Missouri Supreme Court Rules that Out-of-State Company was Selling Telecommunications Services
TracFone could not take Missouri’s “in commerce” exemption because the object of the sale was telecommunications services in Missouri, not phones from Florida.
By Tina Chunn, SALT senior manager
The sales and use tax treatment of telecommunications is a very complex issue, due to the many different charges levied, and often varies among the states. Additionally, companies that are strictly resellers of telecommunications services and not direct providers of these services may find differing application of the sales and use tax laws for their purposes. It is important in these instances to identify the true object of what is sold to verify that sales and use tax is properly applied. The Missouri Supreme Court recently ruled that an out-of-state company was providing telecommunications services to Missouri customers, and therefore was subject to Missouri sales tax. 
TracFone Wireless, Inc. (“TracFone”) provides Missouri customers access to a wireless telecommunications network using a “virtual network” created by contracting with several wireless providers for access to their network services. TracFone sells this access to its customers based on a set number of minutes or a set amount of time, referred to as “airtime.” This service can only be accessed on handsets sold by TracFone, and customers are prohibited from selling the phones or using them to access another provider’s network. The access to the network occurs largely in Missouri on Missouri cell towers, and the phones are activated using the customer’s zip codes in Missouri. All orders are taken from and all payments are made to TracFone’s Florida office. All handsets are sent to Missouri customers from locations outside the state.
TracFone sought a refund for the difference between the sales tax it paid on handsets and “airtime” and the use tax that it should have paid instead. Specifically, TracFone argued that its sales of handsets and “airtime” are made from outside of Missouri, and thus they qualified for a Missouri sales tax exemption, called the “in commerce” exemption, which applies to sales that occur “in commerce” between Missouri and another state.
The Court disagreed with TracFone’s assertions, concluding instead that the true object of the sales was the sale of access to telecommunications services, and any sales of handsets and “airtime” were incidental to the sale of telecommunications services. Further, the “in commerce” exemption would not apply as TracFone was selling local access to telecommunications services in Missouri, and therefore, was making retail sales in Missouri. Although Missouri customers could access telecommunications outside Missouri, the Court determined that the ability to use the service in another location after a transaction is completed does not affect whether it qualifies for the “in commerce” exemption. Additionally, TracFone did not provide any evidence to support that the predominant use of the service was outside Missouri.
Variations in services and products sold can often make it difficult to determine the applicable sales and use taxes as well as any valid exemptions, particularly with regard to the complex transactions and issues that make up the telecommunications industry. Aprio’s SALT team is experienced at reviewing your transactions and analyzing the sales and use tax rules and how they should be applied to your business so that you minimize any potential risks of sales and use tax exposure. We constantly strive to keep our clients advised of important issues and developments in state and local taxes in order to help them address their specific tax situations. We will continue to monitor these and other significant tax developments, and we will include any updates in future issues of the Aprio SALT Newsletter.
This article was featured in the March 2017 SALT Newsletter. To view the entire newsletter, click here.
 TracFone Wireless, Inc. v. Director of Revenue, Missouri Supreme Court, No. SC95785 (Feb. 14, 2017).
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