Are downloadable wallpaper, games, ringtones, and ringback tones sold by a mobile phone carrier subject to New York's utility tax, telecommunications excise tax, or sales tax?

Plain-English summary

A mobile phone carrier sells optional add-ons to its subscribers: wallpaper (a picture for the phone screen), games, and "music and sounds" (ringtones that signal an incoming call, and ringback tones that callers hear instead of ringing). Each is separately charged on the customer's bill. The carrier asked whether these add-ons are hit by three different New York taxes: the section 186-a utility tax, the section 186-e telecommunications excise tax, and the section 1105(b)(2) sales tax on mobile telecommunications service.

The Department concluded:

• Section 186-a utility tax — no. These receipts are not "gross operating income" from gas, electric, steam, water, or refrigeration. (And in any event the section 186-a rate has been zero since January 1, 2005.)
• Section 186-e excise tax and section 1105(b)(2) sales tax on mobile telecom service — no, if separately accounted for. Although the items are bundled with mobile service and therefore start out inside the definition of "charges for mobile telecommunications service," a home service provider is allowed by Tax Law §§ 186-e.2(b)(4) and 1111(l)(2) to separately account for property and services that are not telecom service, using a "reasonable, objective and verifiable standard." Because the carrier separately and reasonably charges for each item, it may exclude those receipts from both telecom taxes.
• Section 1105(a) sales tax — games only. Downloaded games are prewritten computer software, which is tangible personal property regardless of how it is delivered, so they are taxable under section 1105(a) and sourced to the customer's place of primary use. Wallpaper, ringtones, and ringback tones are digital audio and visual files that are not tangible personal property or an enumerated service, so they are not subject to sales tax.

What this means for you

Wireless carriers and mobile content sellers

Separate, reasonable billing is what unlocks the telecom-tax exclusion. If you fold these add-ons into a bundled charge for service, they ride along as taxable "charges for mobile telecommunications service." Bill them separately on a defensible, objective basis and keep the methodology documented. Then run each item through the sales-tax analysis independently — games are taxable software; ringtones and wallpaper are not.

App stores, ringtone and game vendors

The character of the digital item controls its sales-tax treatment in New York. Software (a game with coded instructions that make the device perform a function) is taxable as prewritten software even when downloaded; a pure audio or image file is not. Sourcing for the taxable software follows the customer's place of primary use.

Accountants and tax professionals

Note the two-step logic: (1) the telecom taxes can be avoided by separate accounting under §§ 186-e.2(b)(4) and 1111(l)(2); but (2) section 1111(l)(2) expressly does not exempt anything "otherwise subject to" sales tax — so the games remain taxable under section 1105(a). Don't let the telecom-tax exclusion mask a standalone sales-tax liability on software.

Common questions

Q: Are ringtones taxable in New York?
A: Under this opinion, ringtones and ringback tones are digital audio files that are not tangible personal property or an enumerated service, so they are not subject to sales tax — and, if separately billed, they are also outside the telecom excise and sales-tax-on-service.

Q: Why are games treated differently?
A: Games are prewritten computer software (coded instructions that make the phone perform a function), and New York taxes prewritten software as tangible personal property regardless of how it is delivered.

Q: What does "separate accounting" require?
A: A reasonable, objective, and verifiable standard for charging the non-telecom item, with the charge reasonable and proportionate to the overall service charge. Without it, the add-ons are taxed as part of the mobile telecommunications service.

Citations and references

Statutes, regulations, and authorities:
- Tax Law § 186-a (tax on furnishing of utility services)
- Tax Law § 186-e (telecommunications excise tax; separate accounting under § 186-e.2(b)(4))
- Tax Law § 1105(b)(2) (sales tax on mobile telecommunications service)
- Tax Law § 1111(l) (charges for mobile telecom service; separate accounting; sourcing to place of primary use)
- Tax Law § 1105(a) (sales tax on tangible personal property); § 1101(b)(6), (14) (prewritten software)
- Apple Computer, Inc., TSB-A-07(14)S; Universal Music Group, TSB-A-01(15)S (digital files not TPP)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a08_8c_63s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-08(8)C
Corporation Tax
TSB-A-08(63)S
Sales Tax
November 24, 2008

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z080508B

A petition received May 8, 2008 requests an advisory opinion about whether “wallpaper,” games,
and “music and sounds” sold by a mobile telecommunications provider are subject to the tax on the
furnishing of utility services imposed by Tax Law section 186-a, the telecommunications excise tax
imposed by Tax Law section 186-e, and the sales tax imposed by section 1105(b)(2). We conclude that
receipts from the sale of these products are not subject to the tax imposed by section 186-a or the
telecommunications excise tax imposed by section 186-e. Nor are these products subject to State and local
sales taxes on mobile telecommunications service imposed by section 1105(b)(2). However, receipts
from the sale of games are taxable under Tax Law section 1105(a).
Facts
The mobile telecommunications provider referred to in the petition is a facilities-based carrier,
using its own facilities to provide service, and thus is not subject to the supervision of the New York State
Department of Public Service. The provider contracts with mobile telecommunications customers to
provide mobile telecommunications service. The provider also offers “wallpaper,” games, and “music
and sounds” for sale to its customers. These products are available for purchase at the customer’s option.
Wallpaper is a picture that appears on the screen of a mobile phone. A customer can download wallpaper
to his or her phone for a separate charge for each wallpaper scene. Games include arcade games, puzzles,
sports games, and casino games. There is a separate charge for downloading each game. “Music and
sounds” consist of customized “ring tones” that alert the customer to an incoming call, and “ringback
tones,” which are music, comedy clips, or celebrity messages that callers hear instead of the standard
ringing sound. There is a separate charge for downloading each ring tone. There is also a separately­
stated recurring monthly charge for each ringback tone. Each of the separately-stated charges for
downloading these products appears on the customer’s bill for mobile telecommunications service.
Analysis
The provider’s receipts from the sale of these products are not subject to the tax imposed by
section 186-a. That section imposes tax on the gross operating income of utilities doing business in this
state that are not subject to the supervision of the New York State Department of Public Service. See Tax
Law §186-a.1(c). “Gross operating income” includes receipts from “any sale, conditional or otherwise,
made for ultimate consumption or use of gas, electricity, steam, water or refrigeration, or . . . gas, electric,
steam, water or refrigeration service in this state . . . .” Tax Law §186-a.2(d). The provider’s receipts
from sales of the products described above do not come within the definition of gross operating income

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TSB-A-08(8)C
Corporation Tax
TSB-A-08(63)S
Sales Tax
November 24, 2008

for purposes of Tax Law section 186-a.2(d) In any event, the rate of tax imposed on gross operating
income is zero for taxable years beginning on and after January 1, 2005. See Tax Law §186-a.1(c).
Furthermore, these products are not subject to the telecommunications excise tax imposed by Tax
Law section 186-e or the sales tax on mobile telecommunications service imposed by Tax Law section
1105(b)(2).
The excise tax is imposed on the gross receipts from mobile telecommunications service
provided by a home service provider when the customer’s place of primary use is within New York. See
Tax Law section 186-e.2(a)(4). Sales tax is imposed on “the receipts from every sale of mobile
telecommunications service by a home service provider, other than sales for resale.” Tax Law
§1105(b)(2). Both the term “gross receipt from the sale of mobile telecommunications service” for
purposes of the excise tax and “receipt from the sale of mobile telecommunications service” for purposes
of sales tax include “charges for mobile telecommunications service” as defined in Tax Law section
1111(l)(1). See also Tax Law §186-e.1(a)(1) . “Charges for mobile telecommunications services” means
“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 identifications and call-waiting), and (B) any service and property provided therewith.” Tax Law §
1111(l)(1).
The wallpaper, games, ring tones, and ringback tones described above are not “commercial mobile
radio service” (see Tax Law §1101(b)(25)), nor are they ancillary services. Ancillary services include
directory assistance, call forwarding, caller identification and call waiting. See Tax Law section
1111(l)(1)(A). The products described in the petition are not similar to the ancillary services described in
the Tax Law. Rather, the wallpaper, ringtones, and ringback tones are digital audio and visual files, while
games constitute prewritten computer software. Because these items are provided with the mobile
telecommunications service, they are included among taxable “charges for mobile telecommunications
services” for purposes of the sales and excise taxes.
Nevertheless, these items are not subject to sales and excise tax as charges for mobile
telecommunications service. Tax Law sections 186-e.2(b)(4) and 1111(l)(2) allow a home service
provider to separately account for property and services that are not mobile telecommunications service or
ancillary services, as long as it uses a “reasonable, objective and verifiable standard.” If the provider does
so, the sales are exempt from tax. Thus, if the home service provider separately sells the property or
service, the charge is based on the price for the property or service when separately sold. The charge for
the property or service must be reasonable and proportionate to the total charge for mobile
telecommunications service. Here, the provider separately charges for wallpaper, games, ringtones, and
ringback tones. As long as those charges are reasonable in relation to overall charge for service, the
provider may exclude the receipts from the sale of these products from the Section 186-e
telecommunications excise tax and the sales tax on mobile telecommunications service imposed by Tax
Law section 1105(b)(2).

TSB-A-08(8)C
Corporation Tax
TSB-A-08(63)S
Sales Tax
November 24, 2008

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Finally, although charges for downloaded games are not subject to sales tax as a mobile
telecommunication service, they are taxable as sales of prewritten computer software under Tax Law
section 1105(a). Tax Law section 1111(l)(2) states that “[n]othing herein shall be construed to exempt
from tax or subject to tax any such service or property otherwise subject to tax or exempt from [sales]
tax.” Wallpaper, ringtones, and ringback tones constitute digital audio and visual files that are not
tangible personal property or enumerated services for sales tax purposes. See, e.g., Apple Computer, Inc.,
TSB-A-07(14)S, May 17, 2007; Martin R. Timm, TSB-A-05(34)S, September 27, 2005, Universal Music
Group, TSB-A-01(15)S, April 18, 2001. However, games are considered to be prewritten computer
software. Games are software because they include coded instructions that cause the equipment (in this
case, the mobile phone) to perform a function; they are prewritten software because they are not
“designed and developed by the author or other creator the specifications of a specific purchaser.” Tax
Law § 1101(b)(14). Prewritten computer software is included in the definition of tangible personal
property, regardless of the means by which it is conveyed to the purchaser. See Tax Law §1101(b)(6).
Thus, although downloaded games are not taxable as a mobile telecommunication service, they are
taxable as tangible personal property. See Tax Law §1105(a). Receipts from the sale of games sold or
billed by the customer’s home service provider are sourced to the taxing jurisdiction where the customer’s
place of primary use is located. See Tax Law § 1111(l)(3). Those receipts will be subject to New York
State and local sales tax if the customer’s place of primary use is in New York.

DATED: November 24, 2008

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to
the facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.