When a wireless carrier replaces a customer's lost, stolen, or broken phone under a bundled replacement program, does the carrier owe Tennessee sales tax on the replacement phone — and does it matter whether the claim is handled as a warranty repair or as an insurance claim?

Plain-English summary

A wireless carrier's premium "Enhanced Plans" automatically include a Phone Replacement Program — a single, non-itemized feature combining two distinct legal arrangements with an outside insurance company: a Wireless Equipment Service Contract (warranty-style coverage for mechanical/electrical failure, accidental water damage, and similar defects) and a Wireless Equipment Insurance Policy (coverage for lost or stolen phones). The carrier pays the insurance company a single monthly premium per subscriber for both, and no separate charge ever appears on the customer's bill. When a claim is approved, the carrier hands the subscriber a replacement phone out of a "Pool" of new and refurbished phones, and either retains the customer's deductible or invoices the insurance company.

Two questions, two different answers, because the two halves of the bundle work differently under sales tax law:

1. Replacement phones — Service Contract claims (mechanical/water damage failures): NOT taxable. Tennessee Rule 4 says no sales tax is due when a damaged item is returned under a warranty/guarantee contract and no separate charge is made for the repair or replacement. The Department found the Service Contract is properly a "warranty or guarantee" — it's the carrier's own promise that the phone is as represented, triggered by the phone's own failure. All three Rule 4 conditions were met: a warranty/guarantee contract existed, the damaged phone was returned, and no charge was made to the subscriber.

2. Replacement phones — Insurance Policy claims (lost/stolen phones): TAXABLE. An insurance policy is legally different from a warranty: it indemnifies against a contingency (theft, loss) rather than guaranteeing the seller's own product or workmanship, following the warranty-vs-insurance distinction Tennessee courts have drawn (H&R Block E. Tax Servs., Inc. v. Dep't of Commerce & Ins.). Because Rule 4 doesn't apply, the Department treated the carrier's replacement-phone hand-off as an ordinary taxable retail sale to the insurance company — the carrier sells the phone to the insurer (which doesn't resell it but directs it to the subscriber), and the "sales price" is what the insurer actually pays the carrier: the subscriber's deductible plus the insurer's separate reimbursement.

3. The carrier's own purchases of Pool phones mirror the same split. Phones bought to stock the Pool are tax-free under Rule 4(2) to the extent they fulfill Service Contract warranty obligations. Phones used for Insurance Policy replacements are exempt for a different reason — a sale for resale — because the carrier is reselling them to the insurance company before they reach the subscriber.

What this means for you

Wireless carriers, retailers, or any business offering bundled device-replacement programs

The tax answer turns on the legal character of the underlying contract, not on how the program is marketed or billed to the customer. A single bundled "protection plan" fee can straddle taxable and non-taxable treatment if it covers both warranty-type failures (often non-taxable replacement) and insurance-type contingencies like loss/theft (often a taxable sale to the insurer). Track which type of claim each replacement falls under, even if customers never see the distinction.

Insurance companies and warranty administrators partnering with device sellers

Where a retailer supplies replacement units to you as the insurer (rather than insurer-supplied stock), that hand-off is likely a taxable retail sale measured by whatever the insurer pays the retailer — not a tax-free pass-through.

Accountants and tax professionals

The warranty-vs-insurance line here tracks H&R Block E. Tax Servs. — ask whether the contract guarantees the seller's own product/workmanship (warranty, generally non-taxable replacement under Rule 4) or indemnifies against an external contingency like loss or theft (insurance, generally a taxable sale). Also note the carrier's Pool-phone purchases split along the same line but via two different exemption mechanisms: Rule 4(2) tax-free use for warranty replacements, vs. resale exemption for phones destined for insurer-directed replacements.

Common questions

Q: If my "protection plan" bundle covers both mechanical defects and loss/theft, is the whole thing taxed the same way?
A: Not necessarily — this ruling treats the warranty piece and the insurance piece differently even when bundled into one unitemized monthly fee, based on which type of claim triggers the replacement.

Q: Why does it matter whether the carrier or the insurance company directs the replacement?
A: Because under the insurance-claim scenario, the carrier is selling the replacement phone to the insurance company (a taxable retail sale), not simply repairing/replacing under its own warranty (which Rule 4 exempts).

Q: Can another wireless carrier or retailer rely on this letter ruling for its own bundled replacement program?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it addresses. This summary is informational only, not legal or tax advice.

Citations and references

Tennessee statutes and rules (Tenn. Code Ann. / Tenn. Comp. R. & Regs.):

• § 67-6-230(b) (2011) (sales tax on warranty/service contracts; no additional tax on covered repairs)
• Tenn. Comp. R. & Regs. 1320-5-1-.04 (1974) ("Rule 4") (warranty/guarantee repair-or-replacement tax treatment, including dealer's tax-free purchase/use of TPP to fulfill such obligations under Rule 4(2))
• § 67-6-102(78) (2011) (definition of "retail sale")
• § 67-6-102(80)(A), (D) (2011) (definition of "sale," including furnishing of taxable services)
• § 67-6-102(81) (2011) (definition of "sales price")
• § 67-6-102(77)(A) (2011) (definition of "resale" / "sale for resale")
• §§ 67-6-101 to -907 (2011) (Retailers' Sales Tax Act, general taxability)

Case law:

• Beare Co. v. Tenn. Dep't of Revenue, 858 S.W.2d 906, 908 (Tenn. 1993) (common-usage interpretation of undefined statutory terms)
• Tenn. Farmers Assurance Co. v. Chumley, 197 S.W.3d 767, 782-83 (Tenn. Ct. App. 2006) (same)
• H & R Block E. Tax Servs., Inc. v. Dep't of Commerce & Ins., 267 S.W.3d 848, 863, 865 (Tenn. Ct. App. 2008) (warranty-vs-insurance distinction)
• Tenn. Op. Att'y Gen. No. 85-038 (Feb. 19, 1986) (warranty/service contracts are not insurance)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/12-29.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 12-29
WARNING
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and
circumstances presented, and is an interpretation of the law at a specific point in time. The
law may have changed since this ruling was issued, possibly rendering it obsolete. The
presentation of this ruling in a redacted form is provided solely for informational purposes,
and is not intended as a statement of Departmental policy. Taxpayers should consult with a
tax professional before relying on any aspect of this ruling.
SUBJECT
The application of the Tennessee sales and use tax to a phone replacement program.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon
the Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation
or modification shall be effective retroactively unless the following conditions are met, in which
case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts involved in
the transaction;
(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying upon
the ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.
FACTS
[TAXPAYER] and its operating subsidiaries [REDACTED] (collectively, the “Taxpayer”)
request this letter ruling with respect to taxable periods beginning [DATE]. These operating
subsidiaries are licensed to provide, and do provide, wireless telecommunications services in
Tennessee (including voice service, data service, and wireless Internet access) under the trade
name [TRADE NAME]. [TAXPAYER] is a [NON-TENNESSEE] holding company that is not
licensed to, and does not provide, wireless telecommunications services.
1

The Taxpayer recently introduced a Phone Replacement Program that is included with certain
eligible wireless communication plans. The Phone Replacement Program is a combination of a
wireless handset service contract and an insurance policy underwritten by INSURANCE
COMPANY1 that will, in the case of accidental damage, mechanical breakdown, warranty
claims, or lost or stolen phones, provide a replacement phone to customers who have purchased a
phone from the Taxpayer in connection with subscribing to an eligible wireless service plan.
The Taxpayer currently offers the Phone Replacement Program as one of many non-optional
features it includes in its premium wireless plans (referred to as “Enhanced Plans”). The Phone
Replacement Program is not sold separately and is not available with plans other than the
Enhanced Plans. For regulatory reasons, the Taxpayer has entered into an agreement (the
“Agreement”) arranging for INSURANCE COMPANY to provide the coverage under the
Phone Replacement Program through a non-contributory group Wireless Equipment Insurance
Policy (the “Insurance Policy”) that will cover lost or stolen handsets, and a non-contributory
group Wireless Equipment Service Contract (sometimes referred to herein as the “Service
Contract”) that covers certain handset mechanical or electric failures, accidental water and
certain other specified damages.
The Taxpayer pays INSURANCE COMPANY a single premium of a specified amount per
month per Phone Replacement Program Subscriber (the exact figure varies depending on the
number of total Subscribers) for both the Insurance Policy and the Service Contract. Upon
enrollment, a Subscriber becomes (i) a certificate holder (i.e., a beneficiary) of the Insurance
Policy, which is underwritten by INSURANCE COMPANY, and (ii) a direct contracting party
with INSURANCE COMPANY under the Service Contract. In both cases, the Taxpayer pays
the premium (on behalf of the Subscribers, in the case of the Service Contract) – for which no
separate charge is ever made to the Subscriber – and INSURANCE COMPANY is the obligor.
Under the Insurance Policy, a Subscriber whose phone is lost or stolen pays a $[AMOUNT X]
deductible and receives a new phone (the “Replacement Phone”). Under the Service Contract,
the Subscriber is required to exchange the damaged phone for the Replacement Phone.
In both cases, the Replacement Phone will be the same as or similar to the lost, broken,
inoperable, or damaged phone. Pursuant to its obligations under the Agreement, the Taxpayer
maintains a pool of new and used phones (the “Pool”) from which it provides Replacement
Phones to Subscribers. Taxpayer-owned stores maintain a small supply of Replacement Phones
for walk-in Subscriber claimants, which phones are treated as part of the Pool. As explained
further below, phones turned in by Subscribers pursuant to the Service Contract are refurbished
and added to the Pool, to be provided as Replacement Phones.
A Subscriber is entitled to a maximum of [NUMBER OF] exchanges (although only one can be
for a lost or stolen phone) under the Phone Replacement Program during the [REDACTED]
coverage period that begins when a Subscriber receives a new phone.
1

INSURANCE COMPANY is the trade name for a group of affiliated companies that
provide service contracts and/or insurance contracts. Depending on the state in which a customer resides, the service
contract is provided by [AFFILIATED COMPANIES], and the insurance policy is provided by [OTHER
AFFILIATED COMPANIES].
2

Customer Enrollment and Billing
A [TAXPAYER] wireless customer who purchases a [TAXPAYER] handset and signs up for an
Enhanced Plan is automatically enrolled as a “Subscriber” in the Phone Replacement Program.
Upon enrollment, a Subscriber receives an enrollment package directly from the program
provider, INSURANCE COMPANY. It is possible for a wireless customer to decline
enrollment, but the customer receives no reduction in the price of his or her (referred to hereafter
as “his”) monthly plan for doing so (nor may a customer subscribe to a lower price plan with
identical service, other than the Phone Replacement Program, as the Taxpayer does not offer any
such plan).
The Phone Replacement Program is listed on the customer’s wireless bill as a feature of the
wireless service Enhanced Plan, but the bill is not itemized. There is a single, bundled charge for
all of the services included in the Enhanced Plan (the “Wireless Monthly Fee”), including voice,
messaging, data, Internet access (if applicable), Phone Replacement, and loyalty points.2
Obligations under the Agreement between the Taxpayer and INSURANCE COMPANY
Under the Agreement, the Taxpayer has agreed to provide the following services to

Maintain sufficient quantities of Replacement Phones and components to satisfy
claims under the Phone Replacement Program (in the event the Taxpayer is unable to
fulfill a claim under the Phone Replacement Program, INSURANCE COMPANY will
fulfill the claim and be reimbursed by the Taxpayer for its expenses and the cost of the
equipment)

Develop, market, and make available the Phone Replacement Program in its
service areas


Provide training to its employees and agents


Cooperate with [INSURANCE COMPANY’S] support and administrative
services


Record-keeping

Under the Agreement, INSURANCE COMPANY has agreed to provide the following services:


Track Subscriber enrollment


Provide Subscribers with notification regarding enrollment, cancellation, privacy
policies, and an explanation of benefits


Claims administration and adjustment

2

In its letter ruling request, the Taxpayer acknowledges that the Wireless Monthly Fee, which includes the Phone
Replacement Program, is generally subject to the sales tax.
3



Report to the Taxpayer regarding operational and administration status

Claims Processing and Handling
A claim under the Service Contract is initiated when a Subscriber submits a request along with
his damaged phone at a [TAXPAYER] retail store, or files a claim through the Taxpayer’s
Customer Service Center over the phone. The claim is then submitted to INSURANCE
COMPANY for adjudication and administration.
Section [REDACTED] of the Agreement provides:
[The Taxpayer] shall maintain sufficient quantities (to the extent available) of Eligible
Products and components to fulfill all claims, which [the Taxpayer] will do only pursuant
to instructions received from INSURANCE COMPANY. Any new equipment shall be
accompanied by a full Product Warranty. [The Taxpayer] agrees that any refurbished
equipment will come with a [NUMBER] day mechanical and electrical failure repair or
replacement limited warranty.
Assuming the damage is covered under the Service Contract, the Taxpayer will, upon receiving
direction from INSURANCE COMPANY, take the damaged phone from the Subscriber and
replace it with a phone from the Pool. If the claim is submitted in person at a [TAXPAYER]
store, and is approved by INSURANCE COMPANY, a Replacement Phone will be given
immediately out of the Pool phones at the [TAXPAYER] store (if no Pool phone is available,
one is shipped overnight to the Subscriber from the pool maintained at the Taxpayer’s third party
fulfillment center in [STATE, NOT TENNESSEE]). If the claim is submitted via telephone and
approved by INSURANCE COMPANY, the replacement Pool phone is shipped overnight to
the Subscriber. In that case, the Subscriber must ship the broken or damaged phone to the
Taxpayer, or be charged the full undiscounted retail price of the Replacement Phone. The
Taxpayer gives the Subscriber an invoice showing that the Replacement Phone has been
exchanged for the Subscriber’s damaged phone, and that no balance is due.
INSURANCE COMPANY pays the Taxpayer a “Handset Reimbursement Fee” in the amount
of $[AMOUNT Y] for each Replacement Phone that the Taxpayer provides to a customer at
[INSURANCE COMPANY’S] direction. The Taxpayer retains the broken or damaged phone
and refurbishes it. If that is successful, it is added to the Pool; otherwise, it is sold for scrap.
As under the Service Contract, a claim under the Insurance Policy can be initiated by filing a
claim at a [TAXPAYER] retail store or over the phone for adjudication and administration by
INSURANCE COMPANY. If INSURANCE COMPANY approves the claim, the Taxpayer
will, upon direction from INSURANCE COMPANY, provide the Subscriber with a
Replacement Phone from the Pool.
If an Insurance Policy claim is submitted in person at a [TAXPAYER] store, a Replacement
Phone will be given out of the Pool phones at the store (if no Pool phone is available, one is
shipped overnight to the Subscriber from the pool maintained at the Taxpayer’s third party
fulfillment center in [STATE, NOT TENNESSEE]). The Subscriber must pay a $[AMOUNT X]
deductible before the Taxpayer delivers the Replacement Phone to the Subscriber. The Taxpayer
invoices INSURANCE COMPANY $[AMOUNT Y] for the Replacement Phone, in
4

satisfaction of which the Taxpayer retains the $[AMOUNT X] deductible paid by the Subscriber
and INSURANCE COMPANY pays to the Taxpayer the balance of $[AMOUNT Y MINUS
AMOUNT X].
RULINGS
1.

Is the Taxpayer required to collect and remit Tennessee sales and use tax with respect to
the provision of Replacement Phones to Subscribers at the direction of INSURANCE
COMPANY under the Phone Replacement Program?
Ruling: The provision of Replacement Phones under the Service Contract portion of the
Phone Replacement Program is not subject to the Tennessee sales and use tax. However,
the Taxpayer is required to collect and remit Tennessee sales and use tax with respect to
Replacement Phones provided under the Insurance Policy portion of the Phone
Replacement Program.

2.

Are the Taxpayer’s acquisitions of phones for the Pool exempt from the Tennessee sales
and use tax as sales for resale?
Ruling: The Taxpayer’s acquisition or use of phones that are placed in the Pool is not
subject to the Tennessee sales and use tax, to the extent the phones are used to fulfill
warranty obligations under the Service Contract portion of the Phone Replacement
Program.
With respect to Replacement Phones provided under the Insurance Policy portion of the
Phone Replacement Program, the Taxpayer’s acquisition of such phones for the Pool is
exempt from the Tennessee sales and use tax as a sale for resale.
ANALYSIS

1.

Taxpayer’s liability for provision of Replacement Phones to Subscribers

The provision of Replacement Phones under the Service Contract portion of the Phone
Replacement Program is not subject to the Tennessee sales and use tax. However, the Taxpayer
is required to collect and remit Tennessee sales and use tax with respect to Replacement Phones
provided under the Insurance Policy portion of the Phone Replacement Program.
Retail sales in Tennessee of tangible personal property and certain enumerated services and
items are subject to the sales and use tax under the Retailers’ Sales Tax Act, TENN. CODE ANN.
§§ 67-6-101 to -907 (2011), unless an exemption from taxation applies.3

3

TENN. CODE ANN. § 67-6-102(78) (2011) defines a “retail sale” as a “sale, lease, or rental for any purpose other
than for resale, sublease, or subrent.” TENN. CODE ANN. § 67-6-102(80)(A) defines the term “sale” in pertinent part
to mean “any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in
any manner or by any means whatsoever of tangible personal property for a consideration.” The term “sale” includes
“the furnishing of any of the things or services taxable” under the Tennessee sales and use tax laws. TENN. CODE
ANN. § 67-6-102(80)(D).
5

TENN. CODE ANN. § 67-6-230(b) (2011) imposes the sales tax on the sale of a warranty or service
contract covering the repair or maintenance of tangible personal property at the time of the sale
of the contract. No additional tax is due on any repairs to the extent they are covered by the
contract. Id. TENN. COMP. R. & REGS. 1320-5-1-.04 (1974) (“Rule 4”) explains the application of
the Tennessee sales and use tax to transactions involving sales, warranty, or guarantee contracts.
Rule 4(1) provides that “[w]hen an item of tangible personal property, or any part thereof, is
returned to a dealer pursuant to a sales, warranty, or guarantee agreement for repair or
replacement, and no charge is made to the customer for the repair or replacement, there is no
Sales or Use Tax due.” However, “in the event any charge for labor or a part or parts is made to
the customer for the repair or replacement, the charge that is actually made to the customer” is
subject to taxation. Id.
Thus, the provision of a Replacement Phone to a Subscriber in Tennessee will not be subject to
the sales and use tax if the following requirements are met: 1) the transaction is undertaken
pursuant to a sales, warranty, or guarantee contract, upon which sales tax was paid, covering the
repair or replacement of tangible personal property; 2) the phone that is covered by the sales,
warranty, or guarantee contract is returned to the Taxpayer for repair or replacement; and 3) no
charge is made to the Subscriber for the repair or replacement.
Service Contract
The provision of Replacement Phones to Subscribers under the Service Contract portion of the
Phone Replacement Program is not subject to the Tennessee sales and use tax, because the
transaction meets the requirements set forth under Rule 4(1).
First, the Service Contract portion of the Phone Replacement Program is properly characterized
as a sales, warranty, or guarantee contract covering the repair or replacement of tangible personal
property.4 The Taxpayer has indicated that the Service Contract is a contract whereby the
Taxpayer, in the case of certain handset mechanical or electrical failures, accidental water
damage, and certain other specified damages, will provide a replacement phone to customers
who have purchased a phone from the Taxpayer in connection with subscribing to an eligible
wireless service plan.
The terms “warranty” and “guarantee” are not defined for purposes of the Tennessee sales and
use tax. The Tennessee Supreme Court has stated that when a statute does not define a term, it is
proper to look to common usage to determine the term’s meaning. See, e.g., Beare Co. v. Tenn.
Dep’t of Revenue, 858 S.W.2d 906, 908 (Tenn. 1993); Tenn. Farmers Assurance Co. v. Chumley,
197 S.W.3d 767, 782-83 (Tenn. Ct. App. 2006). BLACK’S LAW DICTIONARY 1725 (9th ed. 2009)
defines a “warranty” as an “express or implied promise that something in furtherance of the
contract is guaranteed by one of the contracting parties; esp., a seller’s promise that the thing
being sold is as represented or promised.” Similarly, a “guarantee” is such a promise “in the
context of consumer warranties or other assurances of quality or performance.” Id. at 772.

4

The Taxpayer acknowledges that the Wireless Monthly Fee, which includes the Phone Replacement Program, is
generally subject to the Tennessee sales tax. It is assumed for purposes of this letter ruling that the Taxpayer has in
fact collected and remitted sales tax on the Wireless Monthly Fee.
6

Here, the Service Contract is properly characterized as a warranty or guarantee contract because
it is a promise that the purchased phone is as represented or promised. The Taxpayer guarantees
the quality and performance of the phone by agreeing to replace the device in the event of a
mechanical or electrical failure, or failure to perform correctly due to water or other damage.
Second, the damaged phone that is covered by the Service Contract is returned to the Taxpayer
for replacement. Third, no charge is made to the Subscriber for the repair or replacement of a
damaged phone under the Service Contract.
Accordingly, the provision of Replacement Phones to Subscribers under the Service Contract
portion of the Phone Replacement Program is not subject to the Tennessee sales and use tax.
Insurance Policy
The Taxpayer is required to collect and remit Tennessee sales and use tax with respect to
Replacement Phones provided under the Insurance Policy portion of the Phone Replacement
Program.
First, Rule 4(1) does not apply with respect to the Insurance Policy, because the Insurance Policy
is not a sales, warranty, or guarantee contract. As discussed above, a warranty is an “express or
implied promise that something in furtherance of the contract is guaranteed by one of the
contracting parties; esp., a seller’s promise that the thing being sold is as represented or
promised.”5 Similarly, a “guarantee” is such a promise “in the context of consumer warranties or
other assurances of quality or performance.”6
The Tennessee Court of Appeals has distinguished product warranties from insurance policies.7
To determine whether a contract is a warranty or an insurance policy, one must determine
whether the contract is primarily a guarantee or whether it is a promise of indemnity. H & R
Block E. Tax Servs., Inc. v. Dep’t of Commerce & Ins., 267 S.W.3d 848, 863 (Tenn. Ct. App.
2008) (holding that a guarantee of the accuracy of tax preparation services was not insurance). A
guarantee is “inextricably linked” to an underlying purchase and is an assurance that the item or
service purchased is as promised. See id. Significantly, a contract is more likely to be considered
insurance if it covers more than just the seller’s own errors or product defects; the element of
contingency, central to any common-sense definition of insurance, is missing where the customer
is “insured” only against losses caused directly by the “insurer.” Id. at 865.
In the Taxpayer’s case, the Insurance Policy is not properly characterized as a warranty or
guarantee contract because it is not a promise that the purchased phone is as represented or
promised, nor does it guarantee the quality or performance of the phone. Rather, it indemnifies
the Subscriber against theft or loss. Additionally, the Insurance Policy covers something other
than the Taxpayer’s own errors or product defects; it insures against the contingency of loss or
theft. As a result, the Insurance Policy is most properly characterized as a contract of insurance.
5

BLACK’S LAW DICTIONARY 1725 (9th ed. 2009).

6

Id. at 772.

7

The Tennessee Attorney General has also drawn this distinction, opining that a warranty or service contract is not
insurance. See Tenn. Op. Att’y Gen. No. 85-038 (February 19, 1986).
7

Because the Insurance Policy is not a sales, warranty, or guarantee contract, Rule 4(1) does not
apply.
Rather, the facts indicate that the Taxpayer makes retail sales of Replacement Phones to
INSURANCE COMPANY.
TENN. CODE ANN. § 67-6-102(78) defines a “retail sale” as a “sale, lease, or rental for any
purpose other than for resale, sublease, or subrent.” TENN. CODE ANN. § 67-6-102(80)(A) defines
the term “sale” in pertinent part to mean “any transfer of title or possession, or both, exchange,
barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever of
tangible personal property for a consideration.” The term “sale” includes “the furnishing of any
of the things or services taxable” under the Tennessee sales and use tax laws. TENN. CODE ANN.
§ 67-6-102(80)(D).
Here, the Taxpayer makes sales of Replacement Phones to INSURANCE COMPANY, which
uses the phones in fulfillment of its contractual obligations under the Insurance Policy.
INSURANCE COMPANY adjudicates and administers claims filed by a Subscriber under the
Insurance Policy. If INSURANCE COMPANY approves a claim, the Taxpayer will, upon
direction from INSURANCE COMPANY, provide the Subscriber with a Replacement Phone
from the Pool. The Taxpayer invoices INSURANCE COMPANY, and INSURANCE
COMPANY pays the Taxpayer $[AMOUNT Y] for each such phone.
Because INSURANCE COMPANY purchases the Replacement Phone from the Taxpayer, but
does not itself resell the phone, the sale of a Replacement Phone by the Taxpayer to
INSURANCE COMPANY constitutes a taxable retail sale in Tennessee when title to and
possession of the phone are transferred to a Subscriber in Tennessee on behalf of INSURANCE
COMPANY. See TENN. CODE ANN. § 67-6-102(78).
TENN. CODE ANN. § 67-6-202(a) (2011) imposes the sales tax on the “sales price” of each item or
article of tangible personal property when sold at retail in Tennessee. TENN. CODE ANN. § 67-6102(81) defines the term “sales price” in pertinent part as “the total amount of consideration,
including cash, credit, property, and services, for which personal property or services are sold,
leased, or rented, valued in money, whether received in money or otherwise,” without any
deduction for items such as the seller’s cost of the property sold.
The sales price of the Replacement Phone therefore equals the total amount paid by
INSURANCE COMPANY to the Taxpayer for the phone. Here, the Taxpayer invoices
INSURANCE COMPANY $[AMOUNT Y] for the Replacement Phone. In satisfaction of this
charge, the Taxpayer retains the $[AMOUNT X] deductible paid by the Subscriber;
INSURANCE COMPANY pays to the Taxpayer the balance of $[AMOUNT Y MINUS
AMOUNT X]. The sales price of the Replacement Phone therefore equals the deductible retained
by the Taxpayer, plus the Handset Reimbursement Fee, which together total $[AMOUNT Y].
Accordingly, the Taxpayer is required to accrue and remit Tennessee sales and use tax with
respect to Replacement Phones provided to Subscribers under the Insurance Policy portion of the
Phone Replacement Program.

8

2.

Acquisition of phones for the Pool

The Taxpayer’s acquisition or use of phones that are placed in the Pool is not subject to the
Tennessee sales and use tax, to the extent such phones are used to fulfill warranty obligations
under the Service Contract portion of the Phone Replacement Program.
With respect to Replacement Phones provided to Subscribers under the Insurance Policy portion
of the Phone Replacement Program, the Taxpayer’s acquisition of such phones for the Pool is
exempt from the Tennessee sales and use tax as a sale for resale.
Service Contract
The Taxpayer’s acquisition or use of phones that are placed in the Pool is not subject to the
Tennessee sales and use tax, to the extent the phones are used to fulfill warranty obligations
under the Service Contract portion of the Phone Replacement Program.
As discussed in the response to Question #1, the Service Contract portion of the Phone
Replacement Program is properly characterized as a sales, warranty, or guarantee contract
covering the repair or replacement of tangible personal property. Rule 4 explains the application
of the Tennessee sales tax to transactions involving such contracts. Rule 4(2) states that
“[d]ealers buying and using tangible personal property to fulfill sales, warranty, or guarantee
obligations to a customer may purchase and use the tangible personal property without the
payment of any” sales or use tax.
For the Taxpayer’s acquisition of phones to come under Rule 4(2), the Taxpayer must therefore
use the Pool phones to fulfill its warranty or guarantee obligations under the Service Contract.
The facts indicate that the Taxpayer uses the Pool phones for this purpose. Assuming the damage
is covered under the Service Contract, the Taxpayer will, upon receiving direction from
INSURANCE COMPANY, take the damaged phone from the Subscriber and replace it with a
phone from the Pool.
Thus, under Rule 4(2) the Taxpayer’s acquisition of phones that are placed in the Pool is not
subject to the Tennessee sales and use tax, to the extent the phones are used to fulfill warranty
obligations under the Service Contract portion of the Phone Replacement Program.
Insurance Policy
With respect to Replacement Phones provided under the Insurance Policy portion of the Phone
Replacement Program, the Taxpayer’s acquisition of such phones for the Pool is exempt from
the Tennessee sales and use tax as a sale for resale.
TENN. CODE ANN. § 67-6-102(78) defines a “retail sale” as any “sale, lease, or rental for any
purpose other than for resale, sublease, or subrent.” (Emphasis added). Sales for resale are
therefore exempt for purposes of the Tennessee sales and use tax.8 TENN. CODE ANN. § 67-68

The phrase “for any purpose other than for resale” has been construed as an exemption that excludes sales for
resale from taxation. See Walker’s, Inc. v. Farr, 338 S.W.3d 887, 892 (Tenn. Ct. App. 2010) (citing Nashville
Clubhouse Inn v. Johnson, 27 S.W.3d 542, 544 (Tenn. Ct. App. 2000) and Colemill Enters., Inc. v. Huddleston, 967
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102(77)(A) provides that the term “resale” means “a subsequent, bona fide sale of the property,
services, or taxable item by the purchaser.” A “sale for resale” is defined under TENN. CODE
ANN. § 67-6-102(77)(A) as “the sale of the property, services, or taxable item intended for
subsequent resale by the purchaser.”
With respect to Replacement Phones provided under the Insurance Policy portion of the Phone
Replacement Program, the facts indicate that the Taxpayer acquires such phones for resale. As
explained in the response to Question #1, the Taxpayer makes retail sales of the Replacement
Phones to INSURANCE COMPANY. Thus, when the Taxpayer acquires the phones, it does so
for subsequent resale to INSURANCE COMPANY. The Taxpayer’s acquisition of such
phones for the Pool is therefore exempt from the Tennessee sales and use tax as a sale for resale.

Kristin Husat
General Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

November 21, 2012

S.W.2d 753, 756 (Tenn. 1998)). Note that TENN. CODE ANN. § 67-6-102(77) requires that all sales for resale be in
strict compliance with the rules and regulations promulgated by the Commissioner of Revenue. A dealer must obtain
a resale certificate from the purchaser in order to make an exempt sale for resale of tangible personal property or
services in Tennessee. See TENN. COMP. R. & REGS. 1320-5-1-.68(1) (2008). Alternatively, the purchaser may
present a Streamlined Sales and Use Tax Certificate of Exemption or a Tennessee Sales and Use Tax Blanket
Certificate of Resale in lieu of a certificate of resale.
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