Does a Nebraska retailer owe use tax on discounted cell phones given out to land service contracts?

Plain-English summary

This ruling addresses the classic "free (or cheap) phone with a contract" promotion and who owes tax on the phone. It supersedes Revenue Ruling 1-98-1.

The setup. A cellular service provider contracts with retailers to sign up customers, paying the retailer for each signed service contract delivered. To get that payment, the retailer offers a cellular telephone at a substantially reduced price to customers who sign a contract.

The holding. When a retailer uses the phone this way, it is not making a bona fide retail sale of the phone — it is using the phone to earn the provider's commission. So:

• Sales tax must be collected on whatever amount the customer pays for the phone, whether it's a bargain price or otherwise; and
• Consumer's use tax is due on the difference between the retailer's cost of the telephone and any amount received from the customer.

In other words, the retailer can't escape tax on the phone's value just because it charged the customer little or nothing — the discount is effectively paid for by the provider's commission, and the retailer owes use tax on the uncollected portion of its cost.

Scope. The ruling applies to cellular phones, and to cellular phone accessories used the same way, transferred on or after July 1, 1999.

What this means for you

A cellular retailer or authorized agent

If you hand out discounted phones to land service contracts, collect sales tax on whatever the customer actually pays, then self-assess consumer's use tax on the gap between your cost of the phone and what you collected. Budget for that use tax as a cost of the promotion — the same logic applies to accessories you give away the same way.

A customer signing a contract

You'll pay sales tax on the (often small) amount you're charged for the phone; the rest of the tax obligation on the phone's value falls on the retailer, not you.

Common questions

Q: A retailer gives me a phone for $1 with a 2-year contract — is there tax?
A: Yes — sales tax on the $1 you pay, and the retailer separately owes consumer's use tax on the difference between its cost of the phone and that $1.

Q: Does this cover accessories too?
A: Yes, cellular phone accessories used in the same inducement manner are covered for items transferred on or after July 1, 1999.

Q: Did this replace an earlier ruling?
A: Yes, it supersedes Revenue Ruling 1-98-1.

Citations and references

• Nebraska Revenue Act — requires sales tax on the amount received for the cellular telephone, whether sold at a bargain price or otherwise, and consumer's use tax on the difference between the retailer's cost and the amount received.
• Revenue Ruling 1-98-1 — the earlier cellular-telephone ruling that this ruling supersedes.
• Effective date — applies to cellular phones and like-used accessories transferred on or after July 1, 1999.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr019902.pdf

Original ruling text

REVENUE RULING 1-99-2
June 11, 1999
Supersedes Revenue Ruling 1-98-1
Sales and Use Tax - Cellular Telephones. RETAILERS WHO USE CELLULAR TELEPHONES AS
AN INDUCEMENT TO OBTAIN SIGNED CELLULAR TELEPHONE SERVICE CONTRACTS
FOR A SERVICE PROVIDER MUST PAY CONSUMER’S USE TAX ON THE DIFFERENCE
BETWEEN THE RETAILER’S COST OF THE TELEPHONE AND ANY AMOUNT RECEIVED
FOR THE PHONE.
Advice has been requested regarding the application of sales and use tax on cellular telephones
used as an inducement by an authorized agent of the cellular service provider to obtain signed
service contracts for the service provider.
A common marketing practice in the cellular telephone industry is for a cellular telephone service
provider to contract with retailers for the retailer’s solicitation of customers for the provider’s
cellular service. The provider agrees to pay the retailer for each signed contract delivered to the
service provider. The retailer is required to have cellular phones available for those becoming
cellular customers.
In order to obtain the payment from the service provider for a signed contract, the retailer offers
to furnish a cellular telephone for a substantially reduced amount to those who sign a service
contract. After the retailer receives a signed contract from the customer, the retailer submits the
contract to the provider and receives the payment from the service provider.
For cellular telephones used by a retailer to obtain a commission, the retailer is not making a bona
fide retail sale of the cellular phone, but is using the cellular phone to receive the payment from
the service provider. Under the Nebraska Revenue Act sales tax must be collected on the amount
received for the cellular telephone whether sold at a bargain price or otherwise. Consumer’s use
tax is due on any difference between the retailer’s cost of the telephone and any amount received
by the retailer from the customer.
The provisions of this ruling apply to any cellular phones, and to any cellular phone accessories
used in the same manner, transferred on or after July 1, 1999.
APPROVED:

Mary Jane Egr
State Tax Commissioner
June 11, 1999

Nebraska Department of Revenue, P.O. Box 94818, Lincoln, Nebraska 68509-4818