Which subscription-television charges were taxable when customers separately paid to rent a decoder, receive scrambled programming, and provide a refundable deposit?

Plain-English summary

A pay-television provider installed electronic decoders on subscribers' television sets so they could unscramble movies broadcast over a local channel. It charged $6 per month for the decoder and a separate $13.95 monthly programming fee, and it could require a refundable security deposit.

California required use tax measured by the $6 decoder rental charge, assuming the provider did not hold the decoders on a tax-paid basis.

The separate programming fee was not subject to sales or use tax.

The refundable deposit was also not taxable. The source found that it secured the subscriber's payment and performance generally rather than primarily securing possession of the rented decoder; it noted that the historical $50 deposit was much smaller than the decoder's $250 cost.

What this means for you

Subscription and equipment providers

Separately stated equipment rent, content access, and refundable security can receive different tax treatment based on their actual function.

Accountants and tax professionals

Document whether rental equipment was acquired tax-paid, separately state programming, and identify whether a deposit secures general performance or serves as consideration for possession.

Common questions

Q: Was the $6 decoder rent taxable?

A: Yes, under the opinion's tax-paid-equipment assumption.

Q: Was the $13.95 programming fee taxable?

A: No.

Q: Was the refundable deposit taxable?

A: No, on the described facts.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0018.930
• Original supporting opinion: 515.0018.930 PDF

Original ruling text

515.0018.930

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)

916/445-2705

November 26, 1980

Mr. R--- S. B--P---, B---, L--- & W----- ---Plaza, Suite XXX XXXX --- --- East
--- ---, CA XXXXX
Dear Mr. B---:
Re:

S--- of CA, Inc.
SR -- XX XXXXXX

Your letter of September 22, 1980 summarizes the nature of your client’s business as follows: “When a customer of S--- first subscribes for the S--- service, S--- installs an electronic decoding device (the ‘decoder’) in the subscriber’s premises by directly attaching the decoder to the subscriber’s designated television set. During certain hours of the week, S--- causes its television programming, consisting primarily of major motion pictures, to be broadcast over the facilities of Channel 22 (K-WBY) in Los Angeles, California. The television signal is encoded or ‘scrambled’ electronically, so that only television sets having the S--decoder attached thereto can unscramble the sound and picture and thereby obtain the S--- programming. S--- charges a monthly fee of $6.00 for the rental of the decoder, and an additional
$13.95 for provision of the programming over Channel 22.
In addition a refundable security deposit may be required.
The characterization and organization of the items in the subscriber agreement (copy attached) and the discussion in your letter of inquiry (copy also attached) cause us to conclude that S--- is required to collect and remit applicable use tax measured by (computed upon) the $6.00 per month rental charge for the rental of the decoder to S---’s subscribers (assuming that S--- does not hold the decoder’s on a tax-paid basis). We conclude also that no sales or use tax is due from S---

P---, B---, L--- & W---

-2-

November 26, 1980
515.0018.930

or its customers as a result of the monthly fee (currently $13.95) for the provision of pay tv programming broadcast over the facilities of Channel 22. Further we believe that no sales or use tax results from the payment of a refundable deposit by the customer to S--- at the initiation of the contract. This last conclusion is based on the fact that the refundable deposit is intended to provide S--- with security for payment and performances of the subscriber in general and is not primarily paid to or by the subscriber to secure possession of the decoder which S--- rents to the subscriber. This conclusion is supported by the fact that the decoder’s cost $250 while the security deposit is currently but $50. Very truly yours,

Philip R. Dougherty
Tax Counsel

PRD:ba