A company leases a private telephone line to connect to its remote construction sites. The line is billed on a per-call basis, and only 12% of the calls originate in Texas (the rest originate in California, New Mexico, and New Jersey). Is any portion of the private line charge subject to Texas sales tax?

Plain-English summary

A taxpayer in Texas leases a private telephone line to communicate with its remote construction sites. The line is billed on a per-call basis, and the bill shows only where calls originate: about 12% of usage originates in Texas, with the remaining 88% originating in California, New Mexico, and New Jersey. The line is for the company's own internal use, not for resale. The taxpayer asked whether any portion of the line charge is subject to Texas sales tax.

The Comptroller answered that long-distance telecommunications originating in Texas and billed to a Texas telephone number or billing/service address are subject to Texas sales tax — so the charges for the calls that originate in Texas (the 12% portion, on these facts) are taxable.

The letter also explains how true private line service is defined and taxed under Rule 3.344. A "private line" is a telephone circuit dedicated for use between specific locations (Rule 3.344(a)(3)). Because private lines are usually switchless circuits, sellers often cannot tell exactly where individual communications originate — Rule 3.344(b)(10) addresses this by taxing, for private line services: (1) the channel termination charge at each channel termination point within Texas, (2) the total channel mileage charge between channel termination points or relay points within Texas, and (3) an apportioned share of any interoffice channel mileage charge that crosses the state border, based on the ratio of miles between the last Texas channel termination point and the state border versus the total mileage in that route (or another Comptroller-approved method).

What this means for you

Businesses leasing private lines for internal communications

If you lease a private line to connect remote sites (like the taxpayer's construction sites here) and are billed on a per-call basis showing call origination, the calls that originate in Texas are subject to Texas sales tax, even if most of your traffic originates out of state. Track origination data carefully, since it directly determines your taxable base.

Telecommunications providers billing private line services

If you bill private line service by channel rather than per call, Rule 3.344(b)(10) gives you a specific apportionment formula for interoffice channel mileage that crosses the Texas border: the ratio of (miles between the last Texas channel termination point and the state border) to (total miles between that termination point and the next termination point in the route). Other apportionment methods require advance written approval from the Comptroller.

Accountants and tax professionals

This letter illustrates that "private line" has a specific regulatory definition (Rule 3.344(a)(3): a dedicated circuit between specific locations) and that its sales tax treatment depends on how the service is billed — per-call origination versus channel-based charges each have their own taxable-receipts rules under Rule 3.344(b)(10).

Common questions

Q: Is a private line used only for a company's internal communications (not resale) exempt from Texas sales tax?
A: No. The letter states that long-distance telecommunications originating in Texas and billed to a Texas telephone number or billing/service address are subject to sales tax, regardless of whether the line is used internally rather than resold.

Q: If most of the calls on a private line originate outside Texas, does that reduce the Texas tax?
A: Yes, in effect — only the charges for calls originating in Texas are subject to Texas sales tax under the facts described (12% Texas-origin usage in this letter).

Q: How does Texas define a "private line" for sales tax purposes?
A: Rule 3.344(a)(3) defines a private line as a telephone circuit dedicated for use between specific locations.

Q: For channel-based (not per-call) private line billing, what exactly is taxable?
A: Under Rule 3.344(b)(10), taxable receipts include the channel termination charge at each Texas channel termination point, total channel mileage charges between Texas termination/relay points, and an apportioned share of interoffice channel mileage crossing the state border.

Q: Can another business rely on this letter for its own private line arrangement?
A: No. The letter states the opinion is based on the facts presented, and other facts, though similar, may yield different results. STAR letters bind only the taxpayer to whom they were issued.

Citations and references

• 34 Tex. Admin. Code § 3.344 — "Telecommunications Services," including the definition of "private line" at 3.344(a)(3) and the taxable-receipts rules for private line services at 3.344(b)(10).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1184F12

Original ruling text

July 7, 1992

Dear **:

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

Facts: ** of *, TX leases a private line from
*. The purpose of leasing this line is to enable **** to
communicate from its remote construction sites.

The billing for this line is on a per call basis. The bill from **
shows origination of calls only. The usage originated in Texas is usually 12%.
The remaining 88% are calls originating in California, New Mexico and New
Jersey. The line is for internal use only and, not for resale.

Question: Is any portion of the line charge subject to Texas Sales Tax?

Response: Long-distance telecommunications that originate in Texas and are
billed to a telephone number or billing or service address in Texas are subject
to sales tax. Since ** clearly originates calls from various service
addresses in Texas, the charge for those calls is subject to sales tax.

A private line is defined in Rule 3.344(a) (3) Private line - A telephone
circuit dedicated for use between specific locations.

Since these are usually switch less circuits, it is normally not possible for
the sellers of true private line telecommunications services to tell where
specific communications originate. This difficulty is dealt with in Subsection
(b)(10) of Rule 3.344.

(b) Services taxable. Sales tax is due on a charge for the following:

(10) private line services, including charges for related equipment. Taxable
receipts include the channel termination charge imposed at each channel
termination point within this state, the total channel mileage charges imposed
between channel termination points or relay points within this state, and an
apportionment of the interoffice channel mileage charge that crosses the state
border. An apportionment on the basis of the ratio of the miles between the
last channel termination point in Texas and the state border to the total miles
between that channel termination point and the next channel termination point
in the route will be accepted. Other methods may be used if first approved in
writing by the Comptroller.

I hope this information is helpful. I am enclosing the complete text of Rule
3.344 for your reference.

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.

Sincerely,

Al Van Allen
Tax Administration Division