New York Advisory Opinion TSB-A-96(18)S: Is a hotel's purchase of a PBX telephone-switching device -- which routes incoming outside calls to the hotel's internal phone system -- exempt from sales tax as production equipment used to provide a taxable telephone service for sale?

Plain-English summary

Kasden Complete Services operates hotels that charge guests for making telephone calls from their rooms, and its hotels currently collect or pay sales tax, plus the state telephone excise tax imposed under Article 9 of the Tax Law and applicable local excise/utility taxes on those guest telephone charges. Petitioner asked whether purchasing a non-income-producing PBX telephone switching device -- which routes incoming calls from AT&T and other providers to the hotel's own internal phone equipment -- is exempt from sales tax.

The Department's answer turns on which section of the Tax Law taxes the hotel's phone charges. Tax Law § 1105(e) taxes hotel room rent, with no resale exclusion available. Tax Law § 1105(b) separately taxes telephone service, and DOES allow a resale exclusion. The Department (citing former Commissioner Tully's guidance in TSB-M-78(9)S) explained that a hotel must collect sales tax on telephone service sales and may claim a credit or refund for tax it paid to the phone company on the portion of service furnished to guests -- but this presumes the telephone charge is separately stated and not merely folded into the taxable room charge under § 1105(e). Separately, Tax Law § 1115(a)(12) exempts machinery or equipment -- including "telephone central office equipment or station apparatus" -- used directly and predominantly (per 20 NYCRR § 528.13(c)(4), over 50% of the time) in receiving at destination or initiating and switching telephone communication, PROVIDED that equipment is purchased by the vendor of the telephone service being sold. So: when a hotel sells a separately stated telephone service taxable under § 1105(b) (rather than treating phone charges as part of the taxable room rent under § 1105(e)), it may be eligible to purchase equipment like a PBX switch exempt from sales tax under § 1115(a)(12) -- but only if the equipment is actually used more than half the time to receive, initiate, or switch communications that are themselves being sold to guests.

What this means for you

Hotels and motels billing guests for phone service

Whether your PBX or similar phone-switching equipment purchase is tax-exempt depends directly on how you bill guests for calls: separately stating and taxing phone charges as their own sale under § 1105(b) opens the door to the § 1115(a)(12) equipment exemption; bundling phone charges into the room rate under § 1105(e) does not.

Hospitality businesses reviewing telephone system purchases

Track what percentage of your switching equipment's actual use goes toward routing calls that are billed to guests as a taxable telephone sale -- the exemption only applies if that use exceeds 50% ("predominantly"), so equipment used mostly for internal hotel operations (not guest-billed calls) likely won't qualify.

Common questions

Q: Does this ruling grant Kasden's hotels a blanket exemption on all PBX equipment purchases?
A: No -- the opinion sets out the CONDITIONS under which the exemption is available (separately stated telephone service taxed under § 1105(b), plus predominant use in switching that sold communication) rather than confirming those conditions are actually met on Petitioner's specific facts.

Q: Why does it matter whether phone charges are separately stated from room rent?
A: Because § 1105(e) (hotel occupancy) and § 1105(b) (telephone service) are different taxing provisions with different rules -- only § 1105(b) allows the resale exclusion referenced in the Department's earlier guidance, and only equipment used to provide a service taxed under § 1105(b) can qualify for the § 1115(a)(12) production-equipment exemption.

Q: What counts toward the "over 50%" predominant-use threshold?
A: Only the equipment's use in receiving at destination or initiating/switching telephone communication that is itself being provided for sale -- use of the same equipment for the hotel's own internal, non-guest-billed calls wouldn't count toward that threshold.

Citations and references

Statutes and regulations:

• Tax Law § 1105(e) (hotel occupancy tax, no resale exclusion)
• Tax Law § 1105(b) (tax on telephony/telegraph service, with resale exclusion)
• Tax Law § 1115(a)(12) (exemption for telephone central office/station equipment used directly and predominantly in switching communications for sale)
• 20 NYCRR 528.13(f)(1) (telephone equipment exemption when purchased by the vendor of the service for sale)
• 20 NYCRR 528.13(c)(4) (meaning of "predominantly": over 50% of use)

Prior guidance referenced:

• TSB-M-78(9)S (former Commissioner Tully's guidance on hotel telephone service taxation and resale credit/refund)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_18s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (18)S
Sales Tax
March 22, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940601C

On June 1, 1994, a Petition for Advisory Opinion was received from Kasden Complete
Services, 500 West 34th St., New York 10018.
The issue raised by Petitioner, Kasden Complete Services, is whether the purchase of a non­
income producing telephone switching device (PBX switch) that routes incoming calls from AT&T
and other provider lines to the internal telephone equipment owned by a hotel is subject to sales tax.
Petitioner states that its hotels charge guests for making telephone calls from the guest rooms.
Petitioner indicates that its hotels collect or pay sales tax as well as the State taxes on telephone
services imposed under Article 9 of the Tax Law and applicable local excise or utility taxes on these
charges.
Section l105(e) of the Tax Law imposes a tax upon "The rent for every occupancy of a room
or rooms in a hotel in this state, except that the tax shall not be imposed upon (1) a permanent
resident, or (2) where the rent is not more than two dollars a day."
Section l105(b) of the Tax Law imposes a tax on "The receipts . . . 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 . . . "
While section l105(b) imposes a tax on telephone service, it also provides an exclusion for
the resale of this service. The resale exclusion does not apply to the tax imposed by section l105(e).
In addressing the taxation of charges by hotels for telephone service under section 1105(b),
which is eligible for the resale exclusion, or section 1105(e), former Commissioner Tully stated that
"a hotel or motel must collect the sales tax on the sale of telephone service and may claim a credit
or refund for the tax paid to the telephone company on that portion of the service which has been
furnished to the guests" (See, TSB-M-78(9)S). This presumes that the charge for the telephone
service is separately stated and not merely an incident of the room charge, which is taxable under
section 1105(e).
Section 1115(a)(12) of the Tax Law provides as follows:
Machinery or equipment for use or consumption directly and predominantly
in the production of tangible personal property, gas, electricity, refrigeration or steam
for sale, by manufacturing, processing, generating, assembling, refining, mining or
extracting, or telephone central office equipment or station apparatus or comparable
telegraph equipment for use directly and predominantly in receiving at destination
or initiating and switching telephone or telegraph communication, but not

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TSB-A-96 (18)S
Sales Tax
March 22, 1996

including parts with a useful life of one year or less or tools or supplies used in
connection with such machinery, equipment or apparatus ....
Section 528.13(f)(1) of the sales tax regulations provides that "Telephone and telegraph
central office equipment or station apparatus, used directly and predominantly in receiving at
destination or initiating and switching telephone and telegraph communication is exempt, when such
equipment and apparatus is purchased or leased by the vendor of such service for sale." (Emphasis
supplied)
Section 528.13(c)(4) of the Sales Tax Regulations provides guidance as to the meaning of
"predominantly" with respect to production as follows:
(4) Machinery or equipment is used predominantly in production, if over 50 percent
of its use is directly in the production phase of a process.
When a hotel or motel sells a separately stated telephone service that is subject to tax under
section 1105(b) of the Tax Law rather than section 1105(e), it may be eligible for exemption on the
purchase of certain telephone equipment under section 1115(a)(12) provided it meets the
requirements of that section. The exemption will only be available if the equipment is used directly
and predominantly (over 50%) in receiving at destination or initiating and switching telephone
communication which is provided for sale.

DATED: March 22, 1996

/s/
DORIS S. BAUMAN
Director
Technical Services Bureau

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