Is cellular telephone service taxable, are all its bundled charges taxed, and what local rate applies?

Plain-English summary

Cellular Telephone Company (trading as Metro One), an FCC-licensed cellular carrier serving the New York metro area, asked whether its two-way mobile telecommunications service is taxable under Tax Law § 1105(b) and, if so, at what local rate. It bills four components: a one-time activation fee, a monthly access fee, usage (air-time) charges, and toll-call charges.

The Department held the service is taxable, and all four charges are part of it:

• Cellular service is a taxable telephone service. It fits the definition of telephony and telegraphy in 20 NYCRR § 527.2(d)(2) (transmission of sound or signals), so it's taxable under § 1105(b), and usage charges are taxable because the utility tax reaches every charge for telephone service.
• All the bundled charges are taxable (single-sale rule). Under Tax Law § 1101(b)(3), when the components of a sale cannot be bought separately, they're treated as one sale. Because a subscriber can't get cellular service without paying the activation, access, usage, and toll charges, all of them are part of the one taxable cellular telephone service (Penfold v. State Tax Commission; Rochester Telephone Corp., TSB-A-87(1)S).
• Local rate follows the exchange. The local tax on the activation, access, and usage charges is the highest rate of local tax within the area of the exchange to which the customer's number is assigned (20 NYCRR § 527.2(d)(6)).
• Interstate is exempt. Interstate and international calls aren't taxed, so only intrastate toll calls are subject to the local tax (at the same exchange-based rate).

What this means for you

Cellular service is squarely within the telephone tax

Mobile two-way telephone service is a taxable telephone service under § 1105(b), just like landline service. Being wireless doesn't change the analysis.

You can't unbundle to escape tax on the fees

Because subscribers can't buy the service without paying the activation, access, usage, and toll charges, the single-sale rule (§ 1101(b)(3)) treats them as one taxable service — even if you separately state them on the bill. Setup and monthly fees ride with the taxable service.

Rate by the number's exchange, and carve out interstate

Source the local tax to the exchange the customer's telephone number is assigned to, using the highest local rate in that exchange's area. Interstate and international calls stay outside the tax, so keep records to separate intrastate toll from interstate/international.

Common questions

Q: Is the one-time activation fee taxable?
A: Yes. Under the single-sale rule, because you can't get the service without it, the activation fee is part of the one taxable cellular telephone service.

Q: What local rate do we charge?
A: The highest rate of local tax within the area of the exchange to which the customer's telephone number is assigned.

Q: Are all toll calls taxed?
A: No. Only intrastate toll calls are taxable; interstate and international calls are exempt.

Citations and references

Statutes and regulations:

• Tax Law § 1105(b) — tax on telephony/telegraphy and telephone/telegraph service; interstate and international excepted
• Tax Law § 1101(b)(3) — "receipt" defined; components that cannot be bought separately are one sale
• 20 NYCRR § 527.2(d)(2) — definition of telephony and telegraphy
• 20 NYCRR § 527.2(d)(6) — local rate is the rate for the locality of the assigned exchange

Cited authority:

• Penfold v. State Tax Commission, 114 AD2d 696 (1985) — inseparable components treated as a single taxable sale
• Rochester Telephone Corporation, Adv Op Comm T & F, Dec. 9, 1987, TSB-A-87(1)S — charges part and parcel of basic telephone service

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_38s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-89 (38)S
Sales Tax
October 11, 1989

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890605B

On June 5, 1989, a Petition for Advisory Opinion was received from Cellular Telephone
Company, 87 West Passaic Street, Rochelle Park, New Jersey 07662.
The issues raised are whether Petitioner, Cellular Telephone Company's, service of providing
two-way mobile telecommunication is subject to the tax imposed under Section 1105(b) of the Tax
Law and, if taxable, what is the appropriate local sales tax rate to be applied.
Petitioner, trading under the name of Metro One, is a provider of cellular telephone service
in portions of the State of New York, New Jersey and Connecticut. The company is one of two
Federal Communications Commission licensed carriers operating in the New York Standard
Metropolitan Statistical Area - encompassing Long Island, New York City, Westchester, portions
of Rockland and Putnam counties and northern New Jersey (this area is known as the Cellular
Geographic Service Area "CGSA").
The service is a form of two-way mobile telecommunications which allows for
communication between a mobile telephone and either a traditional landline telephone or another
mobile unit. Cellular service has been offered by the Petitioner since 1985 and differs in several
important respects from traditional landline service, most notably from the fact that the subscriber
is mobile and may initiate or receive a call anywhere within the CGSA. Additionally, the Petitioner
is unaware of the exact location of a subscriber's unit at any particular time.
Petitioner segments its billing into the following four components:
1)
Activation Fee - This is a one-time charge associated with the initial application for
service. It includes the cost of a credit check, the assignment of a telephone number for the
subscriber and related administrative expenses.
2)
Monthly Access Fee - This is a flat monthly charge which permits the customer
access to the Company's cellular system. The access fee permits the customer to receive service
within the Cellular Geographic Service Area "CSGA".
3)
Usage Charges (based upon number of minutes of use) - These are charges imposed
by the Company for the "air time" utilized by a subscriber, whether from a call made to (outgoing)
or received by (incoming) such subscriber's cellular unit. They are based upon the amount of time
used by the subscriber "on the air."
4)
Toll Call Charges - These are charges imposed by the Company upon outgoing calls
to areas outside the CGSA.

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TSB-A-89 (38)S
Sales Tax
October 11, 1989

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 telephony and telegraphy
and telephone and telegraph service of whatever nature except interstate and
international telephony and telegraphy and telephone and telegraph service."
Section 527.2(d)(2) of the Sales Tax Regulations defines the terms telephony and telephony
to include "... use or operation of any apparatus for transmission of sound, sound reproduction or
coded or other signal."
Section 1101(b)(3) of the Tax Law defines receipt as, "The amount of the sale price of any
property and the charge for any service taxable under this article ... without any deduction for
expenses ...."
Petitioner, Cellular Telephone Company, is selling telephone service as defined in section
527.2(d)(2) of the sales tax regulations.
Usage charges are subject to tax pursuant to section 527.2(d)(5) of the Sales Tax Regulations
since the tax on utility services applies to every charge for any telephone and telegraph service.
The effect of Section 1101(b)(3) of the Tax Law is to treat as a single sale any sale in which
any of the components cannot be singly purchased. Thus, even though the components of a particular
sale can be separately stated, calculated or estimated, if they cannot be separately purchased, the
combination of the items listed must be considered as one. Penfold v. State Tax Commission, 114
AD 2d 696 (1985). Because Petitioner's subscribers simply cannot purchase cellular telephone
service without paying the activation fee, the monthly access fees, the usage charges and the toll call
charges, it must be concluded that these charges are nothing more than an adjunct or component of
the charges for cellular telephone service. These services are part and parcel of basic telephone
service supplied by Petitioner to its customers. Rochester Telephone Corporation Advisory Op,
Comm of T & F, December 9, 1987 TSB-A-87(1)S.
The issue then is what is the appropriate local sales tax rate to be applied to Petitioner's sale
of cellular phone services.
Section 527.2(d)(6) of the Sales Tax Regulations provides: "Where a customer has
telephones at a single location connected to exchanges in different localities, and a tie-line to a
locality in which he is not located, the tax rate applicable for each service is the tax rate in effect in
the locality to which the exchange is assigned.

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TSB-A-89 (38)S
Sales Tax
October 11, 1989
Example:

A business located in Nassau County has two telephone numbers, one with
a Nassau exchange and one with a Queens exchange. This enables his Queens
customers to phone him toll free. Service on the Queens exchange is
considered to be purchased in Queens County even though the telephone is
physically located in Nassau County".

Petitioner indicates that it is assigned telephone numbers for its customers with several
different area codes and exchanges. Therefore the local tax to be charged on the activation fee, the
monthly access fee and the usage charges is the highest rate of local tax imposed within the area of
the exchange in which the telephone number being charged is assigned.
Since section 1105(b) of the Tax Law does not impose sales tax on those telephone calls
which are interstate and international, only those toll calls that are intra-state toll calls are subject to
local tax at the highest rate of tax imposed within the area of the exchange in which the telephone
number being charged is assigned.

DATED: October 11, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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