Texas Rules That Reseller of Voice and Data Services Is Not Selling an Intangible Asset for Apportionment Purposes
March 6, 2018
Ruling highlights the importance of properly characterizing revenue streams for apportionment purposes, since different revenue streams get sourced differently
By Jess Johannesen, SALT manager
In an article from our January 2018 SALT Newsletter, we addressed a Texas private letter ruling that provided guidance when sourcing wireless voice and data services for sales and use tax purposes. Shortly thereafter, Texas issued another private letter ruling providing guidance on sourcing similar services for Texas Franchise Tax apportionment purposes.
The taxpayer does not own or operate a local exchange network in Texas, but the taxpayer contracts with mobile telecommunication carriers to buy and resell voice and data services using the carriers’ network infrastructure. The taxpayer then resells these mobile voice and data services to Company A, a mobile virtual network operator domiciled in Pennsylvania. Company A then resells the services to its own customers under its own branding. The mobile telecommunication carriers invoice the taxpayer, and these invoices detail the usage information related to Company A’s customers. When the taxpayer receives such invoices from the carriers, the taxpayer shares the usage detail information with Company A. Company A then uses the information to bill its customers. However, the taxpayer does not process Company A’s customer information or provide billing services.
The taxpayer asked whether the wireless voice and data services sold to Company A would be treated as the sale of an intangible asset sourced to Company A’s location (i.e., outside Texas). However, the state ruled that even though the taxpayer does not have its own telecommunications network, the taxpayer is reselling the telecommunication services to Company A. Since the taxpayer’s receipts are associated with the resale of telecommunication services, the taxpayer is selling both an internet access service (with regard to the data services) and a telecommunications service (with regard to the voice services). For internet access services, the taxpayer must apportion based on the rule for internet access fees, which are considered Texas receipts if the customer accesses the internet in Texas. For telecommunications services, revenues are sourced to Texas if the service is performed in Texas.
With regard to the apportionment rule for telecommunications services, the ruling notes that the rule refer to, “telephone companies,” and that the taxpayer itself is not a telephone company. However, the state concluded that since the taxpayer sells the same kind of telecommunication services, the taxpayer would be subject to the same apportionment rules as telephone companies. Further, Texas stated that proposed amendments would be issued to reflect that the telephone company apportionment rules should be applied to all entities that sell telecommunication services, such as the taxpayer.
This ruling highlights the importance of properly characterizing revenue streams for apportionment purposes, since different revenue streams get sourced differently. The taxpayer contended that it was reselling an intangible asset, the revenue from which would have been sourced outside Texas. The state ruled that the taxpayer was selling internet access services and telecommunications services, potentially leading to a different sourcing result. Aprio’s SALT team has experience assisting businesses with how state apportionment rules likely apply to their operations and we can help determine if you may be able to lower your apportionment percentage, and therefore, your state income tax liability. We constantly monitor these and other important state and local tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the February 2018 SALT Newsletter.
 Texas Private Letter Ruling No. 201711016L, 11/27/2017.
 Tex. Admin. Code §3.591(e)(12).
 Tex. Admin. Code §3.591(e)(30).
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.