The New York State Department of Taxation and Finance has issued a Guidance finding that a mobile telecommunications service provider's separate charges for sales of cellphones were subject to the telecommunications excise tax under Tax Law 186-e. Guidance, "Application of Telecommunication Excise Tax to the Separate Charge for a Cell Phone Sold by a Mobile Telecommunications Service Provider," NYT-G-17(1)C (N.Y.S. Dep't of Taxation & Fin., Apr. 17, 2017).

Facts. The mobile telecommunications service provider ("Provider") is in the business of providing wireless telecommunications service in New York State. Under a typical plan offered by Provider, a customer entering into a two-year service contract with Provider would receive a cellphone at no charge or at a discounted price. The customer would pay for the wireless service on a monthly basis, and Provider would recoup the cost of the cellphone through the monthly service charge. Provider also offered wireless service on a month-tomonth basis rather than on a long-term basis; however, in such a case, the customer did not receive a free or reduced price cellphone but instead paid full price for the cellphone. Finally, Provider also allowed customers to purchase cellphones on an installment basis with no interest or financing charges if the customer entered into a wireless service contract with Provider for the term of the installment contract. In that case, the customer would sign an agreement with an affiliate of Provider that acted as an agent for Provider. However, as a matter of administrative convenience, Provider included the installment charges for the cellphone on its invoice for cellular service.

Any cellphone purchased by a customer from Provider, regardless of the type of plan, is initially "locked," meaning that it may be used only for service on Provider's network. The "lock" remains on the cellphone for up to 40 days, or even longer in cases where the customer is not in good standing, or the cellphone was purchased pursuant to an installment plan that is not yet paid in full. In addition, even if unlocked, Provider's cellphones use technology that either does not function on many other carriers' networks or does not have full functionality on those other networks.

Issue. Whether Provider's separate charges for cellphones were includible in its gross receipts subject to the telecommunications excise tax under Tax Law 186-e.

Law. The 186-e tax is imposed on a telecommunications provider's gross receipts from the sale of mobile telecommunications in New York State. Tax Law 186-e(2)(a). Charges for mobile telecommunications services are defined by reference to Tax Law 1111(l)(1), which provides that such charges shall include:

any charge by a home service provider to its mobile telecommunications customer for (A) commercial mobile radio service, and shall include property and services that are ancillary to the provision of commercial mobile radio service (such as dial tone, voice service, directory information, call forwarding, caller-identification and call-waiting), and (B) any service and property provided therewith.

(emphasis added). By its terms, this provision distinguishes between property that is "ancillary" to mobile telecommunications services, and other property "provided therewith." If the property is "ancillary to the provision" of the service, then it is treated as a taxable charge for mobile telecommunications services. On the other hand, pursuant to Tax Law 186-e(2)(b)(4), if the property in question is not ancillary to mobile telecommunication services but is instead classified as "property provided therewith," it may not be subject to 186-e tax if the charges are separately stated or may otherwise reasonably be separately accounted for and quantified.

Department's Analysis. The Department found that it was "apparent" that Provider's customers purchased the cellphones to use on Provider's network, as, among other things, the customers purchased the cellphones in a "locked" state, and the cellphones only had, at best, a limited ability to function on other networks even when unlocked. Therefore, the Department determined that the cellphones sold by Provider were "ancillary" to Provider's mobile telecommunications service. Accordingly, it concluded that the separate charges for those cellphones were subject to the 186-e tax.

Additional Insights

The Guidance reflects the Department's position that charges for property that is integral, or "ancillary," to the telecommunications service being provided are subject to 186-e tax. However, the Guidance does not address the question of whether there are any circumstances under which a cellphone purchased from a mobile telecommunications provider would not be treated as integral to the provision of that service, such as where the phone is not "locked" and is fully functional on other carriers' networks.

A Guidance or (NYT-G) is an informational statement of the Department's policies and its interpretation of the law and regulations that is usually based on a particular taxpayer's facts or circumstances. Guidances are usually issued when a taxpayer withdraws its petition for an Advisory Opinion, but the Department decides to publish a redacted version of the Advisory Opinion because it considers the subject matter to be of broad interest. As a result they are issued fairly infrequently; only one other Guidance has been issued since 2009. While they have no precedential value, they are a useful source of information and guidance regarding Department policy.