Tax Type
Retail Sales and Use Tax
Description
Telecommunications; Purchase of telecommunications equipment
Topic
Taxability of Persons and Transactions
Date Issued
05-16-1997
May 16, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************
In your letter of January 10, 1997, you seek correction of the sales and use tax assessments issued to *******(the Taxpayer) as a result of an audit for the period September 1992 through August 1995.
FACTS
The Taxpayer is a retailer of pager equipment. In addition, customers contract with the Taxpayer for the provision of paging services. Although the Taxpayer furnishes pagers (referred to as "leased pagers") to customers in connection with contracted paging services, it does not actually provide the airtime paging services. Rather, the airtime paging services are solely provided by the Taxpayer's wholly-owned subsidiary which owns the terminals, transmitters, and antennae to transmit the signals. During the audit period, the subsidiary was a licensed radio common carrier with the State Corporation Commission.
As a result of the audit, the Taxpayer was assessed sales tax on untaxed sales of merchandise and maintenance contracts. The Taxpayer was also assessed use tax on untaxed purchases of tangible personal property used or consumed in the operation of its business.
The Taxpayer takes exception to the tax assessed on leased pagers purchased by the Taxpayer for use in connection with paging services performed by its subsidiary. The Taxpayer maintains that the leased pagers are exempt from tax based on Code of Virginia § 58.1-609.3(3) and P. D. 90-228 (12/19/90), copies enclosed.
The Taxpayer also takes exception to the tax assessed on customer-owned pager maintenance agreements and maintains that such agreements are for exempt services. The Taxpayer indicates that there are other paging companies not charging the sales tax on such maintenance agreements.
DETERMINATION
Leased Pagers
Code of Virginia § 58.1-609.3(3), formerly § 58.1-608(3)(c), provides an exemption from the retail sales and use tax when tangible personal property is sold or leased to a telecommunications company as defined in § 58.1-400.1 for use or consumption by such company directly in the rendition of its public service. A "telecommunications company" is defined by Code of Virginia § 58.1-400.1(D) as:
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- ...a telephone company or other person holding a certificate of convenience and necessity granted by the State Corporation Commission authorizing local exchange telephone service, interexchange service, radio common carrier system or a cellular mobile radio communications system; or a person authorized by the Federal Communications Commission to provide commercial mobile service as defined in § 332(d)(1) of the Communications Act of 1934, as amended, where such service includes cellular mobile radio communications services or personal communications services; or a person holding a certificate issued pursuant to § 214 of the Communications Act of 1934, as amended, authorizing telephone service; or a telegraph company or other person operating the apparatus necessary to communicate by telegraph.
Although the Taxpayer's subsidiary was a telecommunications company as defined above during the period of audit, it is my understanding that the Taxpayer did not hold a certificate of convenience and necessity issued by the State Corporation Commission and did not hold any of the other authorizations or certifications set out in the above definition. For these reasons, the Taxpayer does not meet the criteria of the telecommunications company definition. As the courts have long established that all exemptions from the retail sales and use tax are to be strictly construed, the Taxpayer is not entitled to the exemption granted under Code of Virginia § 58.1--609.3(3).
In addition, l find that the ruling made in P. D. 90-228 (12/90/90) does not conflict with the determination made in the Taxpayer's case. In that ruling, the department held that a "telecommunications company as defined in Code of Virginia § 58.1-400.1" was entitled to buy pagers for leasing to service customers exempt of the tax. Such ruling is not applicable to the Taxpayer since it does not meet the criteria of the "telecommunications company" definition set out in Code of Virginia § 58.1-400.1.
Accordingly, the tax assessed on the Taxpayer's leased pagers is valid.
Maintenance Agreements for Customer-owned Pagers
Maintenance contracts which provide in whole or in part for the provision of repair parts or replacements for the covered property, are subject to the tax based upon their selling price. This has been the department's longstanding policy as explained to the Taxpayer in P. D. 92-54 (4/27/92), copy enclosed. I would note that this policy was originally set out in Virginia Regulation 630-10-62.1 on January 1, 1985. This regulation is now set out in Title 23 of the Virginia Administrative Code (VAC), specifically as 23 VAC 10-210-910, copy enclosed.
According to the information presented, the maintenance contracts at issue cover replacement of any customer-owned pager unit and accessory which breaks or malfunctions. Accordingly, based on the above cited regulation, the maintenance contracts at issue are considered the sale of tangible personal property and are taxable based on the full retail contract price.
Effective January 1, 1996, maintenance contracts which provide for both repair or replacement parts and repair labor are subject to tax based upon one-half of the total charge for such contracts only. Interpreting this law change, Virginia Tax Bulletin 95-8 (9/27/95, copy enclosed) sets out that this partial exemption on "parts and labor" maintenance contracts does not extend to "parts only" maintenance contracts. Rather, "parts only" maintenance contracts remain fully taxable.
From the information presented on customer-owned pagers with maintenance coverage, it is my understanding that customers merely exchange malfunctioning pagers for similar units. If this is the case and the Taxpayer does not return the same repaired pager to the customer, the maintenance contracts at issue are recognized as "parts only" maintenance contracts. As such, the total charge to the customer for such "parts only" maintenance contracts is taxable.
Based on all of the foregoing, l find no basis to revise the audit. Accordingly, the Taxpayer will receive two bills with interest updated for a combined outstanding liability of******* . To preclude further interest charges, payment should be sent to the address on the bill, or to the attention of *****at the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within the next 30 days.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12126R
Rulings of the Tax Commissioner