Are disconnection or cancellation charges billed by a telecommunications company subject to Texas sales tax?

Subject

Connection/Disconnection/Cancellation Charge — Telecommunications

Plain-English summary

A taxpayer wrote to the Comptroller asking about the tax treatment of disconnection or cancellation charges billed in connection with telecommunications service. The Comptroller ruled that these charges are taxable.

The reasoning rests on the Tax Code 151.007 definition of "sales price" (also called "receipts"), which means the total amount for which a taxable item is sold, leased, or rented, valued in money -- without any deduction for the cost of materials, labor or service employed, interest, losses, or other expenses. Because of that broad definition, charges associated with the sale of a taxable service are taxed the same way the underlying service is taxed. Disconnection fees tied to telecommunications service have been taxable since 1985, which is when telecommunications service itself became a taxable service.

The letter also makes a narrower but useful point: how a company labels the charge -- "connection," "disconnection," or "cancellation" fee -- doesn't change the tax result. Terminology may make the issue harder to sort out, but it does not affect taxability.

What this means for you

Telecommunications providers

If you bill customers a fee for connecting, disconnecting, or cancelling telecommunications service, that fee is taxable in the same manner as the underlying telecommunications service itself. This has been the rule since telecommunications service became taxable in 1985. Renaming the charge does not change whether tax applies.

Accountants and tax professionals

When reviewing a telecommunications company's billing practices, treat connection, disconnection, and cancellation charges as part of the taxable "sales price" under Tax Code 151.007, not as a separately non-taxable fee. The Comptroller's position is that these amounts are swept into the total charge for the taxable service, without any deduction for cost components like labor or service employed.

Business owners evaluating a specific fact pattern

This letter is based on the facts as presented to the Comptroller. If your situation involves additional or different facts, the opinion may not apply the same way -- the letter itself says so.

Common questions

Q: Are disconnection or cancellation charges for telecommunications service taxable in Texas?
A: Yes. The Comptroller ruled that such charges are taxable in the same manner as the telecommunications service itself.

Q: Why are these charges taxable?
A: Because the Tax Code 151.007 definition of "sales price" or "receipts" covers the total amount charged for a taxable item or service, without a deduction for costs like materials, labor or service employed, interest, or losses. Charges associated with a taxable service fall within that definition.

Q: Since when have these charges been taxable?
A: Since 1985, when telecommunications service itself became a taxable service.

Q: Does it matter what the charge is called (e.g., "cancellation fee" vs. "disconnection fee")?
A: No. The letter states that the terminology used to describe the charge may complicate the issue but does not affect taxability.

Q: Could this answer change under different facts?
A: Yes. The letter says the opinion is rendered based on the facts presented, and the opinion may change if there are additional or different facts.

Citations and references

Statutes:

• Tax Code 151.007 (definition of "sales price" / "receipts")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609749L

Original ruling text

September 30, 1996

Dear ***:

Thank you for your recent letter regarding the tax treatment of
disconnection or cancellation charges.

The definition of "Sales Price" in Tax Code 151.007 states in part:

"sales price" or "receipts" means the total amount for which a taxable
item is sold, leased, or rented, valued in money, without a deduction
for the cost of:

(2) the materials used, labor or service employed, interest, losses,
or other expenses;

Accordingly, charges associated with the sale of tangible property and
services are taxable in the same manner as the property and services
themselves. Disconnection fees associated with telecommunications
services have been taxed since 1985 when the service became taxable.

The use of terminology to describe the charge may serve to complicate
the issue, but does not affect the taxability.

This opinion is rendered 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. 3-4680. The direct
line is 512/463-4680. You may also write to Tax Policy, Comptroller
of Public Accounts. My Internet address is [email protected].

Sincerely,

Al Van Allen
Tax Policy Division