Was a pager company the retailer or consumer when it sold pagers for about 25% of cost without requiring customers to subscribe to service?

Plain-English summary

A pager company earned its profit from marked-up monthly service but claimed to sell pagers far below cost. Customers could cancel service, buy a pager without service, or buy service using a compatible pager they already owned.

The first memorandum did not accept the claimed low price because the agreement showed a higher equipment-purchase amount and referred to other service terms that had not been reviewed. It said the contract price controlled unless contrary evidence was established.

The later memorandum assumed for purposes of its answer that the company truly sold a pager for the low stated amount and did not require service. Because the price was about 25% of the company's roughly $70 cost, counsel treated the company as the consumer under the cited below-cost guidance.

On that assumption, tax was measured by the company's cost of the pagers, not the low customer price.

What this means for you

Telecommunications sellers

Below-cost equipment pricing must be real and separable from required service, credits, tariffs, and other contract charges.

Accountants and tax professionals

Verify the entire agreement before applying the 50% rule. The conclusion was explicitly conditional on the low price being the genuine standalone selling price.

Common questions

Q: Did the first memorandum accept the advertised low price?

A: No. The submitted agreement appeared to state a higher equipment price.

Q: What facts did the later answer assume?

A: A genuine low pager price and no required service subscription.

Q: What was the tax measure under that assumption?

A: The pager company's cost.

Citations and references

• California Revenue and Taxation Code § 6091
• California Sales and Use Tax Regulation 1670
• California Sales and Use Tax Annotation 495.0160
• U.S. Lines v. State Board of Equalization, 182 Cal.App.3d 529 (1986)
• Nov. 19, 1992 and Mar. 23, 1993 Audit Evaluation and Planning memorandums, Jan. 4 response, and incoming Joe Cohen correspondence — facts, requests, and history supplied; memorandums, correspondence, attachments, and audit file not reproduced in the official PDF
• Service/Sale Agreement, Equipment Purchase, First Last, Credit, month-to-month term, setup and processing fees, upfront service fees, tariff, Conditions of Service and List of Charges, service-provider contract and markup, no third-party remuneration, cancellation, pager-only and service-only options, approximately $70 cost, and approximately 25-percent price — facts supplied or questioned; complete agreement, tariff, charge list, provider contract and invoices, customer contracts, pager invoices and costs, credits, payments, subscriptions, cancellations, books, returns, and tax records not reproduced in the official PDF
• Official Annotation 280.0875's approximately-25-percent price, no-required-service assumption, consumer status, and cost measure — annotation omits the earlier contract-price rejection and unresolved tariff evidence and supplies no additional transaction or audit record
• Possible later factual determination, agreement review, audit adjustment, assessment, payment, refund claim, appeal, or other final outcome — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 280.0875
• Original supporting opinion: 280.0875 PDF

Original ruling text

State of California

Board of Equalization
Legal Division

280.0875

Memorandum
To

:

Mr. Ed Pedeupe
Audit Evaluation and Planning Section

From :

Ronald L. Dick
Senior Tax Counsel

Subject:

A--- B--- Connection
SR -- XX-XXXXXX

Date: January 4, 1993

This is in reply to your November 19, 1992 memorandum regarding the application of sales tax to charge for pagers under the following facts you provided: "A--- is in the business of providing pager services. A--- indicates that in order to be competitive in the industry and to obtain customers for its services, it sells pagers at a discounted price. The pagers, which would normally list for
$XX.95, are discounted to $XX.95. The pagers cost A--- $XX.00. In addition to the separately stated charge for the pagers, the Service\Sale Agreement (sample copy attached) includes a set-up and processing fee of $XX.95 and a first and last months upfront fee for pager service.... "Customers enter into a contract with A--- for pager service. A--- sells a pager to the customer and collects the above fees. A--- then contracts with a service provider to provide pager services to its customers. The service provider charges A--- a monthly fee for providing the service. A--- marks this fee up when it bills its customers. Thus, A--- makes its profit from the marked up monthly service fee that it charges its customers. Customers retain the pagers when service is discontinued. A--- does not receive any remuneration (i.e., commissions, rebates, etc.) from the service provider, the pager manufacturer, or any other source. Customers can cancel service at any time. Customers can purchase the pagers at the advertised price of $37.95 even if they do not purchase the service (although we doubt that this happens very often). Customers can also purchase the service without purchasing a pager if their pagers use the same frequency as the service provider. In such cases, the customer is only charged the standard $24.95 processing fee and the monthly service fees." Given this information, A--- B--- requests an opinion as to the proper measure of tax. The sample copy of A---'s Agreement you sent shows the Agreement is for a month-to-month

Mr. Ed Pedeupe

-2-

January 4, 1993
280.0875

basis. The sample has prices entered in various boxes. The box labeled "Equipment Purchase" shows $XX.95. The box labeled "First Last" shows $XX.00. We question whether A--- charges only $X.00 per month for its service such that it would charge only $XX.00 for the first and last monthly payments. The box labeled "Credit" shows $XX.00. Apparently, A--- considers the $XX.00 credit as a discount on the sale price of the pager, and the sale price of the pager is $XX.95. We disagree. The Agreement shows the sale price of the equipment to be $XX.95. Tax should be computed on that amount, because there is no basis upon which to consider the gross receipts of A---'s sale as less than $XX.95. The law presumes that all gross receipts are subject to tax until the contrary is established. (Rev. & Tax. Code § 6091.) A--- may sell its pagers at $XX.95, and that amount would be the taxable gross receipts of its sale. However, the facts do not substantiate such a conclusion in this case. The sale price stated on the Agreement is the correct measure for calculation of the sales tax. (U. S. Lines v. State Board of Equalization (1986) 182 Cal.App.3d 529.) Even if A--- rewords its Agreement to show a sale price of $XX.95 for the pager, we would not find that evidence alone as conclusive. On the reverse of the Agreement, the "Conditions of Service and Charges" provides that the Agreement is governed by any terms of a "Tariff" or a "Conditions of Service and List of Charges" maintained in A---'s company offices. We would need to review those applicable provisions before giving a definitive answer.

RLD:sr

State of California

Memorandum
To

:

Mr. Dennis Fox, Supervisor
Audit Evaluation and Planning Section - MIC:40

From :

Ronald L. Dick
Senior Tax Counsel

Subject:

A--- B--- Connection
SR – XX-XXXXXX

Board of Equalization
Legal Division

280.0875
Date: April 2, 1993

This is in reply to your March 23 memorandum regarding the application of sales tax to charges by A--- B--- Connection for pagers. As you may know, we wrote a memorandum to your section on January 4, 1993 regarding A---'s transfers of the pagers to their customers. At that time, A--- claimed that its sales price of the pager was $XX.95. Then we did not believe A--- had presented sufficient evidence for us to conclude that the total sales price was $XX.95. A copy of our memorandum is attached as part of the incoming correspondence from Mr. Joe Cohen. A--- now claims that they sell their pagers for $XX.95. That is still a question of fact. The reverse side of A---'s agreement with its customer continues to refer to the "Conditions of Service and List of Charges" to which our January 4 memorandum referred. Thus, there may be evidence to indicate a higher sales price. However, for purposes of this opinion, we will assume that A--- merely charges its customers $XX.95 for the pagers; that is, A--- would provide a pager to a customer for $XX.95 and not require the customer to subscribe to the pager service. Given that A--- pays approximately $70 for a pager and sells the pagers for approximately 25 percent of their cost, then we believe A--- B--- is the consumer of the pagers. (Cf. Sales and Use Tax Reg. 1670, Gifts, Marketing Aids, Premiums and Prizes; Sales and Use Tax Annot. 495.0160.) Accordingly, we believe that A--- B---'s measure of tax is the cost of the pagers.

RLD:sr