Must a cable company pay sales tax on converters it buys to provide its cable service?

Plain-English summary

An employee of a cable company asked whether converters the company buys — and places in customers' homes as part of its cable service — are subject to sales tax. The company charges customers for the use of the converters and collects sales tax on those charges. The Department ruled the company must pay sales tax when it buys the converters and cannot claim a resale exemption.

"Rather than being rented, the converters are provided to customers as part of the taxable service. Therefore, your company cannot claim exemption on the basis that it is buying the converter to resell by renting or leasing them to its customers."

The Department grounded this in Kansas case law. In Southwestern Bell Tel. Co. v. State Commission of Revenue and Taxation, 168 Kan. 227, 212 P.2d 363 (1949), the Kansas Supreme Court "rejected Bell's contention that its poles, transmission cable, switch boards, telephones and other equipment are exempt because Bell provides a taxable service," recognizing that Bell "was using items like the telephones to provide the telephone service and was not simply leasing them." In In re Tax Appeal of AT & T Technologies, Inc., 242 Kan. 554, 749 P.2d 1033 (1988), the court "upheld the assessment of AT& T for sales tax they failed to collect on telephone repair services," again rejecting the resale-by-lease argument. Quoting the Tennessee Supreme Court's decision in Nashville Mobilephone, Co. v. Woods, 655 S.W. 2d 934 (Tenn. 1983), the Department noted the "general theme" that "when the primary function and purpose of the taxpayer is to provide services, the ownership, use and maintenance of certain type of personal property and equipment are necessary . . . so that the taxpayer, not the customer, is the ultimate user or consumer."

Applying that, "your company's purchase and repair of converters is taxable since the converters are equipment used to provide the service" — no different from its purchases of "wire, satellite dishes, receivers, amplifiers, and other equipment."

What this means for you

Cable and other service providers

Equipment you buy to deliver your taxable service — converters, wire, dishes, amplifiers — is taxable to you at purchase. You are the ultimate consumer of that equipment, so you owe tax on it (and on repairs to it).

Charging customers doesn't create a resale

Separately billing customers for "use" of the equipment, even collecting tax on that charge, does not turn your purchase into a purchase-for-resale. The equipment is a means of providing the service, not property you are leasing out.

Repairs are taxable too

Because you are the consumer of the equipment, repair services performed on it are also subject to tax, as the AT&T case illustrates.

Common questions

Q: Does a cable company pay sales tax on converters it buys?
A: Yes. The converters are equipment used to provide the taxable cable service, so the company is the consumer and owes tax on the purchase.

Q: Can the company buy them exempt for resale since it charges customers for them?
A: No. Providing the converters as part of the service is not a resale by lease or rental, so no resale exemption applies.

Q: What supports this conclusion?
A: Kansas Supreme Court decisions in Southwestern Bell (1949) and AT&T Technologies (1988), and the Tennessee Nashville Mobilephone case they cite, all holding that a service provider is the ultimate consumer of the equipment used to furnish its service.

Citations and references

• The Department did not cite a specific statute number. It relied on the rule — drawn from In re Tax Appeal of AT & T Technologies, Inc., 242 Kan. 554, 749 P.2d 1033 (1988); Southwestern Bell Tel. Co. v. State Commission of Revenue and Taxation, 168 Kan. 227, 212 P.2d 363 (1949); and Nashville Mobilephone, Co. v. Woods, 655 S.W.2d 934 (Tenn. 1983) — that a business whose primary purpose is providing a service is the ultimate consumer of the equipment used to furnish it, so the cable company's purchase and repair of converters is taxable.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-1999-028

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

December 20, 1999

XXXX
XXXX
XXXX

RE: Your e-mail received November 22, 1999

Dear XXXX:

I have been asked to respond to your e-mail that we received late last month. You are employed by a cable company and ask if converters purchased by the cable company are subject to sales tax. Your company places the converters in customer’s homes as part of its cable service. It charges customers for the use of the converters, and collects sales tax on those charges.

Please be advised that your company must pay sales tax when it buys the converters. Rather than being rented, the converters are provided to customers as part of the taxable service. Therefore, your company cannot claim exemption on the basis that it is buying the converter to resell by renting or leasing them to its customers.

The issue that you raise has been raised and litigated in cases in Kansas and several other states. In Southwestern Bell Tel. Co. v. State Commission of Revenue and Taxation, 168 Kan. 227, 212 P.2d 363 (1949), the Kansas Supreme Court considered and rejected Bell’s contention that its poles, transmission cable, switch boards, telephones and other equipment are exempt because Bell provides a taxable service. The court recognized that Bell was using items like the telephones to provide the telephone service and was not simply leasing them to their customer. In In re Tax Appeal of AT & T Technologies, Inc., 242 Kan. 554, 749 P.2d 1033 (1988), the Kansas Supreme Court upheld the assessment of AT& T for sales tax they failed to collect on telephone repair services performed for Southwestern Bell. In this case, the court rejected Bell’s arguments that they were reselling the telephones by lease or rental. The court again found that Bell was providing the telephones to customers as part of their taxable telephone service. This meant that Bell’s purchase of telephones, and their purchase of repair services for those telephones, was subject to tax. In reaching its decision, the Court cited Nashville Mobilephone, Co. v. Woods, 655 S.W. 2d 934 (Tenn. 1983). In that case, the Tennessee Supreme Court cited a series of cases from other states and noted:

The general theme of all these cases is that when the primary function and purpose of the taxpayer is to provide services, the ownership, use and maintenance of certain type of personal property and equipment are necessary in order to enable to furnish the services so that the taxpayer, not the customer, is the ultimate user of consumer within the meaning of the sales tax use tax statutes.

Your cable company purchases converters to allow it to provide taxable television cable service to its customers. While converters are placed in the home of the subscriber, the cable company’s purchase of the converters is conceptually no different than its purchases of wire, satellite dishes, receivers, amplifiers, and other equipment that it buys to have the means to furnish taxable cable service. Like the telephones in Bell and AT & T, your company’s purchase and repair of converters is taxable since the converters are equipment used to provide the service.

I hope that I have adequately answered your question. If not, please call me to discuss this matter further.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 03/28/2000 Date Modified: 10/10/2001

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