that date before assuming intercompany pricing avoids sales tax.

Businesses also asking about franchise tax treatment of intercompany telecom charges

This letter covers sales tax only; the Comptroller routed the franchise tax question to a separate section, so don't read this ruling as addressing franchise tax consequences.

Common questions

Q: Is telecommunications service between related corporate affiliates exempt from Texas sales tax under the intercorporate services exemption?
A: No. Tax Code Section 151.346(c) excludes services, like telecommunications, that were already taxable under the Tax Code as of September 1, 1987, from the intercorporate services exemption.

Q: When did Texas start taxing telecommunications services?
A: 1985, according to this letter — well before the 1987 cutoff date in Section 151.346(c).

Q: Does the TIF assessment apply to these intercompany telecom charges too?
A: Yes — the TIF assessment is due wherever Texas sales tax is due on the telecommunications charge.

Q: Does this letter also cover franchise tax on intercompany telecom services?
A: No — the Comptroller forwarded that part of the question to the Franchise Tax Section for a separate response.

Q: Can I rely on this letter for my own intercompany arrangement?
A: No. It's based on the facts presented, and the letter states the opinion may change on additional or different facts. It binds the Comptroller only for the taxpayer it was issued to.

Citations and references

• Tex. Tax Code § 151.346(a) (intercorporate services exemption)
• Tex. Tax Code § 151.346(c) (excludes services taxable as of September 1, 1987 from the exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9804535L

Original ruling text

April 30, 1998

Dear Mr. **:

Thank you for your recent email which is restated in part with response below.

I have a question regarding the taxability of telecommunication services
between related corporate affiliates. Would the sale of telecommunication
services among these entities be subject to the various telecommunication,
franchise and other applicable taxes?

In addition, if you could cite any statutes or regulations in providing your
answer, it would be extremely helpful.

Response: Sales tax is due on charges for telecommunications services even
though the provider of the service may be related to the customer as described
in Tax Code Section 151.346(a) dealing with Intercorporate Services (Section
enclosed).

Sales tax was imposed on telecommunications services in 1985. Subsection (c)
of Tax Code Section 151.346 excludes from the intercorporate services exemption
services that would have been subject to sales tax as the Tax Code existed on
September 1, 1987.

The TIF assessment will be due on telecommunications charges for which Texas
sales tax is due. I am sending your question to our Franchise Tax Section for
their response which you will receive under separate cover.

This opinion is rendered based on the facts presented. If there are additional
or different facts, the opinion may change.

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 email address is .

Sincerely,

Al Van Allen
Tax Policy Division