Was the taxpayer's early termination fee for a discounted taxable communication service subject to South Carolina sales and use tax?

Plain-English summary

South Carolina PLR 06-2 held that an early termination fee charged by a telecommunications provider was subject to sales and use tax when billed in connection with a taxable communication service.

The taxpayer offered discounted service when a customer committed to maintain the service for a stated period. If the customer ended the agreement early, the charge equaled a fixed amount multiplied by the remaining months and was always less than the monthly service price.

The Department treated the fee as part of the consideration for the taxable service. Because "gross proceeds of sales" and "sales price" broadly included the value received without deduction for expenses, the label "early termination charge" did not remove it from the tax base.

What this means for you

Telecommunications providers

On comparable facts, a fee that economically recovers part of the agreed price for a taxable communication service can follow the service's tax treatment.

Customers ending a term agreement

The ruling treated the termination amount as taxable even though the provider would no longer furnish service for the remaining months.

Common questions

Q: Did the fee have to equal the full remaining service price?
A: No. The ruling notes that the fixed monthly multiplier was less than the monthly service price.

Q: Did calling it a cancellation fee make it nontaxable?
A: No. The Department focused on the fee's relationship to the taxable service and the broad tax-base definitions.

Q: Can another provider rely on this PLR?
A: No. It bound the Department only for the requesting taxpayer and stated facts.

Citations and references

• S.C. Code Ann. §§ 12-36-910 and 12-36-1310 — sales and use tax on taxable communications
• S.C. Code Ann. § 12-36-60 — communications included within taxable property
• S.C. Code Ann. §§ 12-36-90 and 12-36-130 — gross proceeds and sales price
• S.C. Code Ann. § 12-36-2645 — specified telephone service provision cited by the ruling

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: PLR06-2.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P.O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #06-2

SUBJECT:

Early Termination Fee – Taxable Communication Services
(Sales and Use Tax)

REFERENCES:

S. C. Code Ann. Section 12-36-910 (2000; Supp. 2005)
S. C. Code Ann. Section 12-36-1310 (2000, Supp. 2005)
S. C. Code Ann. Section 12-36-60 (2000)
S. C. Code Ann. Section 12-36-2645 (2000)
S. C. Code Ann. Section 12-36-90 (2000, Supp. 2005)
S. C. Code Ann. Section 12-36-130 (2000, Supp. 2005)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #05-2

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific
taxpayer by the Department to apply principles of law to a specific
set of facts or a particular tax situation. It is the Department’s
opinion limited to the specific facts set forth, and is binding on
agency personnel only with respect to the person to whom it was
issued and only until superseded or modified by a change in
statute, regulation, court decision, or another Departmental
advisory opinion, providing the representations made in the request
reflect an accurate statement of the material facts and the
transaction was carried out as proposed.

Question:
Is an early termination charge imposed by ABC, Inc., as described in the facts, subject to
the sales and use tax when billed in connection with a taxable communication service?

Conclusion:
An early termination charge imposed by ABC, Inc., as described in the facts, is subject to
the sales and use tax when billed in connection with a taxable communication service
since such a charge is a part of the “gross proceeds of sales” or “sales price” of the
taxable communications service.

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Facts:
ABC, Inc. (“ABC”) provides telecommunication services and related services in South
Carolina. There is a wide variety of telecommunication services available today from
numerous providers, and the market for such services has become extremely competitive.
As a result, ABC often implements special programs or promotions under which
customers are offered a discount from the regular price of a service if they agree to
comply with certain conditions, including the maintenance of the service for a specified
period of time. A customer that desires to participate in such a program typically does so
by completing and signing a form commonly referred to as a term agreement, program
election, or similar name which sets forth the amount of the discount, the time period
over which the service must be maintained, and any other terms and conditions of the
program.
The term agreement generally provides that, if the customer terminates the agreement
prior to the expiration of the elected term, the customer is required to pay an early
termination charge. The early termination charge is expressed as a fixed dollar amount
multiplied by the number of months remaining on the elected term. The fixed dollar
amount varies depending on the program but in all cases is less than the monthly price of
the service covered by the term agreement.
Discussion:
Code Section 12-36-910(A) states:
A sales tax, equal to five percent of the gross proceeds of sales, is imposed
upon every person engaged or continuing within this State in the business
of selling tangible personal property at retail. (Emphasis added.)
Code Section 12-36-1310(A) reads:
A use tax is imposed on the storage, use, or other consumption in this
State of tangible personal property purchased at retail for storage, use, or
other consumption in this State, at the rate of five percent of the sales price
of the property, regardless of whether the retailer is or is not engaged in
business in this State. (Emphasis added.)
Code Section 12-36-60 defines the term "tangible personal property" to mean:
...personal property which may be seen, weighed, measured, felt, touched,
or which is in any other manner perceptible to the senses. It also includes
services and intangibles, including communications, laundry and related
services, furnishing of accommodations and sales of electricity, the sale or
use of which is subject to tax under this chapter and does not include
stocks, notes, bonds, mortgages, or other evidences of debt. … (Emphasis
added).

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Therefore, the term tangible personal property includes the sale or use of intangibles,
including communications, that are subject to South Carolina sales or use taxes under
Chapter 36 of Title 12.
Communications are subject to sales and use taxes under Chapter 36 of Title 12 pursuant
to Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3) (“charges for the ways or means
for the transmission of the voice or messages”), Code Sections 12-36-910(B)(5) and 1236-1310(B)(5) (“the sale or recharge at retail for prepaid wireless calling arrangements”),
and Code Section 12-36-2645 (900/976 telephone service). (For more detailed
information as to the types of taxable and non-taxable communications services under
these and other provisions of the sales and use tax, see SC Revenue Ruling #04-15.)
The sales tax is imposed upon a retailer's "gross proceeds of sales" which is defined at
Code Section 12-36-90, in part, as:
...the value proceeding or accruing from the sale, lease, or rental of tangible
personal property... without any deduction for... the cost of materials, labor,
or service... [or] any other expenses....
The use tax is based upon the "sales price" of tangible personal property. The term "sales
price" is defined at Code Section 12-36-130, in part, as:
...the total amount for which tangible personal property is sold, without any
deduction for the cost of the property sold, the cost of the materials used,
labor or service cost, interest paid, losses, or any other expenses.
In Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d 920,
923 (1985), the Court of Appeals of South Carolina held the element of service involved
in a lay away sale was subject to tax as being part of the sale of tangible personal
property. The test used by the court was as follows:
...But for the lay away sales, Meyers Arnold would not receive the lay away
fees. The fees are obviously charged for the service rendered in making lay
away sales. For these reasons, this court holds the lay away fees are part of
the gross proceeds and subject to the sales tax.
Accordingly, the total amount charged in conjunction with the sale or purchase of
tangible personal property is subject to the tax.
Commission Decision S-D-92 was an analogous situation that dealt with the "inclusion in
the taxable proceeds of sales of the face value on notes payable to the taxpayer and
received by it in settlement of amounts due of lease agreements that were broken by the
lessee." The Commission ruled that such notes payable a part of the proceeds subject to
the sales or use tax.

3

In SC Private Letter Ruing #88-5, the Department held that the taxpayer’s lease
cancellation fee was a part of the "gross proceeds of sales" or "sales price" and therefore
subject to the sales and use tax.
The Vermont Department of Taxes in Ruling 87-13, dated September 28, 1987, held that
a "lease cancellation fee" was a receipt from the rental of tangible personal property. The
Department stated:
...the cancellation fee you have described is a "receipt" from the rental of
tangible personal property and is therefore subject to tax. In effect the
Lessor has simply agreed to accept less than it is legally entitled to receive
under the lease agreement. The amount that is paid, whether it is
nominated rental payments or a "cancellation fee," is subject to tax as part
of the consideration for the lease.
Based on the above, an early termination charge imposed by ABC, as described in the
facts, is subject to the sales and use tax when billed in connection with a taxable
communication service since such a charge is a part of the “gross proceeds of sales” or
“sales price” of the taxable communication service.
CAVEAT: This advisory opinion is issued to the taxpayer requesting it on the assumption
that the taxpayer’s facts and circumstances, as stated, are correct. If the facts and
circumstances given are not correct, or if they change, then the taxpayer requesting the
advisory opinion may not rely on it. If the taxpayer relies on this advisory opinion, and
the Department discovers, upon examination, that the facts and circumstances are
different in any material respect from the facts and circumstances given in this advisory
opinion, then the advisory opinion will not afford the taxpayer any protection. It should
be noted that subsequent to the publication of this advisory opinion, changes in a statute,
a regulation, or case law could void the advisory opinion.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Ray N. Stevens
Ray N. Stevens, Director

November 7
, 2006
Columbia, South Carolina

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