If a cellular phone company gives away a free phone as part of a promotion tied to a customer's donation to a charity, does the company owe use tax on the phone?

Subject

Cellular Phone Given Away For A Charity Donation — Seller Still Owes Use Tax On The Phone

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1275C08

Plain-English Summary

A cellular phone company described a proposed promotion to the Comptroller: a customer donates $29 in exchange for a gift certificate good for a free cellular phone, and then the customer brings that gift certificate to one of the company's locations and receives the free phone. The company asked whether, if it is providing the free phone "on behalf of" a non-profit (charitable) organization, it is still required to pay use tax on its cost of the phone.

The Comptroller's response was direct: yes, if a cellular phone seller gives a person a cellular phone because that person made a donation to a charity, the seller must pay tax on the acquisition cost of the phone. The letter gives two reasons the giveaway does not escape tax. First, the phone is not given to an exempt entity — it goes to the individual customer, not to the charitable organization itself. Second, the phone is not provided as an integral part of a taxable service, so there's no service-bundling theory that would let the phone pass through tax-free as part of a larger taxable transaction.

As with other STAR letters, the response notes it is rendered based on the facts submitted, and that other facts, though similar, may yield different results.

What This Means For You

If you run charity-tied giveaway promotions: Framing a free-item giveaway as being done "on behalf of" a charity does not, by itself, exempt the item from tax. This letter treats the giveaway as a taxable transaction from the seller's perspective because the item is handed to the individual donor, not to the exempt organization.

Budget for use tax on donated-cost items: If your business acquires goods (like cellular phones) that it later gives away in connection with a promotion involving a charitable donation, expect to owe use tax on your acquisition cost of those goods, per this letter's reasoning.

"Integral part of a taxable service" is a distinct question: The letter notes the phone here was not provided as an integral part of a taxable service. If your fact pattern is different — for example, if the phone were bundled into a taxable service in a way that made it truly integral to that service — the analysis could differ, but that is not the situation addressed in this letter.

Q&A

Q: Does giving a free cellular phone "on behalf of" a charity make the phone exempt from tax?
A: No. The letter states that even when a company frames the giveaway as being on behalf of a non-profit, the seller must still pay tax on the acquisition cost of the phone.

Q: Why doesn't the charitable connection exempt the phone from tax?
A: Per the letter, the phone is not given to an exempt entity (it goes to the individual customer who donated), and it is not provided as an integral part of a taxable service.

Q: Who owes the tax in this scenario — the customer or the seller?
A: The letter states the seller (the cellular phone company) must pay tax on its acquisition cost of the phone.

Q: Does this ruling apply regardless of the specific facts of any other giveaway arrangement?
A: No. The letter states the opinion is rendered based on the facts submitted, and that other facts, though similar, may yield different results.

Original ruling text

October 25, 1993

Dear **:

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

I am detailing the specifics relating to the possibility of our
company donating cellular phones on behalf of ** . The
transactions would be as follows:

A ** customer donates $29 in exchange for a gift
certificate for a free cellular phone from our company.

The customer brings the gift certificate to one of our locations
and receives a free cellular phone.

If we are providing a free cellular phone on behalf of a non-profit
(i.e. charitable) organization, are we still required to pay use
tax on our cost of the phone?

Response: Yes, if a cellular phone seller gives a person a cellular
phone because they made a donation to a charity, the seller must
pay tax on the acquisition cost of the phone. The phone is not given
to an exempt entity, and it is not provided as an integral part of
a taxable service.

This opinion is rendered based on the facts you submitted. 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 (ext.
34680). 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

NOTE: Previous Accession Number 9311141L.2 and/or 9311141L