If a cellular phone retailer charges a customer a 'deactivation' or 'lost commission' fee for canceling service early, is that fee taxable as part of the phone's sales price?

Plain-English summary

A cellular phone dealer wrote to the Comptroller asking about the taxability of a "deactivation fee." The dealer acted as an agent for a phone company: it earned an activation commission whenever a customer signed up for cellular service, and it used that commission to discount the retail price of the phone (in the dealer's example, a $500 phone was sold for $200). The dealer's sales contract let it bill the customer for the commission it lost if the customer deactivated service before the commission was fully earned — the customer could either return the phone or pay a $300 "deactivation" or "lost commission" fee, and the dealer used that money to repay the phone company for the lost commission.

The dealer already collected sales tax on the discounted $200 sale and asked whether the deactivation fee was also taxable. The Comptroller ruled that it is: the deactivation fee is part of the selling price of the phone, and the dealer must collect sales tax on this price increase passed on to the customer. The Comptroller noted this opinion was based on the facts presented and could change if the facts were different.

What this means for you

Cellular phone dealers and retailers

If you discount a phone's price in exchange for an activation commission, and your sales contract lets you recover that commission from the customer (via a "deactivation" or "lost commission" fee) when they cancel service early, treat that fee as an increase to the phone's sales price. Collect sales tax on it just as you would on the original sale price.

Accountants and tax professionals

This ruling illustrates the general Texas sales tax principle that additional amounts collected from a customer that relate to the price of taxable tangible personal property (here, the phone itself) become part of the taxable sales price, even if collected later and structured as a separate "fee." The letter does not cite a specific statute or rule — it applies the sales-price concept directly to the facts presented.

Common questions

Q: Why is the deactivation fee taxable if it isn't a fee for the phone itself?
A: The Comptroller characterized it as a price increase on the phone — the customer originally got the phone at a discount contingent on the dealer earning its commission, and the deactivation fee effectively restores that discount when the commission is lost. Because it adjusts the phone's sales price, it's taxed the same way the original sale was.

Q: Does the phone company (rather than the dealer) need to collect tax on this fee?
A: No. In this ruling, the phone company collects tax on the separate telecommunication service charges it bills directly to the customer. The deactivation fee here is charged by the dealer in connection with its retail sale of the phone.

Q: What if a customer just returns the phone instead of paying the fee?
A: The letter states the customer "may either return the phone or pay" the deactivation fee, but the ruling only addresses the taxability of the fee itself; it does not discuss the tax treatment of a returned phone.

Citations and references

No statutes or rules are cited in this 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/9302876L

Original ruling text

February 5, 1993

Dear **:

Thank you for your letter postmarked January 6, 1992, concerning the taxability
of cellular phone deactivation fees.

Your firm operates as an agent for PHONE COMPANY. As an agent, your firm
receives an activation charge (commission) when a customer signs up for
cellular phone service. The actual telecommunication service is provided by
PHONE COMPANY and they collect all fees and taxes on these services directly
from the customer. Your activation commission received allows your firm to
offer discounts on the customer's phone purchase.

In your example, the retail price of a $500 phone is reduced to $200 contingent
upon your firm earning an activation bonus. Your phone sales contract with the
customer allows you to bill the customer for commissions lost when the customer
deactivates the phone before your commission is fully earned. Your firm repays
PHONE COMPANY for these commissions. Your customer may either return the phone
or pay the $300 "deactivation" or "lost commission" fee.

Your firm collects tax on the $200 initial phone sale and you are questioning
the taxability of the deactivation fee.

The "deactivation fee" is a part of the selling price of the phone. Your firm
must collect sales tax on price increases passed on to the customers.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division