When a company gives a 'free' satellite-TV receiver as an inducement to subscribe to non-taxable TV service, who owes tax on the equipment — and can the company collect it from the customer?
Plain-English summary
Note: This is the revised version of GIL 07-007, dated November 5, 2008, issued to clarify and correct the Department's original December 4, 2007 letter.
A satellite-TV provider gives subscribers their first receiver effectively free as an inducement to sign up. Mechanically, a leasing subscriber is billed $4.99/month plus tax for the receiver and gets a matching $4.99 credit on the first unit; additional receivers are billed $4.99 + tax each with no credit. The company asked: is the "free" first receiver taxable, who owes the tax, and can it recover the tax from the customer?
1. The company owes use tax on the inducement equipment. Normally a retailer can buy equipment tax-free at wholesale if it intends to resell it, or to lease it to customers (for leases over three years, or under three years with Department permission) — §§ 39-26-102(23), 713. But when the retailer instead uses its own inventory for its own purposes — here, marketing — it owes use tax on that use (Reg 39-26-713.2(b)). The Department analogized to Utah Advisory Opinion 96-127DJ, Mercury Cellular, and a Massachusetts rule, all reaching the same result: a retailer owes use tax when it gives goods at a discount in connection with non-taxable services. The use tax is measured by the company's acquisition cost from its supplier (IBM v. Charnes, 601 P.2d 622 (Colo. 1979)). Because the company uses the receiver to market its (non-taxable) TV service, it owes use tax for the one-month period — assuming it hasn't already paid sales tax when it bought the equipment.
2. The company — not the customer — is liable. The legal incidence of the use tax falls on the company. Like any other marketing cost, the Department assumes the company passes it through in its pricing, and it isn't prohibited from doing so. But it would be inappropriate to tell the customer the company is collecting a tax the customer owes the Department — because the customer doesn't owe this tax.
Important contrast (footnote): wireless telecom providers that discount equipment sold in conjunction with taxable telecommunications service are not liable for use tax on the discounted equipment (§ 39-26-202(1)(c)). The difference is that satellite TV service here is non-taxable, which is what triggers the provider's use-tax liability.
What this means for you
Providers giving "free" or discounted equipment with service
If you hand out equipment as a sign-up inducement bundled with a non-taxable service, you're consuming your own inventory for marketing — so you owe use tax on the equipment's acquisition cost, not the customer. You can fold that cost into your pricing, but don't itemize it to customers as "their" tax; the liability is yours.
Taxable vs non-taxable service changes the answer
This result hinges on the service being non-taxable. Where the equipment is discounted alongside a taxable telecommunications service (the wireless example), § 39-26-202(1)(c) means no use tax on the equipment. Check which side of that line your offering falls on.
Want a binding answer? Get a PLR
The Department treated this as a general information letter and invited a private letter ruling for a binding determination on specific facts (§ 24-35-103.5).
Common questions
Q: We give the first receiver free with service. Is there tax?
A: Yes — use tax owed by your company, measured by what you paid for the receiver, because you're using your inventory to market a non-taxable service. (Unless you already paid sales tax when you acquired it.)
Q: Can we collect that tax from the customer?
A: The tax is legally yours, not the customer's. You can recover the cost through pricing like any marketing expense, but you can't tell customers you're collecting a tax they owe the state.
Q: Isn't equipment given away with phone service treated differently?
A: Yes. Wireless equipment discounted with taxable telecom service isn't subject to this use tax (§ 39-26-202(1)(c)). The satellite case is different because the TV service is non-taxable.
Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department. A private letter ruling gives a binding answer.
Citations and references
Statutes, regulations, and cases:
- § 39-26-102(23), C.R.S. — a "sale" includes a lease; wholesale/resale framework
- § 39-26-713, C.R.S. — wholesale exemption for property to be resold or leased
- § 39-26-202(1)(c), C.R.S. — wireless equipment with taxable telecom service: no use tax
- Department Regulation 39-26-713.2(b) — use tax when a retailer uses inventory for its own purposes
- International Business Machines v. Charnes, 601 P.2d 622 (Colo. 1979) — use tax measured by acquisition cost
- § 24-35-103.5, C.R.S.; Department Regulation 24-35-103.5 — PLRs (binding) vs GILs (not binding)
Related Colorado lease / inducement letters:
- [[gil-08-020-taxability-of-certain-goods-and-services]] — leases: lessor-as-consumer for terms of three years or less
- [[gil-08-011-hostess-dollars]] — credits and inducements that don't reduce the taxable price
- [[gil-08-017-federally-funded-coupon-taxability]] — third-party-funded discounts and the tax base
Source
- Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
- Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-07-007.pdf
Original ruling text
Office of Tax Policy Analysis
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-07-007 (Revised)
XXXXXXXXXXXXXX
ATTN: XXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
November 5, 2008
Re: satellite receiver rental
Dear XXXXXXXXXX,
By letter dated December 4, 2007, the department provided you information regarding the
applicability of sales and use tax to equipment your company provides to customers at a discount in
conjunction with satellite TV service. The purpose of this letter is to clarify and correct information in
our correspondence.
Issues
1. Is the free rental of a satellite TV receiver, which is offered with non-taxable TV service for
which a charge is assessed, taxable?
2. Can the company seek reimbursement from customers for taxes due but uncollected?
Background
You state that subscribers who choose to obtain their satellite receiver pursuant to a lease are billed
$4.99 per month, plus applicable state and/or gross receipts tax. They also receive a $4.99 credit on
the same monthly bill for the first leased unit. All additional receivers are billed $4.99 each, plus tax,
per month. There is no other credit for any receiver other than the first receiver. You ask whether the
credit for the first receiver is a rebate or a point of sale discount. You also ask whether the charge of
$4.99 for the first receiver is subject to sales tax. Finally, you ask whether your company can
reimburse itself by collecting the tax from the subscriber if the charge for the first leased receiver is
subject to tax and that tax is a use tax.
Discussion
1. The company is liable for use tax when it provides a customer free rental of equipment as an
inducement to the customer to enter into a contract for satellite TV services and rental of the
equipment.
In general, a retailer is entitled to a wholesale sale exemption when it purchases from a supplier
goods that the retailer intends to resell to a customer. This wholesale sales tax exemption also
applies when the retailer intends to lease the goods to the customer for more than three years or, if
the lease to the customer is less than three years, the retailer obtains permission from the department
to purchase the goods tax free. See, generally, §§39-26-102(23) and 713, C.R.S. customer
However, when the retailer subsequently uses goods in its inventory for its own purposes, such as
marketing, then the retailer must pay use tax for its use of those goods.1 See, Department regulation
39-26-713.2(b); compare, Utah Advisory Opinion No. 96-127DJ, 09/27/1996 (retailer must pay use
tax when it offers goods at a discount in conjunction with non-taxable services), Mercury Cellular
Telephony Co. v. Calcasieu Parish of Louisiana, et al., 773 So 2d 914 (LA 2000), and Mass. Regs.
Code 64H.1.4(1)(Example 5). Use tax is calculated based on the retailer’s acquisition cost from the
supplier. International Business Machines v. Charnes, 601 P.2d 622 (Colo. 1979).
In the circumstances you describe, the company uses the satellite receiver to market its goods and
services. Therefore, the company is liable for use tax for the one-month period. This assumes, of
course, the company has not previously paid sales tax on its acquisition of the equipment from the
supplier.
2. The company, not the customer, is liable for the tax.
The incidence of taxation for use tax falls on the company, not the customer. However, and as is the
case of other marketing costs of the company, the department assumes the company passes such
costs onto customers through a variety of pricing mechanisms. The company is not prohibited from
passing the cost of this use tax onto the customer in a similar fashion. It would be inappropriate,
however, for the company to state to the customer that the company is collecting a tax for which the
customer is liable to the department.
Please note that the department does not collect sales and use taxes for “home-rule” cities and
counties. You can find a list of these jurisdictions by visiting our web site at:
www.revenue.state.co.us (go to Taxation > Forms > Businesses > Sales and Use > DRP 1002)
Contact those governments for information about their taxes.
The department recently enacted a regulation governing requests for tax advice. We issue both
private letter rulings and general information letters. See, §24-35-103.5, C.R.S. and Department
regulation 24-35-103.5. Private letter rulings are issued in response to tax questions relating to
specific factual settings and are binding on the department. General information letters are issued in
response to general tax questions and are not binding on the department. You can view this
regulation on-line at:
http://www.revenue.state.co.us/taxstatutesregs/3921reg24-35-103.5.html
1 As an aside, wireless telecommunications providers that provide discounts on equipment sold in conjunction with taxable
telecommunication services are not liable for use tax on such discounted equipment. See, §39-26-202(1)(c), C.R.S.
I am treating your request as a request for a general information letter. If you would like a private
letter ruling, please take a moment to review the regulation and resubmit your request with the
necessary information.
Pursuant to state law and department regulation 24-35-103.5, the Department will make public a
redacted version of this letter. Your letter requesting this general information letter is not made
public. I enclose a proposed redacted version of this letter. Please contact me within 60 days from
the date of this letter if you have any questions, comments, or objection concerning the redacted
letter.
Respectfully,
Office of Tax Policy
Colorado Department of Revenue