Did telephone-cooperative patronage allocations retroactively reduce individual sales prices and support sales-tax refunds?

Plain-English summary

Telephone cooperatives periodically allocated profits to members' patronage accounts based on usage and sought sales-tax refunds as though the allocations retroactively reduced service prices.

The Comptroller denied the request. No individual transaction's price was renegotiated; instead, the cooperatives recomputed an entire year's results using operating revenue and expenses. The attached analysis characterized that as profit sharing and also noted that pooled cash-flow settlements made it unclear whose money was ultimately credited.

Common questions

Did the patronage allocation reduce prior sales prices? No.

Why was the refund denied? The allocation was not tied to repricing specific transactions and resembled profit sharing.

What role did pooled settlements play? They created uncertainty about whether the cooperative was refunding money originally paid by its own members.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8805L0907B03

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

December 5, 1988

Dear ***:

Thank you for your recent letter requesting refunds of sales tax
to telephone cooperatives who make periodic allocation of patronage
to their members.

In my opinion a sales tax refund is not warranted in these situations.
The allocation of patronage to the members account does not constitute
a renegotiation of sales price of any individual transactions. Further-
more, the payments of * Cash Flow Settlements to the companies
cloud the issue of whose money is being credited to whom.

This opinion is rendered based on the facts you submitted. Other facts,
though similar, may yield different results.

Please feel free to call or write me anytime. You can reach me toll
free by calling 800-531-5441.

Sincerely,
Al Van Allen
Taxability Section
Legal Services Division

October 26, 1988

To: Martin Cherry

From: Al Van Allen

Subject: Telephone Cooperative - Refunds
Made to Members Based on Usage

QUESTION:

Can a telephone cooperative renegotiate the selling price of its
telecommunications services after the sale and obtain a refund of
sales taxes collected from its members and paid to the State?

FACTS:

1.There are 24 telephone cooperatives in Texas the largest
of which services 22,000 subscribers.

2. Subscribers to these coops usually live in rural areas
   where telecommunications providers equipment costs are much
   higher per subscriber due to the distance between customers
   than in metropolitan areas. Until last year, these coops
   couldn't service a city with more than 1500 population.

3. Because of the higher costs of operation from one part of
   the state to another, the state sets local exchange rates and
   requires carriers to pool their revenue. The money is then
   divided up in what is called * Cash Flow Settlements. The
   coops get a lot more than they billed and the others get less.
   To put it another way, the city rate payer subsidizes the rural
   rate payer. It is important to note here that somebody did pay
   the tax on these revenues - IT JUST WASN'T THESE PARTICULAR PEOPLE.

4. Telecommunications services provided by a coop were exempt prior
   to 10-1-87.

5. Long distance service is provided primarily by * (95% according
   to **). The coops buy the billing from ** at a discount
   and re-bill their subscribers. Prior to 10-1-87, this re-billed long
   distance was also exempt from tax since the coop was selling it.

6. A telephone cooperative formed under the telephone cooperative act
   is organized to provide its members with telephone service at cost.
   While it collects more money than this, it subsequently divides the
   profit up among its subscribers based on the percentage of their over
   all billing to the total. The money is allocated to what is called
   a patronage account.

7. The patronage account is used to provide capitalization for expan-
   sion with a eye toward ultimate refund to the subscriber.

8. The Federal Government allows a pro rata portion of the Federal Ex-
   cise Tax to be rebated to the customers Patronage Account when the coop
   certifies that it has determined its actual expenses and made the usage
   refunds to the customers accounts.

9. *** wants us to consider the year end settlement like a
   price renegotiation under Section 151.426(d) and refund the sales tax
   to the coop on a pro rata portion of the refunded amount.

10. If we can't help them administratively, *** tells me that
    they will seek legislation next session. She was of the opinion that
    we could probably do this since we had interpreted Section 151.0047 to
    include all residences and not just those occupied by their owners.

DISCUSSION:

This looks more like a profit sharing plan than the renegotiation
of a sales price. No specific transactions are renegotiated but
rather the entire years sales are recomputed using total operating
revenue and assumable expenses. In addition, no mention is made of
where the * Cash Flow Settlements are applied in the formula.
It is possible that the coop is refunding someone else's money.

RECOMMENDATION:

***'s request should be denied.

INTEROFFICE BOB
BULLOCK
MEMORANDUM
COMPTROLLER OF
PUBLIC ACCOUNTS

Date: October 19, 1988

TO: Al Van Allen, Legal Services

FROM: Tamara A. Haught, Auditor, *** Audit, 2I30

SUBJECT: *** Audit - Student Rebates

In response to our recent telephone conversation on October 18, 1988
regarding audit procedures used to evaluate the taxability of student
rebates given by the ***, to the best of my recollection,
the following theory was applied. Once a year the **
posted the current years rebate percentage available only to those who
had saved their receipts for purchases made during the year. The
percentage was figured based upon the current years profit and then
shared with the students with valid receipts. The rebate was given
in cash. I did not feel the rebate was connected to the sale of tangible
personal property nor was it connected to a return or bad debt write-off.
This was a way of sharing the profit with the students as an incentive
to buy from their store. Sales Tax is a transaction tax and neither I
nor **** felt the return on profit was connected to a sale of
tangible personal property. The audit was performed over 2 years
ago and the file is not located in the Houston North Audit Office,
thus I did not go back into the file to verify the above statements.

Should you need any further information, please do not hesitate to call.