How are affiliated companies providing telephone answering services, paging airtime, and equipment rentals taxed under the franchise, telecommunications excise, and sales taxes?

Plain-English summary

Three affiliated companies under common ownership asked how they are taxed. Center provides telephone answering services (plus voice mail, alarm monitoring, and equipment sales/rentals/repairs); Corp is an FCC-licensed paging common carrier and reseller of paging airtime; Marken holds the assets and earns only rent from the other two. The issues span the Article 9 / 9-A franchise taxes, the section 186-e telecommunications excise tax, and the Article 28 sales tax.

Franchise tax (Issue 1): classification follows the nature of the business (more than 50% of receipts). Center and Marken are general businesses under Article 9-A; a telephone answering service is not a telephone business (CCC Telex). Corp is principally engaged in a telephone business under section 183 -- and section 184 too if more than 50% of its receipts are from local telephone business.

Telecommunications excise (Issue 2): Corp's voice and resold paging airtime are telecommunication services, so Corp owes the section 186-e excise tax. Center is not a section 186-e provider because it does not separately bill for paging airtime; Marken is not either.

Sales tax (Issue 3): Marken's rentals of tangible personal property are taxable under section 1105(a) (real-property rent is not, if separately stated at fair value); Center's equipment sales/rentals are taxable under 1105(a), its repairs under 1105(c)(3), and its alarm monitoring under 1105(c)(8) (unless a medical-emergency service exempt under 1115(r)). Telephone answering, voice mail, travel-message, and paging airtime services are taxable under section 1105(b), except separately stated interstate/international paging; paging airtime bought for resale is exempt.

What this means for you

A telephone answering service is an Article 9-A general business

Despite using phone lines, a telephone answering service is classified as a general business corporation under Article 9-A, not a telephone business under section 183. A paging common carrier, by contrast, is a telephone business under section 183 (and 184 if mostly local).

The 186-e excise tax follows who actually sells the telecommunication service

A paging carrier selling or reselling paging airtime owes the section 186-e excise tax. A company that folds pagers into a bundled answering service without a separately stated paging charge is not a provider of telecommunication services and owes no 186-e tax.

Answering, voice mail, and paging are taxable sales-tax services; watch the carve-outs

Telephone answering, voice mail, travel-message, and paging airtime are taxable under section 1105(b); equipment sales/rentals under 1105(a); repairs under 1105(c)(3); and alarm monitoring under 1105(c)(8). Separately stated interstate/international paging, resale purchases, fair-value real-property rent, and medical-emergency alarm services (1115(r)) are not taxed.

Common questions

Q: Is a telephone answering service a telephone company in New York?
A: No. It is a general business taxed under Article 9-A. A paging common carrier is the one taxed as a telephone business under section 183.

Q: Who owes the section 186-e telecommunications excise tax on paging?
A: The paging carrier that sells or resells the airtime. A company that bundles pagers into an answering service without separately billing for airtime is not a 186-e provider.

Q: Is a telephone answering service subject to sales tax?
A: Yes, under section 1105(b), along with voice mail and paging airtime. Related equipment sales/rentals, repairs, and (non-medical) alarm monitoring are also taxable under sections 1105(a), 1105(c)(3), and 1105(c)(8).

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 183 (franchise tax on a telephone business)
- Tax Law section 184 (additional franchise tax; local telephone business)
- Tax Law section 186-e (telecommunications excise tax; provider definition; paging)
- Tax Law section 209.1 (Article 9-A franchise tax)
- Tax Law section 1105(a) (sales tax on tangible personal property and rentals)
- Tax Law section 1105(b) (sales tax on telephone and telephone answering services)
- Tax Law section 1105(c)(3) (repair/maintenance of tangible personal property)
- Tax Law section 1105(c)(8) (protective and detective services) and section 1115(r) (medical-emergency alarm exemption)
- CCC Telex Service, Inc, TSB-A-89(9)C (July 18, 1989) (answering service is a general business)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a97_37s_16c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(37)S
Sales Tax
TSB-A-97(16)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z970226A

On February 26, 1997, a Petition for Advisory Opinion was received from
Marken Properties, Inc., Relay Communications Center, Inc., and Relay
Communications Corporation, 145 Griffing Avenue, Riverhead, New York 11901.
Petitioners, Marken Properties, Inc. ("Marken"), Relay Communications Center,
Inc. ("Center"), and Relay Communications Corporation ("Corp"), provided
additional information pertaining to the Petition on March 20, 1997.
The issues raised by Petitioners are: (1) whether each corporation is
subject to franchise tax under Article 9-A or Sections 183 and 184 of Article 9
of the Tax Law; (2) how the receipts of each corporation are treated under
Section 186-e of Article 9 of the Tax Law; and (3) how the receipts of each
corporation are treated under Article 28 of the Tax Law.
Petitioners submitted the following facts as the basis for this Advisory
Opinion.
Philip J. Kenter is the sole shareholder of all three companies, which are
federal S corporations. The three corporations operate under one roof.
The assets of the corporations (building, equipment, furnishings, pagers,
etc.) are held by Marken. All of Marken's receipts are derived from payments
from Center and Corp for rent.
Corp is an FCC licensed radio common carrier of voice paging airtime
services and is also a reseller of conventional paging airtime services. All of
Corp's receipts are derived from the provision of these paging airtime services.
Center is a provider of telephone answering services.
As part of its
telephone answering service, Center may provide its customers with pagers, but
does not separately bill for paging airtime services. Center also provides voice
mail, travel message services, alarm monitoring services, radio sales, rentals,
sales of cellular telephones connected to specific cellular carriers, paging
equipment, rentals and repairs.
All of Center's receipts are from these
operations. Center has no receipts from separately stated charges for paging
airtime services.
Center conducts all administrative and billing functions for the three
corporations. For customer convenience, one monthly bill is sent covering the
services provided by the three corporations. The bills separately state the
charges associated with each corporation.
The charges for the telephone
answering services and retail equipment sales are separately stated as charges
made by Center. The charges for voice paging airtime services and resold paging
airtime services are separately stated as charges made by Corp.

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TSB-A-97(37)S
Sales Tax
TSB-A-97(16)C
Corporation Tax

ISSUE 1
Section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax
on domestic or foreign corporations for the privilege of exercising a corporate
franchise, doing business, employing capital, owning or leasing property in a
corporate or organized capacity, or maintaining an office in New York State.
Section 209.4 of the Tax Law, provides that a corporation liable for tax under
Sections 183 and 184 of Article 9 of the Tax Law is not subject to tax under
Article 9-A of the Tax Law.
Section 183 of Article 9 of the Tax Law imposes a franchise tax on a
domestic or foreign corporation formed for or principally engaged in the conduct
of a telephone business, for the privilege of exercising its corporate franchise,
doing business, employing capital, owning or leasing property in a corporate or
organized capacity or maintaining an office, in New York State.
Section 184.1 of the Tax Law provides that a corporation is subject to the
franchise tax under Section 184 for the privilege of exercising its corporate
franchise, doing business, employing capital, owning or leasing property in a
corporate or organized capacity or maintaining an office, in New York State, if
it is formed for or principally engaged in local telephone business. The term
"local telephone business" means the provision or furnishing of telecommunication
services for hire wherein the service furnished by the provider thereof consists
of carrier access service or the service originates and terminates within the
same local access and transport area ("LATA").
The term "telecommunication
services" has the same meaning for purposes of Section 184 as for Section 186-e
of the Tax Law.
Section 186-e.1(g) of the Tax Law defines "telecommunication services" as
"telephony or telegraphy, or telephone or telegraph service, including, but not
limited to, any transmission of voice, image, data, information and paging,
through the use of wire, cable, fiber-optic, laser, microwave, radio wave,
satellite or similar media or any combination thereof and shall include services
that are ancillary to the provision of telephone service ... and also include any
equipment and services provided therewith.
Provided, the definition of
telecommunication services shall not apply to separately stated charges for any
service which alters the substantive content of the message received by the
recipient from that sent."
To determine the classification and proper taxability of a corporation
under either Article 9-A or Sections 183 and 184 of Article 9, an examination of
the nature of the corporation's activities is necessary, regardless of the
purposes for which the corporation was organized.
See Matter of McAllister
Bros., Inc. v Bates, 272 AD 511, 517. Ordinarily, a corporation is deemed to be
principally engaged in the activity from which more than 50 percent of its
receipts are derived. See, e.g., Re Joseph Bucciero Contracting Inc., Adv Op St
Tax Commn, July 23, 1981, TSB-A-81(5)C.

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Sales Tax
TSB-A-97(16)C
Corporation Tax

In CCC Telex Service, Inc, Adv Op Comm T & F, July 18, 1989, TSB-A-89 (9)C,
it was held that where the petitioner was principally engaged in a telephone
answering service business, it would be classified as a general business
corporation and would be subject to tax under Article 9-A of the Tax Law.
With respect to Issue 1, Marken and Center are principally engaged in
general business activities and are subject to tax under Article 9-A of the Tax
Law. It appears that Corp is principally engaged in a telephone business that
is taxable under Section 183 of Article 9 of the Tax Law, and, if more than 50
percent of its receipts are derived from local telephone business as defined in
Section 184.1 of the Tax Law, Corp is also taxable under Section 184 of the Tax
Law.
ISSUE 2
Section 186-e.2(a) of the Tax Law imposes an excise tax �on the sale of
telecommunication services by any person which is a provider of telecommunication
services....�
Section 186-e.1(e) of the Tax Law defines �provider of telecommunication
services� as �any person who furnishes or sells telecommunications services
regardless of whether such activities are the main business of such person or are
only incidental thereto.�
Section 186-e.2(a) of the Tax Law provides that the tax is imposed on gross
receipts from: (1) any intrastate telecommunication services; (2) any interstate
and international telecommunication services (other than interstate and
international private telecommunication services) which originate or terminate
in New York State and which telecommunication services are charged to a service
address in New York State, regardless of where the amounts charged for such
services are billed or ultimately paid; and (3) interstate and international
private telecommunication services as determined in Section 186-e.3 of the Tax
Law.
With respect to Issue 2, the voice paging airtime services and the resales
of conventional paging airtime services provided by Corp are telecommuncation
services pursuant to Section 186-e.1(g) of the Tax Law. Therefore, pursuant to
Section 186-e.1(e) of the Tax Law, Corp is a provider of telecommunication
services and is subject to the excise tax imposed by Section 186-e.2(a) on its
receipts derived from the provision of these paging airtime services.
Center is the provider of telephone answering services. As part of these
services, it may provide its customers with pagers. However, Center does not
separately bill for paging airtime services, it is included in the charges for
the telephone answering services. Since the paging airtime services provided by
Center are not resold as separately billed paging services, Center is not
considered the provider of telecommunication services under Section 186-e.1(e)
of the Tax Law. Accordingly, Center is not subject to the tax imposed under
Section 186-e of the Tax Law.

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TSB-A-97(37)S
Sales Tax
TSB-A-97(16)C
Corporation Tax

Marken is not a provider of telecommunication services and is not subject
to the tax imposed under Section 186-e of the Tax Law.
ISSUE 3
Section 1105(a) of Article 28 of the Tax Law imposes New York State sales
tax upon receipts from every retail sale of tangible personal property, except
as otherwise provided in such article. A "sale" includes any transfer of title
or possession (or both) of tangible personal property and any rental, lease or
license to use or consume such property in any manner or by any means for a
consideration (see, Tax Law, §1101(b)(5)). "Tangible personal property" means
corporeal personal property of any nature and does not include real property
(see, Tax Law, §1101(b)(6)).
Section 1105(b) of the Tax Law imposes sales tax upon receipts from every
sale, other than a sale for resale, of telephony and telegraphy and telephone and
telegraph services of whatever nature, except interstate and international
telephony and telegraphy and telephone and telegraph services, and from every
sale, other than a sale for resale, of telephone answering services. Section
1105(b) was amended by Chapter 166 of the Laws of 1991 to specifically add
telephone answering services to the enumerated services in this section in order
to assure consistent application of the tax on all answering services no matter
who performs such services or by what means. A "telephone answering service" is
any service that consists of taking messages by telephone and transmitting such
messages to the purchaser of the service (or his or her designee), but not
including such a service if it is merely an incidental element of a different
service purchased by the customer (see, Tax Law, §1101(b)(13)).
Section 527.2(d) of the
provides, in pertinent part:

Sales

and

Compensating

(2) The term telephony and telegraphy
operation of any apparatus for transmission
reproduction or coded or other signals.
*

*

Use

Tax

Regulations

includes use or
of sound, sound

*

Example 2: Paging service which is a one-way transmission of
communication by signal or voice or both signal and voice from a
base unit to a mobile unit is considered telephony.
*

*

*

(4) A service is not considered telegraphy or telephony if
either of these services is merely an incidental element of a
different or other service purchased by the customer.
Example 6: A company offers its customers a protective service
using a central station alarm system, which transmits signals
telegraphically. The customer is purchasing a protective service.

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Sales Tax
TSB-A-97(16)C
Corporation Tax

(5) The tax on utility services applies to every charge for
any telephone and telegraph service.
Among these charges are
monthly message rate and intrastate toll charges and charges for
special services, such as installation, change of location,
conference connections, tie-lines, WATS lines and the furnishing of
equipment.
See, also, Telephone Answering Services Subject to Sales Tax Effective
September 1, 1991, Technical Services Bureau Memorandum, October 11, 1991,
TSB-M-91(13)S.
Section 1105(c)(3) of the Tax Law imposes State sales tax upon the receipts
from every sale, except for resale, of the services of installing, maintaining,
servicing or repairing tangible personal property that is not held for sale in
the regular course of business. Section 1105(c)(8) imposes tax upon the receipts
from every sale, except for resale, of protective and detective services,
including, but not limited to, all services provided by or through alarm or
protective systems of every nature, such as protection against burglary, theft,
fire, water damage or any malfunction of industrial processes or any other
malfunction of or damage to property or injury to persons. However, Section
1115(r) of the Tax Law provides for an exemption from tax on receipts from the
sale of alarm call services designed specifically to respond to medical
emergencies.
(State and local sales taxes similar to those imposed by Sections
1105(a),(b) and (c) as previously described are also imposed, where applicable,
under Sections 1107, 1108 and 1109 of Article 28 and pursuant to the authority
of Article 29 of the Tax Law.)
With respect to Issue 3, Marken’s receipts from its rentals of tangible
personal property in New York State to Center and Corp are subject to State and
local sales taxes under Section 1105(a) of the Tax Law, unless the tangible
personal property is rented by Center or Corp solely for the purpose of renting
the property to their customers (i.e., resale).
Marken’s receipts from its
rentals of real property are not subject to sales tax. Receipts attributable to
the rental of tangible personal property must reasonably reflect the fair rental
value of such property and must be stated separately from receipts from the
rental of real property (see, Northway Properties, State Tax Comm, July 31, 1984,
TSB-H-84(107)S).
Center’s receipts from its sales and rentals of tangible personal property
in New York State are also subject to State and local sales taxes under Section
1105(a) of the Tax Law, provided such sales and rentals are not for purposes of
resale. Receipts from the sales of its repair services to tangible personal
property that is not held by its customers for resale in the regular course of
business are subject to tax under Section 1105(c)(3). Receipts from the sales
of its alarm monitoring services are taxable under Section 1105(c)(8) provided
these services are not designed specifically to respond to medical emergencies.

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TSB-A-97(37)S
Sales Tax
TSB-A-97(16)C
Corporation Tax

Receipts from the sales of Center’s telephone answering services, voice
mail and travel message services, and receipts from the sales of Corp’s voice and
conventional paging airtime services are subject to tax under Section 1105(b) of
the Tax Law. However, any separately stated receipts from the sale of paging
services of an interstate or international nature are not subject to tax. Corp’s
purchases of conventional paging airtime services for purposes of resale may be
made without payment of the sales tax (see, 20 NYCRR 527.2(e)).

DATED:

June 26, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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