Are an affiliate's receipts from selling mobile-phone equipment subject to New York's section 186-e telecommunications excise tax, and do they pass through to its members or partners?

Plain-English summary

A wireless group set up Equipco (an LLC or partnership owned by the carrier "Wireless Co" and affiliates) to sell mobile-telecommunications equipment -- handsets and devices -- to the carrier's customers, usually at a discount tied to signing or renewing a service contract. The carriers reimburse part of that discount through a commission. Equipco also sells equipment at retail. Crucially, Equipco does not sell the telecommunications service; Wireless Co and its affiliates do.

The Department held:

1. Equipment receipts are not taxed under section 186-e. Section 186-e's excise tax falls on a provider of telecommunication services that sells those services. Equipco sells equipment only, not service, so its equipment sales are outside section 186-e (following Marken Properties / Relay Communications).
2. No pass-through to owners. Because an LLC's or partnership's section 186-e gross receipts are not passed through to its members or partners, Equipco's members/partners do not include Equipco's equipment receipts in their own section 186-e gross receipts.

Caveat: If equipment and service are marketed as a package, Equipco may be selling equipment on the carrier's behalf, and the full package price (including equipment) becomes the carrier's taxable gross receipt from selling the service. Likewise, if Wireless Co itself bills for the equipment, section 186-e.1(a)(2)(A) treats it as providing the equipment with the service, so its taxable receipt includes both charges.

What this means for you

Splitting equipment from service

Selling devices through a separate entity that does not provide the telecommunications service can keep those equipment receipts outside the section 186-e excise tax. The line that matters is who sells the service -- the equipment seller alone is not a "provider of telecommunication services."

Watch packaging and billing

The structure is fragile. If equipment and service are bundled and marketed together, or the service provider bills for the equipment, the equipment charge can be pulled back into the provider's taxable gross receipts. Keep marketing, contracts, and billing genuinely separate if the goal is to keep equipment out of 186-e.

Partnership/LLC owners

Section 186-e gross receipts of an LLC or partnership do not flow through to members or partners. An owner does not pick up the entity's telecom receipts on its own 186-e computation -- unlike income-tax pass-through treatment.

Common questions

Q: Are mobile-phone equipment sales subject to the section 186-e excise tax?
A: Not when the seller sells only the equipment and not the telecommunications service. Section 186-e taxes providers of telecommunication services on receipts from those services.

Q: Can the equipment ever be taxed under 186-e?
A: Yes -- if equipment and service are marketed as a package or the service provider bills for the equipment, the equipment charge becomes part of the provider's taxable gross receipt from the service.

Q: Do an LLC's or partnership's 186-e receipts pass through to its owners?
A: No. Members and partners do not include the entity's section 186-e gross receipts in their own.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 186-e (excise tax on telecommunication services)
- Tax Law section 186-e.1(g) (definition of telecommunication services; mobile telecommunications service)
- Tax Law section 1101(b)(24) (definition of mobile telecommunications service)
- Tax Law section 186-e.1(a)(2)(A) (provider billing for equipment with service)
- Marken Properties, Inc. / Relay Communications, TSB-A-97(16)C and (37)S
- PricewaterhouseCoopers LLP (Equipco), TSB-A-05(8)C (July 20, 2005)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a05_8c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(8)C
Corporation Tax
July 20, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C031202A

On December 2, 2003, a Petition for Advisory Opinion was received from
PricewaterhouseCoopers LLP, Attn. Brian Goldstein, 1301 Avenue of the Americas, New York,
New York 10019.
The issues raised by Petitioner, PricewaterhouseCoopers LLP, are:
1. Whether the gross receipts of Equipco, as described below, from the sale of mobile
telecommunications equipment will be subject to the tax imposed under section 186-e of
the Tax Law.
2. Whether a partner or member of Equipco, as described below, includes its share of
Equipco’s gross receipts in the partner’s or member’s gross receipts under section 186-e
of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
A company (“Wireless Co”) provides mobile telecommunications services in New York
State, directly and through affiliates.
The affiliates of Wireless Co that provide mobile telecommunications service (each, an
“Affiliate” and collectively, the “Affiliates”) consist of corporations, partnerships and limited
liability companies (LLCs).
Another entity (“Equipco”) will be either a single member LLC that is owned by
Wireless Co or an Affiliate, or a partnership that is owned by Wireless Co and/or one or more
Affiliates. Equipco will sell mobile telephone equipment including cell phones and cell phone
accessories (collectively, “Equipment”) in New York.
Equipco acts as a commissioned salesperson and agent of Wireless Co and the Affiliates
for the purpose of finding purchasers of the telecommunications service provided by Wireless Co
and the Affiliates. Equipco earns a commission from Wireless Co and the Affiliates for
establishing or renewing contracts for the provision of mobile telecommunications service
between Wireless Co or the Affiliates and customers. Equipco will, among other regular sales of
Equipment, sell Equipment concurrently with the establishment or renewal of a contract for
mobile telecommunications service between Wireless Co or an Affiliate and the Equipment
purchaser. Establishment or renewal of the service contract will also be made by employees of
Wireless Co or an Affiliate at retail outlets maintained by Wireless Co or the Affiliate. In
order to encourage the establishment or renewal of these contracts, Equipment will be sold by

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Equipco to such customers at a discounted price if the customer establishes or renews a contract
for mobile telecommunications service with Wireless Co or an Affiliate when the customer
purchases Equipment.
Equipco will use a portion of the commission fee paid by Wireless Co or an Affiliate to
“fund” the discount. If the Equipment is damaged or defective, the customer’s recourse and
remedy for repair or replacement are through Equipco (which might ultimately process the
problem through the distributor or manufacturer of the equipment). If the customer terminates
the contract for the provision of mobile telecommunications services early or otherwise defaults
on the contract, Wireless Co or its Affiliate may be entitled to damages arising from the early
termination or default. However, regardless of whatever damages the customer may owe
Wireless Co or an Affiliate occasioned by the early termination or default of the service contract,
the customer retains possession and ownership of the Equipment. In the event of a default on the
service contract, neither Equipco nor Wireless Co or an Affiliate is contractually entitled to
damages or recoupment of the discount in the purchase price for the Equipment even though
such price was premised upon the establishment or renewal of the service contract.
Equipment will also be sold by Equipco to existing customers of Wireless Co and its
Affiliates and to others. Equipco will not sell the Equipment in such cases at a discounted price.
Applicable law
Section 186-e of the Tax Law provides, in part:
1. Definitions. As used in this section, where not otherwise specifically defined
and unless a different meaning is clearly required:
(a)(1) “Gross receipt” means the amount received in or by reason of any
sale, conditional or otherwise, of telecommunication services or in or by reason of
the furnishing of telecommunication services. Gross receipt from the sale of
mobile telecommunications service provided by a home service provider shall
include “charges for mobile telecommunications service” as described in
paragraph one of subdivision (l) of section eleven hundred eleven of this chapter,
regardless of where the mobile telecommunications service originates, terminates
or passes through... “Amount received” for the purpose of the definition of gross
receipt, as the term gross receipt is used throughout this article, means the amount
charged for the provision of a telecommunication service.
(2)(A) Any charge for a service or property billed by or for a mobile
telecommunications customer’s home service provider shall be deemed to be provided by
such mobile telecommunications customer’s home service provider.
*

*

*

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(c) “Person” means persons, corporations, companies, associations, joint-stock
companies or associations, partnerships or limited liability companies....
*

*

*

(e) “Provider of telecommunication services” means any person who furnishes or
sells telecommunications services regardless of whether such activities are the main
business of such person or are only incidental thereto....
*

*

*

(g) “Telecommunication services” means telephone or telegraphy, or telephone or
telegraph service, including, but not limited to, any transmission of voice, image, data,
information and paging, through the use of wire, cable, fiber-optic, laser, microwave,
radio wave, satellite or similar media or any combination thereof and shall include
services that are ancillary to the provision of telephone service ... and also include any
equipment and services provided therewith....
(h) For the purpose of applying the provisions of this section to mobile
telecommunications service, the following terms when used in relation to mobile
telecommunications service shall be defined as such terms are defined in section eleven
hundred one of this chapter: “mobile telecommunications service,” mobile
telecommunications customer,” “home service provider,” ...
2. Imposition. (a) There is hereby imposed an excise tax on the sale of
telecommunication services by any person which is a provider of telecommunication
services, to be paid by such person, at the rate of ... two and one-half percent on and after
January first, two thousand of gross receipt from ... (4) mobile telecommunications
service provided by a home service provider where the mobile telecommunications
customer’s place of primary use is within this state.
Section 1101(b) of the Tax Law provides, in part:
(24) “Mobile telecommunications service” shall mean commercial mobile radio
service. “Mobile telecommunications service” does not include prepaid telephone calling
service or air-ground radio telephone service as defined in section 22.99 of title 47 of the
code of federal regulations as in effect on June first, nineteen hundred ninety-nine.
*

*

*

(27)(i) “Mobile telecommunications customer” shall mean either (A) a person or
entity that contracts with a home service provider for mobile telecommunications
services; or (B) if the end user of mobile telecommunications services is not the

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contracting party, the end user of the mobile telecommunications service, but this clause
(B) applies only for the purpose of determining the place of primary use....
(ii)”Home service provider” shall mean a facilities-based carrier or reseller as
defined in subparagraph (iv) of this paragraph, with which the mobile
telecommunications customer contracts for the provision of mobile telecommunications
service.
Section 1111(l)(1) of the Tax Law defines “charges for mobile telecommunications
services” and provides, in part:
Such term shall mean any charge by a home service provider to its mobile
telecommunications customer for (A) commercial mobile radio service, and shall include
property and services that are ancillary to the provision of commercial mobile radio
service (such as dial tone, voice service, directory information, call forwarding , caller­
identification and call-waiting), and (B) any service and property provided therewith.
Opinion
With respect to Issue 1, Equipco will be either a single member LLC owned by Wireless
Co or an Affiliate, or a partnership owned by Wireless Co and/or one or more Affiliates. As
either an LLC or a partnership, Equipco is a person under section 186-e.1(c) of the Tax Law and
will be subject to the excise tax imposed under section 186-e of the Tax Law if it is a provider of
telecommunication services that sells telecommunication services.
Telecommunication services under section 186-e.1(g) of the Tax Law include mobile
telecommunications service which is defined under section 1101(b)(24) of the Tax Law. Under
section 186-e.1(g), mobile telecommunications service includes any transmission of voice,
image, data, information and paging, through microwave, radio wave or satellite, and services
that are ancillary to the provision of telephone service and any equipment and services provided
therewith. The sale of mobile telecommunications service includes any equipment and services
provided therewith. The tax is imposed on a person’s gross receipt from the sale of such mobile
telecommunications service and includes charges for mobile telecommunications service as
defined in section 1111(l) of the Tax Law. Charges for mobile telecommunications service
include any charge by a home service provider to customers for (a) commercial mobile radio
service, and include property and services that are ancillary to the provision of such commercial
mobile radio service such as dial tone, voice service, directory information, call forwarding,
caller-identification and call-waiting, and (b) any service and property provided therewith.
In this case, Petitioner states that Equipco is the seller of mobile telecommunications
equipment, but that Equipco does not sell the mobile telecommunications service. Wireless Co
and the Affiliates are providing the mobile telecommunications service, and Equipco’s
Equipment that is used to provide such mobile telecommunications service is sold to customers

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of Wireless Co and the Affiliates concurrently with the establishment or renewal of a contractual
relationship for such mobile telecommunications service with the customers. When the
Equipment is sold in conjunction with the service contract, the customer’s price for the
Equipment is discounted. A portion of the amount of the commission fee paid by Wireless Co or
the Affiliate that has the contractual relationship with the customer for the telecommunications
service “reimburses” Equipco for the discount on the Equipment. Equipco also sells Equipment
to existing customers of Wireless Co and its Affiliates and others through retail sales.
Based on the facts presented, Equipco is selling mobile telecommunications equipment,
but it is not selling mobile telecommunications service. See Marken Properties, Inc., Relay
Communications Center, Inc., and Relay Communications Corporation, Adv Op Comm T&F,
June 26, 1997, TSB-A-97(16)C and (37)S. Therefore, Equipco’s sales of the Equipment are not
subject to the tax imposed under section 186-e of the Tax Law.
With respect to Issue 2, Equipco is a person under section 186-e of the Tax Law and is a
taxpayer if it has taxable gross receipts as defined in section 186-e of the Tax Law. Therefore, if
Equipco is a single member LLC or a partnership, its gross receipts are not treated as passed­
through to its member or partners and are not included in the gross receipts of the member or
partners for purposes of section 186-e of the Tax Law. Accordingly, if Equipco is a single
member LLC, its member will not include Equipco’s gross receipts from Equipco’s sale of the
Equipment when computing the member’s gross receipts under section 186-e of the Tax Law. If
Equipco is a partnership, none of the partners will include the partner’s distributive share of
Equipco’s gross receipts from Equipco’s sale of the Equipment when computing the partner’s
gross receipts under section 186-e of the Tax Law.
However, it should be noted that there are circumstances in which the gross receipt for
the sale of the mobile telecommunications service by Wireless Co and its Affiliates would
include the amount received for the Equipment used by the customer in connection with the
provision of the telecommunication services. For instance, if the telecommunication services
sold by Wireless Co or its Affiliates and the Equipment are marketed in package form, Equipco
may be considered in some cases to be selling the Equipment on behalf of Wireless Co or its
Affiliates. Such a determination would depend on the specific nature of any agreements between
Wireless Co or its Affiliates with Equipco, and the specific nature of the contractual service
agreements between Wireless Co or its Affiliates with the mobile telecommunications customer.
The sale of such a package in that case would be considered the sale of the mobile
telecommunications service, and the total package price, including the amount paid for the
Equipment, would be considered to be the gross receipt of Wireless Co or its Affiliates from the
sale of mobile telecommunications service.
Furthermore, if Wireless Co bills for the Equipment, under section 186-e.1(a)(2)(A) of
the Tax Law it is considered to be providing the Equipment along with the telecommunication
services, and Wireless Co’s gross receipt for purposes of section 186-e.1(a)(1) of the Tax Law

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will include both the charge for the telecommunication services and the charge for the
Equipment.

DATED: July 20, 2005

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.