Did an unlimited monthly cellular subscription fee fall under Illinois sales tax or telecommunications excise tax?

Plain-English summary

The Department did not decide whether the unlimited monthly cellular plan was subject to Retailers' Occupation Tax or Telecommunications Excise Tax. The customer paid a flat monthly amount for unlimited minutes, lost access if the monthly charge was unpaid, and had no rollover minutes.

The GIL explained the statutory dividing line:

• A prepaid telephone calling arrangement was tangible personal property subject to Retailers' Occupation Tax and not Telecommunications Excise Tax.
• The definition generally required a right to purchase telephone or telecommunications service paid for in advance, with no further service once the prepaid amount was consumed unless recharged.
• It excluded a payment-card arrangement that merely credited an account under an existing subscription plan.
• A prepaid telephone plan that did not meet the statutory definition was taxed under the Telecommunications Excise Tax.

The Department said the request contained too little information to decide whether the company's plan met the prepaid definition.

The physical phone followed a separate rule. A retailer selling cellular phones owed Retailers' Occupation Tax on the gross receipts received for the devices and collected complementary Use Tax from the customers.

What this means for you

Do not classify a cellular plan from the label "prepaid" or "monthly" alone. Examine how advance payment works, whether service is consumed and recharged, and whether a payment merely credits an existing subscription account. Keep the taxable device sale separate from the service-plan analysis.

Common questions

Q: Did the Department decide the tax on the unlimited monthly fee?
A: No. It said the facts were insufficient to determine whether the plan was a prepaid telephone calling arrangement.

Q: Which tax applied to a qualifying prepaid calling arrangement?
A: Retailers' Occupation Tax, not Telecommunications Excise Tax.

Q: Were cellular phone devices taxable when sold?
A: Yes. The retailer owed Retailers' Occupation Tax on the device-sale gross receipts and collected complementary Use Tax.

Subject

Miscellaneous

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0046.pdf

Original ruling text

ST 11-0046-GIL 06/22/2011 MISCELLANEOUS
This letter discusses the sales of cellular telephones when they are sold.
130.101. (This is a GIL).

86 Ill. Adm. Code

June 22, 2011

Dear Xxxxx:
This letter is in response to your letter received in this office on March 7, 2011, in which you
request information. The Department issues two types of letter rulings. Private Letter Rulings
(“PLRs”) are issued by the Department in response to specific taxpayer inquiries concerning the
application of a tax statute or rule to a particular fact situation. A PLR is binding on the Department,
but only as to the taxpayer who is the subject of the request for ruling and only to the extent the facts
recited in the PLR are correct and complete. Persons seeking PLRs must comply with the
procedures for PLRs found in the Department’s regulations at 2 Ill. Adm. Code 1200.110. The
purpose of a General Information Letter (“GIL”) is to direct taxpayers to Department regulations or
other sources of information regarding the topic about which they have inquired. A GIL is not a
statement of Department policy and is not binding on the Department. See 2 Ill. Adm. Code
1200.120. You may access our website at www.tax.illinois.gov to review regulations, letter rulings
and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
Background Facts
ABC, is an Illinois corporation engaged in the business of the sale of cellular
communications products and services through its retail stores. One aspect of the
corporation’s business is selling cellular phone subscription plans from major carriers to
the ultimate end users of said plans. One such plan is an account wherein the end user
subscribes to pay a flat fee per month for an unlimited number of cellular minutes per
month. Each month the user is required to pay the fee or the user is not able to use any
of the minutes. Likewise, in the event of nonpayment, no minutes that were paid for
from any previous month ‘roll-over’ into the new month. For each plan, the major carrier
pays the telecommunications excise tax to State of Illinois.
Question Presented
Where a cellular phone customer subscribes to an arrangement with a major cellular
carrier wherein said customer pays a monthly flat subscription fee to the carrier for the
use of unlimited minutes per month on the carrier’s network, is the retailer of said plan
required to pay the Retailers' Occupation Tax on the monthly fee pursuant to 35 ILCS
120/2 and Section 130.101 of the Illinois Administrative Code?

DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property at retail to purchasers for use or consumption. See
86 Ill. Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this State, any
kind of tangible personal property that is purchased anywhere at retail from a retailer. See 86 Ill.
Adm. Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
Retailers’ Occupation Tax is measured by the sellers’ gross receipts from sales of tangible
personal property. If retailers sell cellular phones to their customers, the retailers incur Retailers’
Occupation Tax measured by the gross receipts from the sales. At the time the retailers purchase
cellular phones from their suppliers, the retailers should supply Certificates of Resale to their
suppliers. Then, when the retailers sell the cellular phones, the retailers will pay Retailers’
Occupation Tax based on the amount they receive from their customers. This amount represents the
gross receipts received from the sale of the cellular phone. It is important that retailers be very
careful when computing the amount of gross receipts from the sales of their cellular phones. “Gross
receipts” means “all the consideration actually received by the seller, except traded-in tangible
personal property” from all sources. See 86 Ill. Adm. Code 130.401. The retailers are required to
collect a complementary Use Tax liability from their customers when the sales of the cellular phones
occur. The tax should be listed as a separate item from the selling price of the equipment and not as
an administration or service charge. See 86 Ill. Adm. Code § 150.135.
From the limited information contained in your letter, we cannot determine whether the
Company is providing prepaid telephone calling arrangements. On and after January 1, 2001, prepaid
telephone calling arrangements shall not be considered telecommunications subject to the
Telecommunications Excise Tax. 35 ILCS 630/3 & 4. "Prepaid telephone calling arrangements"
generally means the right to exclusively purchase telephone or telecommunications services that
must be paid for in advance, provided that, unless recharged, no further service is provided once that
prepaid amount of service has been consumed. “Prepaid telephone calling arrangements” include
the recharge of a prepaid calling arrangement. "Prepaid telephone calling arrangement" does not
however include an arrangement whereby a customer purchases a payment card and pursuant to
which the service provider reflects the amount of the purchase as a credit on an account for a
customer under an existing subscription plan. 35 ILCS 120/2-27. Beginning January 1, 2001, prepaid
telephone calling arrangements are considered tangible personal property subject to Retailers'
Occupation Tax liability and not the Telecommunications Excise Tax. 35 ILCS 120/2. Prepaid
telephone plans that do not meet the definition of a “prepaid telephone calling arrangement” are taxed
under the Telecommunications Excise Tax.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Associate Counsel
RSW:msk