96-361 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Coupons, premiums, and cash discounts; Discounted price

Topic

Basis of Tax

Date Issued

12-09-1996

December 9, 1996

Re: Request for Ruling: Retail Sales and Use Tax

Dear*****************

This is in reply to your letter in which you request a ruling regarding the application of the retail sales and use tax to sales of cellular telephones in certain situations. I apologize for the delay in responding to your letter.

FACTS

In the situation presented in your letter, a retail store sells electronic equipment, including cellular telephones. The retailer is also an authorized agent for a cellular telephone service carrier ("carrier") and can offer a cellular service contract to its customer. A customer can purchase a cellular telephone from the retailer for a deeply discounted price (below the retailer's cost price) if he agrees to sign a contract for telephone service through the retailer. The retailer receives a commission from the carrier when a customer activates new cellular service with the carrier. The commission is paid to the retailer regardless of whether the customer purchases a cellular telephone .

In addition to paying the retailer a commission each time one of its customers enrolls in a cellular service agreement, the carrier sells cellular telephones at a discounted price directly to consumers in order to promote new activations of cellular service.

You request a ruling on the proper measure of the sales and use tax when the sales price of cellular telephones is deeply discounted when sold contemporaneous with the execution of a new contract for cellular telephone service.

RULING

Code of Virginia §58.1-603 imposes the sales tax on the sales price of tangible personal property. The term "sales price" is defined in Code of Virginia §58.1-602 as:

- [t]he total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, . . . without any deduction therefrom on account of the cost of the property sold, the cost of the materials used, labor or service costs, losses or any other expenses whatsoever.

The department has previously ruled that the sales tax is computed on the sales price charged to the customer, i.e., the total amount for which an item is sold. See Public Documents (P.D.'s) 84-195 (10/22/84), 94-14 (1/13/94) and 95-298 (11/21/95). In the situation presented in your letter, both the retailer and the carrier are making retail sales of cellular telephones to customers at a deeply discounted price. The proper measure of the sales tax is the sales price charged to the customer (the discounted sales price of the cellular telephones). The charge for the telephone service contract is a separate service transaction which is not subject to the Virginia sales and use tax. The retailer (or carrier) should collect the tax from the customer based on the discounted sales price paid by the customer for the telephone.

Please note that the department's policy regarding items given to customers free of charge by a retailer is not changed by this ruling. Under Virginia Regulation (VR) 630-10-32, the tax applies to the cost price of property purchased originally for resale and later withdrawn from inventory "for a promotional give-away or other free distribution." For example, if a retailer or carrier gives a cellular telephone to a customer when he agrees to enter into a service contract with the carrier, the retailer is required to remit use tax on the cost price of the telephone withdrawn from the resale inventory.

If you have any questions regarding this ruling, you may contact***************of the department's Office of Tax Policy at*************.

Sincerely,

Danny M. Payne
Tax Commissioner

OTP/10336F

Rulings of the Tax Commissioner