Are charges by contractors who trace telephone circuits and lines (as part of a telephone bill auditing service) subject to Texas sales tax?

Plain-English summary

A telephone bill auditing company asked the Comptroller whether charges from contractors it hires are subject to sales tax. The contractors' job is to physically trace circuits and lines from the telephone company's demarcation point to the exact location of the equipment sitting on that circuit, so the auditing company can identify circuits that are being billed for but aren't actually in use.

The work itself involves hooking up toners and test sets at various jack positions to follow the wiring, and sometimes entering the telephone system's programming mode just to read (not change) the trunk group data. No programming is altered -- the contractors are only gathering information that the requester then uses to build audit presentations showing customers which circuits can be disconnected.

The Comptroller's answer was short and direct: "Tracing circuits is not a taxable service." As with all STAR letter rulings, the response is expressly limited to the facts presented, and the Comptroller notes that other, even similar, facts could yield a different result.

What this means for you

Telephone/utility bill auditing businesses

If your business (or contractors working for you) performs physical circuit-tracing work -- locating and identifying lines and equipment on the customer's premises without altering any telephone system programming -- this ruling supports treating those charges as non-taxable in Texas. The key facts here were that the work was purely investigative/locational and no programming changes were made.

Contractors performing circuit-tracing work

Contractors billing the auditing company for tracing services can rely on this letter (to the extent it applies to their own facts) as an indication that such billed labor is not subject to sales tax, since it wasn't characterized as a taxable telecommunications, repair, or data processing service.

Accountants and tax professionals

Because the ruling turns entirely on how narrowly the described activity was framed (locating circuits and pulling read-only trunk data, no programming alteration), advise clients to document precisely what the contracted work involves. If the scope expands to include reprogramming, repair, or installation, this letter's conclusion may not extend to those additional activities.

Common questions

Q: Is tracing telephone circuits and lines a taxable service in Texas?
A: Based on this letter, no -- the Comptroller ruled that tracing circuits is not a taxable service.

Q: Does it matter that the contractors sometimes enter the telephone system's programming mode?
A: The letter notes this only happens to pull trunk group data, and that "no alteration of programming is performed." The ruling doesn't address whether actually changing programming would change the tax result.

Q: Who is subject to tax here -- the auditing company or its contractors?
A: The question was about "charges made by these contractors," and the response was that this circuit-tracing work is not taxable, without distinguishing between the auditing company and the contractors it hires.

Q: Can another business rely on this letter for its own circuit-tracing work?
A: Only the original requester can rely on this specific letter for detrimental-reliance purposes. The Comptroller also cautions that "other facts, though similar, may yield different results," so businesses with different facts should seek their own guidance.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9206107L

Original ruling text

June 8, 1992

Dear **:

Thank you for your recent letter which is restated in part with response below.

Facts: Our telephone auditing service will sometimes use contractors to perform
part of our audit service. The work that these contractors do is to trace
circuits and lines from the telephone company demarcation to the exact location
of the equipment that is on the circuit.

The work involves hooking up toners and test sets on various jack positions to
trace the exact location. Sometimes entering the telephone programming mode is
required. No alteration of programming is performed. Only the trunk group data
is obtained for me to make my presentations. The type of information presented
to our customers is to disconnect circuits not being used.

Question: Are the charges made by these contractors subject to sales tax?

Response: Tracing circuits is not a taxable service.

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

If you have questions or need more information, please call or write. You may
reach me by calling toll free, (800) 531-5441. My direct line number is (512)
463-4680. The number for FAX transmissions is (512) 475-0900. You may write to
me in care of Tax Administration Division.

Al Van Allen
Tax Administration Division

May 21, 1992

Mr. Al Van Allen
COMPTROLLER OF PUBLIC ACCOUNTS
Tax Administration
P.O. Box 13528
Austin, Texas 78711

Dear Mr. VanAllen:

Thank you for the information you provided me on the telephone yesterday. To
confirm what we talked about, our telephone bill auditing service will
sometimes use contractors to perform part of our audit service.

The work that these contractors do is to trace circuits and lines from the
Telephone Company demarcation to the exact location of the equipment that is on
the circuit.

The work involves hooking up toners and test sets on various jack positions to
trace the exact location. Sometimes entering the telephone system programming
mode is required. No alteration of programming is performed. Only the Trunk
Group data is obtained for me to make my presentations.

The type of information presented to our customers is to disconnect circuits
not being used. Seventy-three per cent (73%) of all bills we audit contain
something that should not be there.

If you require any additional information, please call me on **.
Thank you for your attention in this matter. I have also enclosed some
marketing information to encourage the State Comptroller office to use our
services.

Sincerely,