Ryan & Company’s Dispute Resolution Group (DRG) recently obtained a decision that a taxpayer who uploaded computer software onto wireless handsets was engaged in manufacturing wireless telephones for sale and that the computers and peripheral equipment used by the taxpayer to upload the software was exempt manufacturing equipment.
The taxpayer receives wireless handsets from manufacturers such as LG, Motorola, Nokia, and Samsung. Upon receipt, the wireless handsets are capable of making 9-1-1 emergency phone calls, but otherwise cannot be used to send or receive calls, text messages, or voice mails. The taxpayer uploads the wireless handsets with network-specific software, which adds an operating frequency, initial settings, network information, roaming lists, menus, home market area, and a Number Assignment Module (NAM). The taxpayer then packages and ships the wireless handsets to its customers or customers’ designees. After uploading the network-specific software, the wireless handsets are marketed, sold, and used as wireless phones.
The agency argued that the wireless handsets were not changed by uploading the network-specific software, and that the taxpayer was merely engaged in a non-taxable service, the installation of computer software. The agency also argued that the network-specific software was not a component part of the wireless handsets, and therefore, the taxpayer could not be considered a manufacturer.
The DRG argued that the taxpayer was engaged in two forms of manufacturing: processing and fabricating. The taxpayer processed the wireless handsets because it changed 9-1-1-only devices into fully functioning wireless phones. Moreover, the taxpayer fabricated the wireless handsets because it added network-specific software as a component to make the wireless handsets work in a new and different manner. The Administrative Law Judge agreed with the DRG’s position and held that the taxpayer was engaged in both processing and fabricating wireless phones. The Comptroller adopted the judge’s proposed decision that the taxpayer’s computers, peripheral equipment, wrapping and packaging equipment, and wrapping and packaging materials were exempt from sales tax.