If I bundle a cellular phone's price with the cost of service, does that affect my use tax liability on the phone?

Subject

Cellular Phone — Sales Price Bundled With Cost Of Service By Service Provider

Plain-English Summary

A cellular phone service provider gave phones to its customers, bundling the price of the phone together with the cost of cellular service. The provider asked the Comptroller whether the price it placed on the phone for the customer would affect its own use tax liability on that phone.

The Comptroller answered "no." Because the provider hands the phone to the customer as part of its taxable telecommunications service, the provider may purchase the phone for resale — tax-free, using a resale certificate — no matter what price (including a nominal or bundled-in price) it assigns to the phone when billing the customer.

What This Means For You

Cellular service providers and similar bundlers

If you give away or "sell" hardware (like a phone) to customers as part of a taxable service you provide, you can generally buy that hardware for resale under a resale certificate. The price you charge the customer for the hardware — even if it's bundled into or subsumed by the service fee — does not change your right to buy the item tax-free for resale, and it does not create use tax exposure on the item itself.

Accountants and tax professionals

This letter is a narrow, fact-specific application of Texas's resale rules to bundled telecommunications hardware pricing. It confirms that pricing mechanics on the customer-facing invoice (e.g., a nominal or bundled phone charge) do not control the seller's own use tax analysis — the controlling fact is that the phone is transferred to the customer as part of a taxable sale of service.

Q&A

Q: Does bundling a cellular phone's price into the service fee change what use tax the provider owes on the phone?
A: No. The provider can still buy the phone for resale regardless of the price it puts on the phone for the customer.

Q: Why doesn't the provider owe use tax on the phone it gives to the customer?
A: Because the phone is provided to the customer as part of the taxable cellular service being sold, the provider's purchase of the phone qualifies for the resale exemption rather than being a taxable use by the provider.

Citations

No statutes, rules, or other authorities were 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/9408694L

Original ruling text

August 16, 1994

Dear ** :

Earlier today, we discussed the taxability of cellular phones provided to
customers of your company where the price of the phone is bundled with the cost
of service. You wanted to know if the price of the phone to the customer would
affect your use tax liability.

The answer is "no." Because the cellular phone service provider is providing a
cellular phone to its customer as part of the taxable service, it may buy the
phone for resale regardless of the price it places on the phone to the
customer.

I hope this satisfactorily answers your question. If you need additional
information, please write me at 111 E. 17th Street, Austin, Texas 78774, or
call me at 1-800-531-5441, extension 3-4004.

Sincerely,

Wade Anderson