If a cellular phone retailer sells a phone cheap (or gives it away) to get a customer to sign up for a carrier's service contract, is sales tax owed on the full contract price, and can the retailer buy the phone tax-free for resale?

Plain-English summary

This 1995 ruling answers a comparative-state survey question about how Utah's sales and use tax applies to a specific cellular-phone-plus-service-contract arrangement. The requester described a hypothetical fact pattern: "Retailer A" sells cellular telephones purchased from a vendor for $250 each, out of a store located in the requester's state. "Company B" provides cellular telecommunications service and contracts with Retailer A to promote and solicit subscribers for Company B's service.

To induce customers to sign up, Retailer A offers two options: buy just the phone for $300 (Option 1), or buy the phone for $10 and agree to subscribe to Company B's service for at least a year (Option 2). Under Option 2, Company B pays Retailer A a $275 commission per subscriber plus $35 earmarked for advertising -- for a total of $320 to Retailer A ($10 from the customer, $275 commission, $35 advertising payment). The full commission is charged back to Retailer A if the customer deactivates service within 90 days, and the activated customers become subscribers of Company B, not of Retailer A.

The Commission was asked two questions: (1) can Retailer A buy the phones from its supplier tax-free as a purchase for resale, and (2) what amount of gross receipts must Retailer A use to compute the sales/use tax due, given it collects $320 total across the customer payment and the two payments from Company B.

The Commission ruled that a sale of cellular equipment to a retail vendor is exempt from sales tax if purchased for resale, but not if purchased for the vendor's own use -- in that case the vendor, as end consumer, owes tax on its own cost of the equipment (Utah Code Ann. § 59-12-103(27)). Under Option 1 (phone sold alone), the vendor must collect sales tax on the amount actually paid by the customer, even if that price is below the vendor's cost (§ 59-12-103(1)). Under Option 2, if the contract price covers both the phone and the service, sales tax applies to the entire contract price -- the Commission's own example: $10 for the phone plus $290 for service means tax is calculated on the full $300. But if the service contract price covers only the service and the phone is given away as a premium incentive to buy the service, then the vendor -- not the customer -- is the end consumer of the phone and must pay sales tax on its own cost of the equipment, under Utah Admin. Rule R865-19S-68(A).

What this means for you

Cellular phone retailers and agents who bundle phones with service contracts

If you sell a phone at a discount as part of a package where the customer's payment is understood to cover both the phone and the service, you collect sales tax on the full amount the customer pays for the whole package -- not just on the discounted phone price. But if you structure the deal so the customer's payment is really only for the service and the phone is handed over as a free incentive, the tax obligation shifts to you: you become the "consumer" of that phone and owe sales/use tax on what you paid your supplier for it, rather than the customer owing tax on it.

Retailers selling phones on a standalone basis

If you sell a phone by itself, you owe tax on whatever price the customer actually pays -- even if you sell below your own cost. The ruling is explicit that a below-cost retail sale doesn't change the tax base; it's the amount actually paid by the customer that gets taxed.

Accountants and tax professionals

This ruling turns on a binary: does the "contract price" the customer pays cover both the phone and the service (tax the whole thing), or does it cover only the service with the phone as a true premium/incentive (the retailer, not the customer, is taxed on its own cost of the phone under Rule R865-19S-68(A))? Watch how commissions and side payments from the carrier (like the $275 subscriber commission and $35 advertising payment here) are structured -- the ruling doesn't say those carrier-to-retailer payments are part of the customer's taxable purchase price; the tax base described is keyed to what the customer pays under the contract.

Common questions

Q: Can a retailer buy cellular phones tax-free to resell them?
A: Yes, a purchase of cellular equipment for resale is exempt from sales tax. But if the retailer ends up using a phone itself rather than reselling it, the retailer becomes the end consumer and owes tax on its own cost of that phone.

Q: If I sell a phone alone below what I paid for it, do I still owe tax?
A: Tax is collected on the amount the customer actually pays, even if that's below the retailer's cost. There's no minimum-price floor for tax purposes in this ruling.

Q: I bundle a cheap phone with a required service contract. How much is taxable?
A: If the contract price is understood to cover both the phone and the service, sales tax applies to the entire contract price the customer pays -- the ruling's example taxes a full $300 contract ($10 phone + $290 service) as a single $300 taxable amount.

Q: What if I just give the phone away for free to get someone to sign up for service?
A: Then the service contract price covers only the service, and the phone is a premium incentive. In that case, under Utah Admin. Rule R865-19S-68(A), the retailer -- not the customer -- is treated as the consumer of the phone and must pay sales tax on its own cost of acquiring it.

Q: Can I rely on this ruling for my own cellular-phone sales structure?
A: No. This is a private letter ruling (here, a response to another jurisdiction's comparative-state survey describing a hypothetical fact pattern); it binds the Utah State Tax Commission only for the specific facts it addresses. It's also one of the Commission's older rulings from 1995 -- the Utah Code and administrative rules have been renumbered and amended many times since, so confirm the current statute and rule text before relying on the reasoning here.

Citations and references

Statutes (Utah Code Ann., as cited in 1995):

• § 59-12-103(27) -- resale exemption from sales and use tax; a vendor that buys equipment for its own use, rather than resale, owes tax on its cost
• § 59-12-103(1) -- sales tax is imposed on the amount actually paid or charged for tangible personal property

Rules (Utah Admin. Code):

• R865-19S-68(A) -- where a taxable item (like a phone) is given away as a premium/incentive alongside a sale that is not itself taxed on the phone's value, the vendor giving away the premium is treated as the consumer and owes tax on its own cost of that item

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/95-064.htm

Original ruling text

95-064

Response
October 3, 1995

Request

XXXXX

Utah
State Tax Commission

Taxpayer
Assistance

210
North 1950 West

Salt
Lake City, UT 84134

Dear
XXXXX:

We
are currently studying a sales and use tax issue regarding the sale of cellular
telephones.

Please
answer the questions on page 2, based on the facts provided below.

Facts

Retailer A sells cellular telephones at its store located
in your state. Such telephones are
purchased by retailer A from a vendor for $250 per telephone.

Company B provides cellular telecommunications service to
subscribers in your state.

Company B contracts with Retailer A for Retailer A to
promote, solicit and obtain requests for the service provided by company B.

To induce customers to purchase Company B�s service,
Retailer A offers customers the following options when purchasing a cellular
telephone from Retailer A:

Option #1 Purchase
only the telephone for $300, or

Option #2 Purchase
the telephone for $10 and agree to subscribe to Company B�s service
for a minimum period of one year.

If option #2 above is chosen, Company B will pay to
Retailer A the following:

(1) A commission of $275 for each subscriber procured by
Retailer A and accepted by Company B, and

(2) $35 for each subscriber procured by Retailer A, to be
used exclusively for advertising Retailer A�s cellular operations.

The commission paid by Company B to Retailer A does not
vary with the type or cost of the telephone sold by Retailer A.

The full commission will be refunded by Retailer A to
Company B (�charge back�) if the service activation is deactivated for any
reason within 90 days after the activation date.

Activated subscribers are subscribers of Company B, and
not of Retailer A.

Retailer A has no right or obligation to bill or collect from
subscribers or potential subscribers any money or charges for services provided
by Company B.

Questions

Please
explain how your state�s sales and use taxes apply to the above facts by
answering the following questions.

1.
May Retailer A purchase from its supplier the cellular telephone exempt from
sales/use tax as a purchase for resale?

2.
What amount of gross receipts must Retailer A use to compute its sales or use
tax due? (Note: Retailer A receives a total of $320; $10 from the customer, a
$275 commission from Company B, and a $35 advertising payment from Company B.)

Please
include copies of your state�s laws, rules, regulations, and/or court cases
related to this issue.

We
would appreciate it if you could respond by XXXXX. You may enter your answers
in the space below and fax your response to me at XXXXX, or call me at XXXXX
with your answers.

Thank
you for your cooperation,

Sincerely,

XXXXX

XXXXX

RE:
Advisory Opinion - applicability of sales tax to sales of cellular phones and
related service agreements.

Dear
XXXXX,

We
have received your request for information pertaining to various types of sales
arrangements that may be entered by retailers of cellular phones. We respond as follows:

A
sale of cellular phone equipment to a retail vendor is exempt from sales tax if
the property was purchased for resale.
However, a sale of cellular equipment to the vendor for the vendor�s own
use does not qualify for this exemption.
In that case, the vendor, as the end consumer, must pay tax on his or
her cost of the equipment. �59-12-103(27) Utah Code Ann.

When
the vendor sells the phone equipment to a customer under option #1, the vendor
must collect sales tax on the amount paid. �59-12-103(1) Utah Code Ann. If the vendor sells cellular phone equipment
to a customer at a price which is below the vendor�s cost, the vendor must
collect sales tax on the amount actually paid by the customer.

If
the vendor sells the phone equipment along with the cellular service under
option #2 and the contract price includes both the cost of the service and the
phone equipment, the vendor must collect sales tax on the entire contract
price. For example, if the customer
pays $10 for the phone and $290 for the service contract, the vendor must
calculate sales tax on the on the entire $300 charge. If, on the other hand, the price of the contract covers only the
service, and the cellular phone equipment is given away as a premium incentive
to purchase the service, it is the vendor, as the end consumer of the phone,
who must pay sales tax on his or her cost of the equipment. Utah Admin. Rule R865-19S-68(A).

The
statute and the administrative rule cited are enclosed for your information. Please let us know if we can be of further
assistance.

For
the Commission,

Alice
Shearer

Commissioner