Connecticut State Department of Revenue Services

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PS 96(5)

Promotional Cellular Telephones

PURPOSE: The purpose of this Policy Statement is to describe the proper tax treatment of transactions involving the transfer to a new cellular telephone service subscriber of a cellular telephone when no charge is made to the customer or the charge is lower than actual cost.

EFFECTIVE DATE: Effective for sales made on or after July 1, 1996.

TRANSFERS BY CELLULAR TELEPHONE CARRIERS OR INDEPENDENT RETAILERS TO SUBSCRIBERS: Some cellular telephone carriers transfer cellular telephone equipment to subscribers at no charge or for a charge that is below its cost when the subscribers agree to purchase cellular telephone services from those carriers for a predetermined minimum period (e.g., one or two years).

Cellular telephone carriers may also market their services through independent retailers. The agreement between the cellular telephone carrier and the retailer provides that, when a retailer signs up a subscriber for the carrier's service, the carrier will make a payment or multiple payments to the retailer.

Sales and use taxes are imposed by Conn. Gen. Stat. §12-408(1) upon a retailer's gross receipts from the sale of tangible personal property for a consideration. It is irrelevant to the imposition of the tax whether the consideration is more than, less than or equal to the cost that was paid by the retailer to purchase the tangible personal property. A retailer may purchase without tax tangible personal property to be resold, without regard to the amount such retailer intends to charge for the property, as long as the retailer makes no use of the property "other than retention, demonstration or display while holding it for sale in the regular course of business" (Conn. Gen. Stat. §§12-410(4) and 12-411(12)). Thus, as long as the cellular telephone carrier or independent retailer will charge some amount to the subscriber for the cellular telephone equipment, the carrier or retailer may purchase the equipment on resale under Conn. Gen. Stat. §§12-410 and 12-411. When the cellular telephone carrier or independent retailer sells cellular telephone equipment to a subscriber, it must charge tax upon its gross receipts from such sale.

When a cellular telephone carrier or independent retailer which is registered as a Connecticut retailer transfers cellular telephone equipment at no charge to a subscriber, the carrier or retailer is using the property for promotional purposes; therefore the carrier or retailer may not purchase the equipment on resale (see Conn. Gen. Stat. §§12-410(4) and 12-411(12); see also Bulletin 24, p. 2). Instead, use tax is due from the carrier or retailer based upon the purchase price paid by the carrier or retailer for the equipment.

The commissions paid to retailers by cellular telephone carriers when new subscribers sign subscription contracts are not consideration for the sale of tangible personal property and are not taxable.

BREACH OF CONTRACT BY SUBSCRIBER: The contract between the cellular telephone carrier and the subscriber may provide that, if the subscriber later breaches the contract by canceling the contract before the set minimum period has expired, the subscriber will pay a penalty to the carrier. A variation of such a contract provides that, if the subscriber later breaches the contract with the carrier by canceling the contract before the set minimum period has expired, the customer will return the cellular telephone equipment plus pay a penalty to the carrier.

Similarly, in cases where a breaching subscriber receives cellular telephone equipment from an independent retailer, the agreement between the retailer and the subscriber may provide that the subscriber will pay a penalty to the retailer, with the retailer either retaining a deposit paid by the subscriber upon entering into the contract or charging the amount on the subscriber's credit card pursuant to a payment authorization signed by the subscriber at the time of sale. The agreement may also require the breaching subscriber to forfeit the cellular equipment to the retailer.

Where, subsequent to a transfer of cellular telephone equipment by a cellular telephone carrier or an independent retailer which is registered as a Connecticut retailer to a subscriber at no charge, or for a charge that is below the carrier's or retailer's cost the subscriber is required to pay a previously agreed upon "penalty" for canceling the cellular telephone service contract but is allowed to keep the equipment, such penalty is taxable under Conn. Gen. Stat. §12-407(2)(a), as of the time it is imposed, as consideration for the purchase of the equipment by the subscriber.

Where a subscriber is required to forfeit the cellular telephone equipment and to pay a previously agreed upon penalty to a cellular telephone carrier or retailer which is registered as a Connecticut retailer, the penalty is compensation to the carrier or retailer for the temporary use of the carrier's or retailer's equipment, and therefore is taxable, as of the time it is imposed, as consideration for the lease of tangible personal property under Conn. Gen. Stat. §12-407(2)(j).

Where a breaching subscriber who received cellular telephone equipment at no charge from a carrier or a retailer is required to pay a previously agreed upon penalty for breaching the contract, no refund or credit of the use tax paid by the carrier or retailer at the time the equipment was transferred at no charge to the subscriber may be claimed by the carrier or retailer. Such payment of use tax was not erroneous in that the use of the equipment at the time it was transferred to the subscriber by the carrier or retailer is a separate and distinct taxable event from the sale of the equipment which occurs when the subscriber pays the previously agreed upon penalty for breaching the subscription contract.

EFFECT OF THIS DOCUMENT: A Policy Statement is a document that explains in depth a current Department policy or practice affecting the Connecticut tax liability of taxpayers. A Policy Statement indicates the Department's informal interpretation of Connecticut tax law and may be referred to for general guidance by taxpayers or tax practitioners.

EFFECT ON OTHER DOCUMENTS: None affected.  

PS 96(5)
Sales and use taxes
Issued: 7/2/96