Were separately stated telephone-directory listing charges taxable in Texas?

Plain-English summary

A company asked the Comptroller to clarify an earlier audit memorandum about telephone service, directory listings, and prior-contract treatment.

The agreement under review did not make the company a telephone company under Rule 3.344. The other contracting entity—not the requesting company—was regulated by the Public Utility Commission. Apart from the historical treatment of basic local exchange service, PUC regulation did not change the earlier findings.

Directory-listing charges were nontaxable because directory listings were not taxable items, not because the charges were passed through without profit. A separately stated listing charge was nontaxable. A lump-sum charge combining basic local exchange service and a directory listing was fully taxable.

The company also had to apply tax-rate increases as they occurred under the contract described. Telecommunications services did not qualify for a prior-contract exemption merely because their tax base changed in 1985 or 1987. The letter separately said services that first became taxable on October 1, 1987 could qualify for the prior-contract exemption.

What this means for you

Separately stating the directory listing mattered. The ruling did not create a general exemption for costs passed through at no markup, and it distinguished telecommunications already in the tax base from services newly taxed in 1987.

Common questions

Were directory listings taxable? Not when separately stated.

What if the listing and basic local service appeared as one charge? The full lump-sum charge was taxable.

Did no-profit pass-through treatment create the exemption? No. The letter said profitability did not determine whether a taxable service or sale was taxable.

Did all telecommunications contracts receive prior-contract protection? No. The letter denied that treatment for telecommunications already in the tax base and separately addressed services newly taxable on October 1, 1987.

Citations and references

• 34 Tex. Admin. Code Rule 3.344 (telecommunications services)
• 34 Tex. Admin. Code Rule 3.319(c)(4) (prior contracts)
• TR #1208 (the earlier agency memorandum discussed in the letter)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9011L1061C01

Original ruling text

November 30, 1990

Dear **:

In your letter of November 21 you requested additional information regarding
this agency's TR #1208.

I have restated your questions with a response:

1. COMPANY ABC (**) is regulated by the PUC under the COMPANY X
   general exchange tariff, section 18, titled joint user service. I have enclosed
   a copy of this tariff (Exhibit IV). The telecommunications paragraph on page 2
   in TR Memo 1208 is unclear in relation to what the difference would be in
   taxation for basic local exchange service, if COMPANY ABC does not fall under
   Rule 3.344. Also, were any other decisions based on whether or not COMPANY ABC
   is regulated by the Public Utility Commission (PUC)?

Response

The agreement between COMPANY X and COMPANY ABC doesn't qualify COMPANY ABC as
a telephone company under the provisions of Comptroller's Rule 3.344 (effective
October 1, 1985). COMPANY X is the entity regulated by the public utility
commission, not COMPANY ABC. Charges for basic local exchange service weren't
taxable prior to October 1, 1987 if the charges were billed by a telephone
company as defined in the above rule. Otherwise, regulation by the PUC has no
effect on the findings in TR #1208.

2. TR Memo 1208, page 3, states that charges for directory listing are exempt
   because they are a pass-through from COMPANY X. It is our interpretation that
   just because the PUC regulation prohibits us from making a profit on certain
   items that we obtain for our customers through COMPANY X doesn't qualify these
   items for exemption. As a matter of fact, we are prohibited from marking up
   certain basic local line charges. My interpretation of a pass-through is an
   item for which the cost plus tax is charged to a third party (for example, an
   attorney charging the cost of his telephone calls to a client). Under normal
   billing conditions, when a person or business is charged for basic local
   service, the charge for a listing is included in this amount and tax is charged
   on the entire amount. If a listing is separately stated, would it then become
   exempt from state and local sales tax? To further state the issue, COMPANY X
   indicates in their reports to us (Exhibit V), there are three listings taxed
   two different ways.

Response

The directory charges in TR #1208 are exempt from tax because charges for
directory listings aren't taxable items, not because they are pass-through
charges. If a service or sale is taxable, the charge is taxable whether or not
the item is sold at a profit.

Accordingly, charges for directory listings aren't taxable if they are
separately stated. However, if the customer is charged one lump-sum amount for
basic local exchange service and a directory listing, the total charge is
taxable.

If the charges under codes **, *, and *** are for
directory listings only, the charges aren't taxable. I can't specifically
address the taxability of the charges listed in Exhibit V without a complete
description of the items.

3. In TR Memo 1208, page 5, under prior contract exemption for
   telecommunications (statement 1), Rule 3.319 (c)(4) is partially stated, but
   Rule 3.319(c)(3) is referenced. My interpretation is that because Exhibit I
   states that the customer agrees to pay the sales tax imposed, I must charge the
   tax rate increases as they occur. But I further interpret that when the new
   services were added to the tax base, they qualify for the prior contract
   exemption. This means that long distance and basic local exchange services
   under contract are exempt from sales tax until such time as the exemption
   expires. For the interstate long distance and local basic exchange service that
   became taxable 10/1/87 the exemption expires 1/1/90. I am uncertain as to the
   exemption period for intrastate long distance that became taxable 10/1/85.

Response

The reference in TR #1208 to Rule 3.319(c)(3) is to Rule 3.344(effective
November 6, 1990) which is enclosed. The appropriate reference in Rule 3.344
(effective April 1, 1988) which you submitted is Rule 3.319(c)(4). Your
interpretation is correct that your company is required to charge tax rate
increases as they occur on charges in Exhibit I (which was submitted with TR

1208).

Telecommunications services including long distance and basic local exchange
services don't qualify for the prior contract exemption from inclusion in the
tax base as indicated in TR #1208, page 4, in the response to Inquiry B (also
see Inquiry C on page 5 of TR # 1208). When telecommunications services were
added to the tax base effective October 1, 1985, the legislation didn't contain
a prior contract exemption from state or local sales and use taxes. The
statutory changes effective October 1, 1987, merely added other charges to the
definition of telecommunications services (that is, telecommunications services
weren't newly taxable services as of that date).

Services which became taxable as of 10-1-87 would qualify for the prior
contract exemption from inclusion in the tax base (see Inquiry B on page 5 of
TR #1208).

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions, please contact Tax Correspondence. You may call toll
free 1-800-252-5555, or our regular number is 512/463-4600. My extension is
3-4662. You may write me at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Correspondence

November 27, 1990

TO: Bob Jeffcoat, Tax Correspondence Division

FROM: June Zivley, Austin Audit 2I80

SUBJECT: TR#1208

Attached is the letter from the Controller of COMPANY ABC to me regarding the
above TR. As we discussed by telephone, I would appreciate your response to her
questions. I discussed the fact of receiving this letter with Lucy today who
suggested I refer it to you.

I would appreciate a response ASAP as we have an audit pending and the taxpayer
is trying to dissolve one of the corporations.