Is a telecommunications management company's bundle of services — including its management and membership fees and its usage reports — taxable as telephone service?

Plain-English summary

The accounting firm Peat, Marwick Main & Co. asked, for a client, how sales tax applies to a telecommunications management company. That company selects and arranges telephone transmission services (T-1, FX, WATS, long-distance routing) for business clients, is billed by the phone companies as the "customer of record" so it can get bulk rates, and passes those charges through to clients without markup. For managing the services it charges a management fee (a percentage of the pass-through charges) plus a flat monthly membership fee. It owns no transmission or switching equipment.

The Department held the whole package is taxable telephone service:

• All the company's receipts are telephone-service receipts. The reimbursed pass-through costs, the management fee, and the membership fee are all receipts from the sale of telephone service under Tax Law § 1105(b) and 20 NYCRR § 527.2. So all of it — other than interstate and international telephone service — is taxable (citing Stouffer Management Food Service, Inc. v. Tully).
• The reports and extra services ride along as telephone service. The detailed usage reports and the additional and enhanced telemanagement services, though separately billed, are part of the telephone service the company provides. They are taxed under § 1105(b) and are not separate information services under § 1105(c)(1).
• The company buys the phone services for resale. The telephone services it buys from the local and long-distance carriers (other than services for its own use) are purchased for resale to its customers and are not taxable to the company.

What this means for you

If you resell or "manage" telecommunications for clients: New York can treat your entire charge — including your management and membership fees and the pass-through phone charges — as taxable telephone service under § 1105(b), even if you own no network equipment and just arrange and bill for others' services. Charge tax on the intrastate portion.

Separately billing "reports" or "management" doesn't make them information services. When usage reports and telemanagement add-ons are part of delivering the telephone service, they follow the § 1105(b) treatment of that service — they aren't carved out as § 1105(c)(1) information services. (Contrast TSB-A-89(22)S, where confidential product-testing reports were an exempt information service because they weren't part of a taxable telephone service.)

Buy the underlying phone service for resale. Because you resell the telephone service, the services you buy from the carriers (other than for your own use) are purchases for resale — give the carriers a resale certificate rather than paying tax.

Common questions

Q: We just arrange and re-bill phone service and add a fee — is that taxable?
A: Yes. The Department treats your reimbursed pass-through charges, management fee, and membership fee as receipts from taxable telephone service under § 1105(b), except for interstate and international service.

Q: Our usage reports are billed separately — aren't they a nontaxable information service?
A: No. When the reports are part of providing the telephone service, they're taxed as telephone service under § 1105(b), not as § 1105(c)(1) information services.

Q: Do we pay tax on the phone service we buy from the carriers?
A: Not on what you resell to clients — that's a purchase for resale. You do owe tax on services you buy for your own use.

Citations and references

Statute and regulations:

• Tax Law § 1105(b) — tax on telephone and telegraph service (excluding interstate and international)
• Tax Law § 1105(c)(1) — tax on information services (held inapplicable here)
• Tax Law § 1101(b)(3) — definition of "receipt" (no deduction for expenses)
• 20 NYCRR § 527.2 — telephone and telegraph service
• 20 NYCRR § 527.3 — information services

Case cited:

• Stouffer Management Food Service, Inc. v. Tully, 69 A.D.2d 1023, 414 NYS2d 948

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_17s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89(17)S
Sales Tax
July 17, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S881019A

On October 19, 1988, a Petition for Advisory Opinion was received from Peat, Marwick
Main & Co., 345 Park Avenue, New York, New York 10154.
The issue raised is whether Petitioner's client's service is subject to sales tax under section
1105(b) or section 1105(c)(1) of the Tax Law.
The following is a description of their client's services, which has been provided by the
Petitioner.
Management Company is headquartered in California and has offices in New York as well
as other cities in the U.S. It provides comprehensive telecommunications management service to
various business entities and a variety of specialized information and consulting services. Clients are
directly connected or "hard wired" to local telephone switches. Services offered include but are not
limited to the following:
1)

Telecommunications Management - Within the local access and
transport area (LATA), Management Company selects for its clients,
a variety of transmission services, including T-1, FX, WATS, and
Direct Distance Dialing ("DDD") lines and provides to the local
telephone company routing programs for clients' telecommunication
traffic. For inter-LATA traffic (long distance), Management Company
selects the carriers, services and facilities best suited to its clients'
needs, arranges for those services and facilities to be connected to the
local telephone company switch, and for traffic to be routed to the
optimal available service.

2)

Detailed Usage Reports - Management Company provides
comprehensive monthly management reports to every client as part
of its basic service. The reports list calls by telephone number in
chronological order and provide a separate listing of all calls lasting
more than 15 minutes or costing more than $5.00. Multi-call reports
are also provided that list all telephone numbers called more than 10
times during the billing period. Enhanced management reports may
also be purchased to provide information needed to control telephone
abuse, management costs and all patterns. In addition, clients may
acquire all accounting reports which allow calls to be expensed to
specific projects, clients or departments.

3)

Additional Telemanagement Services - Management Company
provides access to credit consultants and credit reports, information

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TSB-A-89(17)S
Sales Tax
July 17, 1989
professionals, and numerous business data bases, conference calling,
and voice mail.
4)

Enhanced Telemanagement Services - Management Company
provides solutions to clients' telecommunications problems, such as
coordination of telephone moves with company relocations, PBX
installation and telemarketing training.

Services provided by local exchange and long distance telephone companies are
billed to Management Company, including taxes, as the "customer of record" for its
group of clients. This allows Management Company to receive bulk rates on behalf
of the client group. The telephone company charges are passed through directly to the
customer without mark-up. For managing these services Management Company
charges the client a management fee. The management fee is calculated as a
percentage of the pass-through charges on the bill. Management Company does not
own any telecommunication transmission or switching devices.
The charges imposed by the telephone companies for services which are not managed
by Management Company (i.e., taxes, line charges, surcharges, installation charges,
etc.) are also passed through to the client without mark-up. A management fee is not
applied to these charges.
In addition to the management fee, a monthly membership fee is charged to each
customer at a flat rate. Both the management fee and monthly membership fee are
separately stated on the customer's bill.
The following sections of the Tax Law and sales tax regulations are applicable to Petitioner's
client.
Section 1105(b) of the Tax Law imposes a tax upon:
"The receipts from every sale, other than sales for resale, of gas, electricity,
refrigeration and steam, and gas, electric, refrigeration and steam service of whatever
nature, and from every sale, other than sales for resale, of telephone and telegraphy
and telephone and telegraph service of whatever nature except interstate and
international telephony and telegraphy and telephone and telegraph service.
Section 1101(b)(3) of the Tax Law defines the term "receipt" as:
"The amount of the sale price of any property and the charge for any service taxable
under this article, valued in money, whether received in money or otherwise,
including any amount for which credit is allowed by the vendor to the purchaser,
without any deduction for expenses or early payment discounts, but excluding any
credit for tangible personal property accepted in part payment and intended for resale
and excluding the cost of transportation of tangible personal property sold at retail

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TSB-A-89(17)S
Sales Tax
July 17, 1989

where such cost is separately stated in the written contract, if any, and on the bill
rendered to the purchaser. For special rules governing computation of receipts, see
section eleven hundred eleven."
Section 1105(c)(1) of the Tax Law imposes a tax on:
"The furnishing of information by printed, mimeographed or multigraphed matter or
by duplicating written or printed matter in any other manner, including the services
of collecting, compiling or analyzing information of any kind or nature and
furnishing reports thereof to other persons, but excluding the furnishing of
information which is personal or individual in nature and which is not or may not be
substantially incorporated in reports furnished to other persons, and excluding the
services of advertising or other agents, or other persons acting in a representative
capacity, and information services used by newspapers, radio broadcasters and
television broadcasters in the collection and dissemination of news."
The amounts received by Management Company from its customers under the reimbursed
costs, management fee, and "membership" fee arrangements constitute receipts from the sale of
telephone services pursuant to section 1105(b) of the Tax Law and section 527.2 of the Sales and
Use Tax Regulations and therefore all of such receipts, other than those derived from interstate or
international telephone service, are subject to sales tax. Stouffer Management Food Service, Inc. v.
Tully, 69 A.D.2d 1023, 414 NYS2d 948. The charges for detailed usage reports, additional
telemanagement services and enhanced telemanagement services, although separately billed, are part
of the telephone services provided by Management Company to its customers and are thus subject
to sales tax pursuant to section 1105(b) of the Tax Law and section 527.2 of the Sales and Use Tax
Regulations and are not information services taxable pursuant to section 1105(c)(1) of the Tax Law
and section 527.3 of the Sales and Use Tax Regulations.
The telephone services purchased by the Management Company, other than those services
purchased for its own use, from the local exchange and long distance telephone companies are
purchased by it for resale to its customers and therefore such purchases are not subject to sales tax
pursuant to section 1105(b) of the Tax Law.

DATED: July 17, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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