In a case argued by Morrison & Foerster LLP, the Court of Appeals unanimously held that a provider of satellite television service was not subject to sales or use tax on its purchases of equipment that was leased to customers for a separately stated fee and on which sales tax was collected and remitted. Matter of EchoStar Satellite Corp. v. Tax Appeals Trib., 20 N.Y.3d 286 (2012). The Department has now issued a Technical Memorandum explaining how the EchoStar decision “affects the application of the sales and use tax resale exclusion to certain purchases made by satellite and cable television service providers.” Technical Memorandum, TSB-M-14(3)S (N.Y.S. Dep’t of Taxation & Fin., Mar. 7, 2014).
When resale exclusion will apply. According to the Technical Memorandum, prior to EchoStar, the Department’s position was that the resale exclusion was generally not allowed for the purchase of equipment provided to customers by cable or satellite television service providers. After EchoStar, it is now the Department’s position that the resale exclusion will apply under certain circumstances. Specifically, the resale exclusion applies to a cable or satellite service provider’s purchases of equipment where either the equipment is purchased and then sold outright to its customers, or where the equipment is purchased and then leased to customers provided all of the following conditions are met: (i) the provision of equipment is structured as a lease; (ii) the rental fee is separately stated on the customer invoice; and (iii) the lease payment is directly proportional to the value of the equipment and reflects the cost of the equipment.
To provide cable and television service providers “with more certainty” concerning the sales tax impact under EchoStar, the Technical Memorandum also states that except where the equipment is actually sold outright to customers, the Department will treat the equipment as not being resold, and thus will not require that sales tax on the equipment be collected from customers, if certain conditions are met: (i) there is no separate lease agreement for the equipment and the customer service agreement does not contain a separate section that the equipment is being leased; (ii) the customer service agreement does not have an explicit lease term but merely provides that the equipment may be used by the customer during the term of the television service; and (iii) the service provider paid sales or use tax in its equipment purchases and does not seek a refund or credit of the tax paid. This will enable service providers that meet these criteria to avoid a sales tax collection responsibility with respect to the equipment furnished to customers.
Transitional rules. The Department has set out “transitional rules” under which cable or satellite television service providers that had paid sales tax on their equipment purchases, and that now qualify for the resale exclusion under EchoStar, may be eligible to claim a refund or a credit. However, if the service provider has not collected sales tax on its rental charges for the equipment, the refund amount is limited to the amount of tax the service provider paid on its equipment purchases, less the amount of tax it should have collected on rental charges for that equipment. In addition, the Technical Memorandum states that sales tax will not be assessed on a service provider’s sales and rental of equipment to customers prior to December 1, 2013, if the service provider (i) paid tax on its purchase of the equipment and (ii) is not seeking a refund or credit for the tax it paid under the EchoStar decision.
Those “transitional rules” also provide that the Department will not assess sales tax on the service provider’s sales or rentals of equipment for tax periods prior to December 1, 2013, where the provider paid sales tax on its equipment purchases and does not seek a refund or credit of the tax pursuant to EchoStar.
The Department’s Technical Memorandum, which was issued more than a year after the EchoStar decision, appears to serve several purposes. First, it provides clarity to the cable and satellite television industry on the scope of the resale exclusion for equipment purchases. It does this by articulating the parameters under which the resale exclusion will apply and, notably, by making clear when service providers will not be considered to be reselling equipment to customers (which would require that they collect sales tax with respect to the resold equipment). Second, by setting somewhat narrow parameters for when the resale exclusion will apply, it limits the availability of the resale exclusion, and consequently, potential refund claims resulting from the EchoStar decision. Third, it makes clear that even where the service provider qualifies for resale treatment, and claims a refund of the sales tax paid, the Department will reduce the refund amounts where sales tax has not been collected from customers by the amount of sales tax that should have been collected.