JEFFERSON CITY — The Missouri Supreme Court recently decided that Florida-based TracFone, which resells telecommunications services to Missouri customers, did not meet the state’s "in commerce" sales tax exemption.
The court came to the decision by examining the “true object” of transactions.
TracFone has no physical presence of a store, warehouse or tower in Missouri but contracts through other service providers to resell prepaid minutes or unlimited packages called “airtime” to access the network. Customers can use the network through handsets sold by TracFone, which must be used by the customer with a TracFone package and cannot be resold or used on another network. Payment and shipment of the handsets are all managed outside Missouri.
TracFone paid the Missouri sales tax on its transactions but then sought a partial refund in 2013, claiming it should receive a sales tax exemption since the sales were “in commerce” between states and only should be charged use tax. TracFone wanted the difference between the sales tax and the state’s use tax refunded.
Jim Kranjc of Ryan, one of the largest tax services firms in the United States, said that TracFone argued that its transactions should not be charged both the state and local tax rate. The Missouri state sales tax rate is about 4 percent, and local tax rates vary, with some over 4 percent.
“TracFone paid on these transactions on a total sales tax basis, which would have been probably over 8 percent … versus just trying to go on the use tax basis, which which is just the state rate at 4 percent,” Kranjc told the St. Louis Record. “The local portion of it just as much or higher than the state portion.”
The state Supreme Court affirmed a lower court’s ruling that examined the true object of the transactions were for access to local service using the towers and network in the state to Missouri residents. The sales tax exemption did not apply because the true object of the transactions did not cross state lines, the court said. The court also ruled that the sale of the handset were “incidental” to the service.
“What the court really had to determine here was what was the essence or the true object of the transactions, was it selling the handsets, was it selling the airtime, or was it truly selling just access to a telecomm network within the state of Missouri,” Kranjc said.
This ruling is significant for businesses because it clarifies that an out-of-state company with no physical presence can still be charged the full sales tax because of the true object of its transactions.
“Resellers that are reselling services or products need to review the contracts with their in-state or local company to see if it’s really a Missouri transaction or not because that will determine which rate of tax applies,” Kranjc said.
Kranjc said companies should carefully examine their business practices, their contracts and taxes in light of this new state Supreme Court ruling to ensure they're paying the correct taxes.