Can a cellular telephone company buy 'positive validation' (fraud-prevention/roamer-validation) services tax-free with a resale certificate, on the theory that the cost is passed through to customers on their cellular bill?

Plain-English summary

A cellular telephone company asked the Comptroller whether it could buy "positive validation" services tax-free for resale. Positive validation is a fraud-prevention service (referred to in the attached exhibits as a roaming-fraud validation system): when a "roamer" tries to use a cellular network, the service checks whether that roamer's number is authorized with its home ("billing") carrier, and alerts the network if it isn't, to stop fraudulent calls before they're completed.

The cellular company bought this validation service from another company ("Company A") and paid sales tax on that purchase. It then billed its own cellular customers a combined service charge that included the validation cost, without breaking that cost out as its own line item, and collected sales tax from customers on the total combined charge.

The cellular company asked two related questions:

1. Since it was already collecting sales tax from its end-customers on the total charge (which included the validation cost), could it instead give Company A a resale certificate and buy the validation service tax-free, on the theory that the cost was being "resold" to its customers?
2. Did it matter that the validation charge was not separately itemized on the customer's bill?

The Comptroller's answer: the positive validation service is not an integral part of the cellular service provided to customers, so it may not be purchased tax-free for resale. Whether or not the charge was separately stated on the customer's bill was not a relevant consideration either way. The Comptroller noted the opinion was based on the specific facts submitted, and that other, similar facts could yield a different result.

What this means for you

Cellular carriers and telecom resellers

You cannot assume that every cost you pass through to customers as part of a bundled service charge qualifies as a "sale for resale" of that specific input. The Comptroller looks at whether the purchased service is itself an integral part of the taxable service you're selling — here, a back-office fraud/validation service used to protect the network was treated as a cost of doing business, not as a resold component of the cellular service itself.

Businesses that bundle third-party costs into a single customer charge

Separately itemizing (or not itemizing) a pass-through cost on your customer invoice does not, by itself, determine whether you can buy that underlying service or item tax-free for resale. The billing presentation was expressly not a factor in this ruling.

Anyone buying fraud-prevention, validation, or similar "behind the scenes" services

If the service is used internally to operate or protect your business (rather than being a discrete item or service you're reselling as such to the end customer), expect the Comptroller to treat your purchase of it as a taxable purchase, not a purchase for resale.

Common questions

Q: Can a cellular company buy fraud-prevention/validation services tax-free with a resale certificate if it later collects sales tax from customers on a bundled charge that includes that cost?
A: No, according to this letter. The Comptroller found the validation service was not an integral part of the cellular service sold to customers, so it could not be purchased for resale.

Q: Does it matter whether the validation charge is separately itemized on the customer's bill?
A: No. The letter specifically states that whether the charge was or was not separated on the customer's bill was not a consideration in the analysis.

Q: Can I rely on this letter for my own business?
A: No. This opinion was rendered based on the specific facts submitted by the requester, and the Comptroller noted that other facts, though similar, may yield different results. Letters on STAR generally may only be relied upon by the taxpayer to whom they were issued.

Citations and references

No Texas statutes or Comptroller rules are cited by number in this letter. The ruling turns on the Comptroller's general sale-for-resale analysis (whether a purchased service is an "integral part" of the taxable service resold to customers) rather than on a specific rule or statute quoted in the text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9601913L

Original ruling text

January 16, 1996

Dear *****:

Thank you for your follow-up letter regarding the tax treatment of "positive
validation charges" purchased by cellular telephone companies. Your letter of
June 16, 1995 asked if this is a resaleable item and if so is it necessary to
separately identify such charges to individual customers.

As with your earlier letter, I have discussed your situation and additional
facts with the sales tax section of Tax Policy Division. I also discussed it
with senior agency staff. Our opinion is that the positive validation service
is not integral to the provision of cellular service and so may not be
purchased for tax free for resale. The fact that charges were or were not
separated on the customers bill was not a consideration.

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

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct line is
512/463-4680. My Internet address is [email protected]. You may
also write to Tax Administration, Comptroller of Public Accounts.

Sincerely,

Al Van Allen
Tax Administration Division

December 20, 1995

Mr. Al Van Allen
Comptroller of Public Accounts
Tax Administration Division
State of Texas
Austin, TX 78774

Dear Mr. Van Allen:

Attached is a copy of the original question presented in our letter to you dated
June 16, 1995, Exhibit A. In that letter we requested guidance on the cellular
company's tax responsibilities as they related to ***** (COMPANY A).
Exhibits B and C relate to the cellular company's agreement with COMPANY A.

Please contact me if additional information is required.

Sincerely,

EXHIBIT A

June 16, 1995

Comptroller of Public Accounts
Sales Tax Division - Tax Policy
Capital Station
Austin, TX 78774

Gentlemen:

Please consider the following fact situation and respond to the questions as to
the appropriate treatment for sales tax purposes. Any additional information or
reference to authority for your response will be appreciated.

Situation:
A cellular telephone company pays COMPANY A for various monthly "positive
validation service charges." These charges are subject to sales tax. The
cellular company includes the COMPANY A charges on its statement to the cellular
customers combined with other service charges that have nothing to do with
COMPANY A. Sales tax to the cellular customer is computed on the total service
charge which includes the COMPANY A charge. The COMPANY A charge is not
separately stated on the cellular bill

Questions:

1. May the cellular company issue a resale certificate to COMPANY A, since the
   sales tax on the COMPANY A charge is being collected from the end user, is the
   cellular customer?

2. Does it make any difference that the final billing to the cellular customer
   does not separately state the COMPANY A charge, since tax is collected on the
   total of all charges?

Comments:
COMPANY A has advised the cellular company that it can accept a resale
certificate if the cellular company provides line item invoicing of COMPANY
A charges to the cellular customers. We don't understand why a separate line
item would be required since tax is computed on total charges including
COMPANY A. If a separate line item is needed it would require programming
changes to the cellular companys billing s system that would not result in
any change in sales tax collection.

Please respond as soon as possible. The cellular company tries diligently to
comply with all sales tax law and would like to avoid the additional cost of
this change which seems to be of no benefit.

Sincerely,

EXHIBIT B

7.1 Assurance Not To Export: Notwithstanding any other provision of this
Agreement, Member will not export, directly or indirectly, any U.S.
source technical data acquired from COMPANY A or any of its affiliates, or
any products utilizing any such data without first obtaining the written
consent to do sofrom the Department of Commerce, or other agency of the
United States Government, when required by an applicable statute or
regulation and from COMPANY A. COMPANY A shall have the right to suspend
performance of any of its obligations under this Agreement, without any
prior notice being requried, and without indemnification whatsoever, if
Member fails to so notify COMPANY A.

ARTICLE VIII. TAXES AND DUTIES

8.0 Member shall promptly pay to COMPANY A an amount equal to any excise,
use, value added, privilege, revenue, or sales tax, or any other tax
(except income and franchise taxes), assessment, or any duties imposed
by or under authority of any federal, state, provincial, or local law,
and to be paid by COMPANY A with respect to the goods and services
furnished under this Agreement or any portion or modification hereto
or any Addenda hereto.

8.1 Local taxes payable by COMPANY A in connection with the payment of
Services under this Agreement which Member has a legal obligation to
withhold shall be withheld and timely paid by Member for the account
of COMPANY A. All taxes so paid by Member for the account of COMPANY A
shall be accounted to COMPANY A in a written statement by the thirtieth
day following the close of the calendar quarter in which paid. Such
statement shall be accompanied by the official governmental receipt or
receits in favor of COMPANY A, or bank transfer document, indicating
the particular payment in respect to which the tax payment was made.

ARTICLE IX. WARRANTY

9.0 COMPANY A warrants that it will provide the Products and Service
described in this Agreement with due care and in a workmanlike
manner.

9.1 EXCEPT FOR THE EXPRESS WARRANTY SET FORTH HEREINABOVE,
COMPANY A MAKES NO OTHER REPRESENTATIONS OR WARRANTIES.

EXHIBIT C

2.0 ** (SERVICE )

** (SERVICE ) is a Service which will provide the Member, in
its role as Originating Carrier, with the ability to validate the
billing status of a Roamer, provided that Roamer's Billing Carrier is
an ACCESS member particpating in SERVICE , or otherwise participates in
a validation service with which COMPANY A has a ** Agreement.
SERVICE validates cellular traffic to reduce fraudulent, unauthorized
Roamer access to a Member's cellular network. SERVICE automatically
broadcasts a negative alert to Member when informed that an
unauthorized Roamer is attempting to use the network; that is, a Roamer
whose cellular telephone number corresponds to a SERVICE member's or
**** member's number will be validated to determine whether
or not such Roamer's number is authorized on the system f the Billing
Carrier. If it is verified that such Roamer's number is not authorized
in the Billing Carrier's system, both the Billing Carrier and Originating
Carrier will be so modified. The goal is to prevent the fraudulent user
from completing subsequent calls.

2.1 Additional Features. Additionally, Member may select the Fraud
Serial Number feature to automatically add and delete electronic
serial numbers in Member's switch negative file(s).

2.2 Availability. SERVICE will normally be available seven (7) days a
week, twenty-four (24) hours a day for data collection, excluding
any scheduled upgrades or maintenance to the SERVICE system and
COMPANY A's network. Member will be provided advanced notification of
any scheduled activity mentioned above. SERVICE processing and ONLINE
access will be available seven (7) days a week, except for scheduled
upgrades and maintenance. The number of hours per day may vary;
however, SERVICE processing and ONLINE are normally available to
Member between 7 a.m. and 12 a.m. EST.