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Missouri Court Rules Out-of-State Telecom Company Does Not Qualify for “In Commerce” Exemption

Tax Development Feb 23, 2017

Missouri Sales and Use Tax: Missouri Supreme Court Rules Out-of-State Telecommunications Company Does Not Qualify for “In Commerce” Exemption

The Missouri Supreme Court recently ruled that an out-of-state company reselling telecommunications services to Missouri customers did not meet the qualifications for the “in commerce” sales tax exemption pursuant to § 144.030.1.RSMo (TracFone Wireless, Inc. v. Director of Revenue, Missouri Supreme Court, No. SC95785, February 14, 2017). TracFone Wireless, Inc. (“TracFone”) has no physical presence in Missouri via cell towers, warehouses, or any other facilities.

TracFone explained that it operated a “virtual network” by contracting with several wireless providers to purchase access to its network. Then, it resells the access to end users consisting of a set number of minutes of usage or “unlimited” minutes for a set period of time. Tracfone refers to these packages as “airtime.” The services can only be accessed via handsets sold to customers by TracFone. Additionally, customers are prohibited from using or reselling the handsets to access another provider’s network. All orders are taken from and all payments are made to TracFone’s Florida office. Likewise, handsets are sent to Missouri customers from locations outside the state.

In May 2013, TracFone requested partial refunds of the sales tax it paid on wireless telecommunications services.  TracFone argued that it did not make retail sales in Missouri. As such, TracFone argued that the sales of handsets and airtime from its Florida offices were subject to Missouri use tax and pursued the difference between the Missouri sales tax it paid and the Missouri use tax. In its initial arguments, TracFone contended that the sales took place “in commerce” between Missouri and Florida and met the exemption outlined in § 144.030.1.RSMo.

The Court disagreed with the taxpayer’s contention on the basis that the true object of these transactions was the sale of access to telecommunications service within Missouri and cited previous decisions setting precedent for the court’s findings [Six Flags Theme Parks, Inc. v. Dir. of Revenue, 102 S.W.3d 526, 527-28 (Mo. banc 2003), Branson Scenic Ry. v. Dir. of Revenue, 3 S.W.3d 788, 789 (Mo. App. 1999), etc.]. Furthermore, the court found that the sales of handsets were merely incidental to the service. The Supreme Court ruled that the taxpayer did not meet its burden of proof to qualify for the “in commerce” exemption and confirmed the Administrative Hearing Commission’s denial of the taxpayer’s refund request.