Sales Tax State Activity Update - February 2009

New York Offers the 411 on Cell Phone Application Tax

A mobile telecommunications service provider inquired whether the sale of “wallpaper”, games and “music and sounds” for sale to its customers was subject to sales tax. The company, a facilities-based carrier, used its own facilities to provide the telecommunication service to its customers.

Customers had the option to purchase (download) wallpaper, games or music and sounds for a separate fee.

• Wallpaper is a picture that appears on the screen of a mobile phone. Customers could download wallpaper to his or her phone for a separate charge for each wallpaper scene.
• Games included arcade games, puzzles, sports games and casino games. A separate charge was imposed for each game downloaded.
• Music and sounds consisted of “ring tones” that alerted the customer to an incoming call and “ringback tones” which were music, comedy clips, or celebrity messages that callers hear instead of the standard ringing tone. There was a separate charge for each downloaded ring tone. There was also a separately stated recurring monthly charge for each downloaded ringback tone.

Each of the charges appeared separately on the customer’s bill for mobile telecommunications service.

The Department ruled that the wallpaper, ring tones, and ringback tones were digital audio and visual files and were not considered to be tangible personal property or enumerated services for sales tax purposes. However, the games were considered to be prewritten computer software. The games were software because they included coded instructions that caused the equipment (in this case the mobile phone) to perform a function. Prewritten computer software is included in the definition of tangible personal property, regardless of the way it is conveyed to the purchaser.

The wallpaper, ring tones and ringback tones were not subject to sales tax. As long as the charges were separately stated and reasonable in relation to the overall charge for service, the provider may exclude the receipts from those services from the sales tax on mobile telecommunications service. However, the receipts from the sale of games were subject to sales tax and must be sourced to the taxing jurisdiction where the customer’s place of primary use was located. If the customer’s place of primary use was located in New York, those receipts were subject to New York State and local sales tax.

(TSB-A-08(63)S, New York State Department of Taxation and Finance, Office of counsel Advisory Opinion Unit, 11/24/08)

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