Is an optional 'loss protection' charge on leased pagers taxable, and does it need to be separately stated?

Plain-English summary

Pro Net, Inc. provides emergency medical paging services, including the sale and lease of pagers to doctors and hospitals. It offers optional "loss protection" — about $1.00-$1.50 per pager per month — that protects a customer from having to pay Pro Net the full value of a lost pager (the customer still pays a $25 or $50 deductible if a pager is lost). The monthly invoice doesn't show the loss-protection charge separately, but the annual contract breaks the total per-pager monthly fee into access, lease, and maintenance charges (all taxable) plus the loss-protection charge. Pro Net asked whether the loss-protection charge is taxable.

The Department said not taxable, with a condition:

• It's indemnification, not rent. The loss-protection charge is an indemnification to the lessor for the loss of use of the pager, not additional rent that would be a taxable "sale" under § 1101(b)(5).
• Precedent. In Olin Rent-A-Car the charge for collision damage attributable to the renter was indemnification, not taxable additional rent; in Alamo Rent A Car, TSB-A-91(33)S, insurance charges were not taxable provided they are separately stated.
• The separate-statement condition. Under § 1132(a) and § 527.1(b) (a single-unit sale of taxable and exempt items is taxed on the total price), the loss-protection charge is not taxable provided the annual contract provides a breakdown of the monthly fee between the taxable charges and the loss-protection charge. Here the contract does that, so the loss-protection charge is exempt.

What this means for you

Insurance/indemnity charges can be nontaxable — if you separate them

A charge that indemnifies the lessor (or insures the customer) against loss or damage isn't taxable rent. But that only holds when the charge is separately identified from the taxable lease charges; bundle it invisibly into one lump sum and you risk it being taxed as part of the rental.

A contract breakdown can satisfy the separate-statement rule

Here the monthly invoice didn't itemize the loss-protection charge, but the annual contract did — and the customer kept a copy. The Department accepted that contractual breakdown as sufficient to keep the loss-protection charge exempt.

Bundled taxable + exempt items are taxed on the total

The default rule (§ 527.1(b)) is that when taxable and exempt items are sold as a single unit, tax applies to the whole price. The way out is a genuine breakdown separating the exempt indemnity/insurance charge from the taxable lease/access/maintenance charges.

Common questions

Q: Is a pager "loss protection" charge taxable in New York?
A: No, if it's broken out from the taxable lease charges. It's indemnification for loss of use of the pager, not taxable additional rent.

Q: Does it have to appear separately on the monthly bill?
A: The Department accepted a breakdown in the annual contract (kept by the customer) as sufficient, even though the monthly invoice didn't itemize it.

Q: What if the loss-protection charge isn't separated at all?
A: Then, under § 527.1(b), the bundled charge risks being taxed on the total price as part of the taxable rental.

Q: Why isn't it taxable rent?
A: Because it indemnifies the lessor for the loss of use of the pager rather than being consideration for the use of the pager — following Olin Rent-A-Car and Alamo Rent A Car.

Citations and references

Statutes, regulations, and authorities:

• Tax Law § 1132(a) (duty to collect tax and state it separately on the invoice)
• Tax Law § 1101(b)(5) (definition of "sale," including rental; loss-protection charge held not to be taxable additional rent)
• 20 NYCRR § 527.1(b) (a single-unit sale of taxable and exempt items is taxed on the total price)
• Olin Rent-A-Car of New York, Inc., TSB-H-78(38)S (collision-damage charge is indemnification, not taxable additional rent)
• Alamo Rent A Car, Inc., TSB-A-91(33)S (insurance charges not taxable when separately stated)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_65s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (65)S
Sales Tax
October 2, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S910620B

On June 20, 1991, a Petition for Advisory Opinion was received from Pro Net, Inc., 600 Data
Drive, Suite 100, Plano, Texas 75025.
The issue raised by Petitioner, Pro Net, Inc., is whether charges billed to its customers for
"loss protection" against lost pagers is subject to State and local sales and use taxes.
Petitioner provides emergency medical paging services which involve the sale and lease of
pagers to doctors and hospitals.
Petitioner currently does not collect sales tax on monthly charges billed to a customer who
chooses the optional loss protection. The monthly charge, usually $1.00 to $1.50 per pager, protects
the customer from having to pay to Petitioner the full value of a pager should it be lost. A customer
who loses his or her pager must, however, pay a $25.00 or $50.00 deductible fee depending on the
type of pager lost.
Monthly invoices do not show the loss protection charge separately. Instead, the annual
contract with each customer contains a breakdown of the total per pager monthly fee between access
charges, lease charges, maintenance charges, all of which are subject to sales tax, and loss protection
charges. The customer retains a copy of the contract and thus is aware of the charges even though
they are not separately stated on his monthly invoice.
Section 1132(a) of the Tax Law provides that:
Every person required to collect the tax shall collect the tax from the
customer when collecting the price, amusement charge or rent to which it applies.
If the customer is given any sales slip, invoice, receipt or other statement or
memorandum of the price, amusement charge or rent paid or payable, the tax shall
be stated, charged and shown separately on the first of such documents given to him.
The tax shall be paid to the person required to collect it as trustee for and on account
of the state.
In Olin Rent-A-Car of New York, Inc., Dec St Tx Comm, April 30, 1976, TSB-H-78(38)S
the State Tax Commission held that the amount of the charge by Olin Rent-A-Car of New York, Inc.
for collision damage to rental autos attributable to the fault of the renter was an indemnification to
the lessor for the loss of use of and the damage to the rented auto as a result of the collision. The
charge was not additional rent which would have been subject to retail sales tax as a sale under
section 1101(b)(5) of the Tax Law.

-2­
TSB-A-91 (65)S
Sales Tax
October 2, 1991
In Alamo Rent A Car, Inc., Adv Op Comm T&F, April 15, 1991, TSB-A-91(33)S the
Commissioner advised, in part, as follows:
5.

Q:

Are charges for personal accident insurance paid by the lessee to insure
against liability for injuries incurred by lessee or his passengers subject to
sales tax?

A:

Charges for insurance are not subject to State and local sales and use tax,
provided such charges are separately stated on the bill presented to the lessee.

Section 527.1(b) of the Sales and Use Tax Regulations provides that:
When tangible personal property, composed of taxable and exempt items is sold as
a single unit, the tax shall be collected on the total price.
Example:

A vendor sells a package containing assorted cheeses, a
cheese board and knife for $15. He is required to collect tax
on $15.

Therefore, pursuant to the provisions of Section 1132(a) of the Tax Law and Section 527.1(b)
of the Sales and Use Tax Regulations and in accordance with the State Tax Commission decision
in Olin Rent-A-Car of New York, Inc., supra, and the Advisory Opinion of the Commissioner of
Taxation and Finance in Alamo Rent A Car, Inc., supra, Petitioner's charge to a customer for loss
protection against lost pagers is not subject to State and local sales tax provided that the annual
contract with the customer provides a breakdown of the monthly fee for the pagers between taxable
charges and loss protection charges. The amount of the charge is an indemnification to the lessor for
the loss of use of the pager. The charge is not additional rent which would have been subject to retail
sales tax as a sale under section 1101(b)(5) of the Tax Law.

DATED: October 2, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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