New York Court of Appeals Reverses Lower Courts in EchoStar Decision: Satellite Provider's Purchases Are Not Subject to Tax
Monday, January 7th, 2013
The New York Court of Appeals, the highest court in New York, recently ruled that a satellite television provider's purchases of equipment it provides to its customers are not subject to sales or use tax. The ruling could have a dramatic impact for satellite and cable television companies operating in New York.
The case, In the Matter of EchoStar Satellite Corporation v. Tax Appeals Tribunal of the State of New York, had its genesis in 2005 when the New York Department of Taxation and Finance (DTF) audited EchoStar. Between March 2000 and February 2004, EchoStar did not pay sales or use taxes on its purchases of equipment, such as receivers or switches, that EchoStar provided to its customers, which enabled them to receive EchoStar's satellite television services. Rather, EchoStar treated the equipment transactions as rentals and collected sales tax from its customers on the portion of the bill attributed to the equipment fee.
However, the DTF disagreed with EchoStar's approach. The DTF took the position that providing the equipment to the customers was incidental to providing satellite television service. New York only taxes sales of services that are specifically designated as taxable, and providing satellite television is not designated as a taxable service. Therefore, the DTF reasoned that the service, along with any incidental equipment provided with the service, is not taxable. Because the DTF determined that the equipment was incidental to a non-taxable service, the DTF concluded that EchoStar was not "selling" the equipment and should not collect sales tax on the equipment fee. Instead, the DTF determined that EchoStar should have paid sales tax when it purchased the equipment.
EchoStar challenged the DTF's audit determination, and an administrative law judge agreed with the DTF's analysis and upheld its determination. EchoStar then appealed to the Tax Appeals Tribunal (Tribunal), which also upheld the DTF's determination. The controversy moved into the judicial branch when EchoStar appealed the Tribunal decision in the Appellate Division of the New York judiciary. The Appellate Division confirmed the Tribunal decision, which, in turn, led EchoStar to appeal to the New York Court of Appeals.
The issue before the Court of Appeals was the same as in the lower court and during the administrative appeals: Is a satellite television provider's purchase of equipment that will subsequently be provided to a customer a purchase for resale?
New York does not tax purchases of tangible personal property that will be resold. And, because the definition of "sale" in New York includes "lease" and "rental," New York likewise does not tax purchases of items that will subsequently be rented. Therefore, if the transaction in which EchoStar provided its customers the equipment that allowed them to receive satellite television service fit within the definition of lease or rental, then that transaction is also a "sale," and EchoStar's purchase of that equipment would be a non-taxable purchase for resale. Thus, the question in this case ultimately turned on whether EchoStar leased the equipment to its customer.
The DTF contended that the equipment EchoStar furnished to its customers was incidental to providing satellite television service. So, the DTF argued that when EchoStar provided the equipment to its customers, EchoStar was not selling or leasing the equipment, and, therefore, EchoStar's purchase of the equipment could not be for "resale."
The Court of Appeals examined three factors to determine that EchoStar's agreements were leases. First, EchoStar structured its customer agreements as leases, separating the service component from the equipment component. Second, EchoStar charged its customers equipment fees that were directly proportional to the number of receivers provided. Third, EchoStar separately stated those equipment fees on their monthly invoices. After considering these facts, the Court stated that EchoStar's provision of equipment was far from incidental to their business model.
The question may still remain as to whether a company may pay sales tax on equipment it buys if it chooses to bill the equipment rental as a lump-sum with the service of providing satellite television. However, it is clear that when a satellite company chooses to rent equipment to customers and collect sales tax, the company's purchase of the equipment is a non-taxable purchase for resale. Finally, while the decision does not address cable television providers, the same reasoning should logically apply to a cable television provider's purchases of equipment that it will subsequently rent to its customers.
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